Avoiding 5 surprise home loan killers
Getting a first home mortgage or refinanced loan is the ultimate exercise in preparation and organization.
It can take years. After you have met the income and credit requirements, the last thing this process needs is an unexpected and unpleasant surprise to create chaos and sometimes ruin an entire home loan application.
Five potential disasters quickly can compromise your chances of closing on a sale or mortgage refinance.
Here are some tips to help you avoid such pitfalls:
An Internet home loan gone bad. These types of loans from disreputable websites can look too good to be true, which means they probably are. Shop for a loan locally — unlike lenders who only have an Internet presence, local lenders and brokers know your immediate area. The face-to-face advantage of local lenders means better customer service and an exponentially increased likelihood that your home loan will close on time.
Big rate hikes from picking the wrong “time horizon.” With all of the uncertainty surrounding the economy, knowing how long you plan to stay in your home might be the most important factor in your loan decision. If you are planning to stay in the house for at least 15 years, locking in a low rate for a long-term loan makes sense. For example, rates for a 30-year home loan have climbed recently to 3.81%, so do not count on them being low forever. Conversely, a 5- or 7-year adjustable-rate mortgage (ARM) could be risky. However, if you have a short time horizon, choosing a 5- or 7-year product is a great way to quickly build equity with money that is less expensive to borrow.
A lowball appraisal. A lowball appraisal can cost you thousands of dollars you did not expect at the home loan closing. Even worse, it can blow up the entire application. Ironically, new federal regulations have increased the chances of that happening. Appraisers with little knowledge of your area are overemphasizing foreclosures when estimating home values, so you need to provide the appraisers with comparables. You might have to find such comparables on your own, but it is a lot easier than you think. Your local government or a trusted Realtor have statistics on recent sales. If you want to eyeball comparables in person, think about attending open houses.
Secret fees. Beware of extra fees on your balance. Some disreputable mortgage lenders secretly will add fees to the original balance. Reputable lenders will add only the appraisal cost (usually around $400). If you see extra fees on your balance in a loan quote, get out of there as fast as you can!
Unpermitted work on the property. Unpermitted “improvements” on a property lead appraisers to estimate a home’s value based on the county's recorded square footage data. Many times, this involves a garage where a bathroom gets bootlegged in. Unpermitted work can be a deal-killer with FHA loans, as government agencies frown on such violations. If you are refinancing, get your permits up-to-date. If you are buying, make sure you get a written list of improvements with permits from the owner or Realtor.
You do not need to become paranoid to avoid unpleasant surprises in a home loan. However, it does help to gather as much information and have as much face-to-face contact as possible throughout the process.
About Gloria Shulman
Gloria Shulman has been a leading mortgage and real estate professional for the past 30 years. As a Southern California mortgage broker, Gloria has helped thousands of responsible borrowers acquire loans with trendsetting financial products and has become a leading national expert on home appraisals.