7 Mortgage Mistakes To Avoid
Point of Interest
Due diligence in the home buying process is crucial to avoiding the biggest mortgage mistakes. Just a few simple mistakes could cost buyers thousands of dollars on a new home purchase.
When searching for a new home, you may begin by counting bedrooms and bathrooms. But other factors are even more important to take into account if you want to avoid the biggest mortgage mistakes when buying a home. Paying even 0.5% higher in interest on a $250,000 mortgage for 30 years can cost you over $25,000 over the life of the loan.
Start your path to homeownership the right way and secure a financially sound mortgage by avoiding the most costly mortgage mistakes for borrowers.
7 mortgage mistakes to avoid
Buying a home can be a tricky process, and mistakes in this process can follow you for the life of your loan. By avoiding the following mortgage mistakes, you can feel confident in making smart financial decisions during the buying process, leaving you better positioned for long-term financial security.
1. Spending too much on a home.
Lenders are legally prevented from approving mortgages that are more than 35% of your household income, but most financial advisors recommend mortgages that are no more than 28% of your income.
Just because you can get approved for a larger mortgage doesn’t mean it’s a good idea, and many households with mortgages equaling 30% or more of the family income find themselves “house poor” — which means their monthly mortgage leaves them so strapped each month that one unexpected emergency could result in financial disaster.
2. Not shopping for the best rates and loan types.
Many home buyers look at multiple homes before choosing the “perfect” one, but most never give a second thought to putting the same effort into shopping for the perfect mortgage. Different lenders offer different rates, have different fee structures and run different promotions. By comparison shopping, you can save thousands over the life of your loan.
You should also make sure that you choose the right loan for your needs. For example, the low fixed interest rate that comes with the first part of an adjustable-rate mortgage may seem tempting, but if you’re planning to stay in your home over the long haul, the fluctuating rate that follows may end up costing you more than you bargained for. So make sure you check out all the options and find the right one for your needs.
Worried that multiple credit checks from shopping around will hurt your chances of approval? Finance companies expect customers to shop around, so as long as you do all of your shopping within a 30-day window, it affects your credit the same as only shopping with one lender.
3. Failing to check your credit scores.
One of the biggest factors in your approval for a mortgage loan is your credit score. The credit bureaus are notorious for assigning rapid score decreases for even one late payment, but it can take months of on-time payments to improve your score.
You can get a free copy of your credit report from each credit bureau every year, so take the time to review your reports and correct any inaccuracies before shopping for your mortgage.
4. Making intentional changes to your credit.
Before you decide to pay off that old medical bill, trade in your car or close out a credit card, check with your finance company first. Some borrowers mistakenly think that closing out a credit card or paying off old bills will improve their credit, but in some cases, those intentional changes can hurt you.
For example, spending $2,000 to pay off your car loan may only improve your credit by one or two points, and at worst, it can actually cause your score to decrease. Instead, you may be better off putting that money toward the down payment on your home. Your mortgage lender is in the best position to advise what, or what not, to pay off if you have existing debt, so be sure to get guidance before making any significant money moves.
5. Not building your homebuyer’s team.
Buying a home is not a solo activity. Building a strong team that advocates for you can mean the difference between a successful transition into your new home and several months of frustration and missed opportunities.
Your real estate agent and mortgage lender will be your primary contacts, but there are countless other underwriters, inspectors, appraisers and advisors who will be involved in the process. You aren’t likely to already know a trustworthy advocate to fill each of these roles, so it’s important to start with a reputable real estate agent who can recommend qualified people to help you build your strong homebuyer’s team.
6. Skipping the inspections.
According to Home Advisor, repairing a cracked foundation can cost $10,000 or more. You don’t want to be caught with major repairs or hidden damage, and home inspections are your insurance ticket to avoid major issues when buying a home.
General home inspections aren’t the only inspection available to you during the buying process. You can also choose to get a property survey, termite inspection, electrical inspection, septic system inspection and other inspections. While you shouldn’t necessarily throw your money away on every inspection under the sun, opt for the general home inspection and add on more specialized inspections if your general inspector finds cause for concern.
7. Ignoring the hidden costs of homeownership.
If you’re expecting that the downpayment will be the only expense at closing, you may be in for a huge disappointment. During the homebuying process, there are countless other expenses that may fall on you to cover at closing if they aren’t covered by the seller. That’s yet another reason to build a strong team that can negotiate some of these expenses for you.
At a minimum, be prepared to pay for your home inspection, appraisal, initial escrow deposit, title fees and loan origination fees on top of your down payment. In addition, plan for other expenses after you purchase your home, such as routine maintenance or a home warranty.
The final word
Buying a home involves much more than finding a home with granite countertops and beautiful landscaping. By doing your homework in all aspects of the mortgage process, you can avoid the biggest mortgage mistakes and get yourself in a good financial position to handle all of the challenges that come with being a homeowner.