If you're applying for a mortgage for the first time, the whole
process can seem pretty intimidating. There's a lot to understand
and it can get confusing at times.
It's often simpler to focus on what to avoid rather than try to
figure out everything you ought to do. With that in mind, here's a
list of seven major mistakes to steer clear of when taking out that
first home loan.
1 - Not doing your homework
Buying a home and taking out a mortgage is the biggest financial
transaction that most people will make during their lives. But many
head into it with only a vague understanding of how the whole
process works.
Take several weeks to learn everything you can about mortgages,
as well as about the process of buying a home. Make sure you
understand such things as discount points, closing costs, APR,
Truth-in-Lending forms, amortization and mortgage insurance.
Learn how to use an online mortgage calculator and get
comfortable with figuring how different interest rates will affect
your monthly mortgage payments and the rate at which you pay down
your loan principle.
An hour or so a day, over four to six weeks, can mean big
savings over the next 30 years, as well as making you a more
satisfied borrower at the same time.
2- Getting the wrong credit score
It's pretty common knowledge that you should check your credit
reports for errors before applying for a mortgage. It's also
recommended that you obtain your credit score, so you can get an
idea of what sort of mortgage rate you should be able to qualify
for.
What many don't realize, however, is that there are many
different types of credit scoring systems out there and only one -
the FICO score - is widely used in mortgage lending. Consumers
ordering credit scores are sometimes provided with "educational"
scores that can vary significantly from what a borrower's FICO
score would be with the same credit history..
To get your FICO scores, go to
www.myfico.com
. Unlike your credit reports, which you can get free of charge once
a year, you'll have to pay for them - $19.95 gets both your
TransUnion and Equifax scores (Experian does not provide FICO
scores directly to consumers). You can get a "free" FICO score by
signing up for a credit reporting service, but that has a monthly
fee of its own.
3 - Not shopping around
It's amazing how many borrowers make only a minimal effort to
shop around for a mortgage. Perhaps they simply pick the lender
advertising the lowest interest rate in their area. Or they just go
where they do all their other banking. Or they get just one or two
loan offers before deciding. They assume it's a competitive
business, so how much difference can there be?
The fact is, mortgage loan offers vary significantly from lender
to lender. There are many different ways of structuring a loan
offer, and some may be more advantageous to you than others.
Get loan offers from at least four or five different lenders and
study them to see how they differ. Is one trading off a lower rate
for higher fees? How will affect your payments overall? Will one
accept a smaller down payment?
Don't focus just on the major banks on the assumption they'll
have the best deals. Smaller lenders and credit unions can
sometimes offer very attractive terms, and may be willing to
approve mortgages for properties or personal circumstances the
bigger lenders will not. Check too, into online lenders and
mortgage brokers - the latter don't make loans directly, but
instead work with multiple lenders to find you the best deal.
4 - Focusing solely on the interest rate
This is probably the biggest mistake that borrowers make. It's
easy to see why. The mortgage rate affects what you're going to be
paying over the life of the loan, so all those other fees and terms
may seem minor by comparison. But those costs add up.
In fact, it's very common for lenders to advertise a low
mortgage rate but build into the loan offer so many additional
charges that it's actually more costly than a competing mortgage
offer with a higher rate! Charging for discount points - which are
a way of buying down your mortgage rate - is one way, but other
fees can be a factor as well.
A convenient way to compare the total cost of competing mortgage
proposals is to look at the annual percentage rate (APR) on each.
This will be listed prominently on the Truth in Lending Act form
you receive with a loan offer and will be listed along with
advertised mortgage rates as well. It expresses the total cost of
the loan in terms of an interest rate.
It should be noted that the APR is only an approximation, and
the full cost of a different loans can vary depending on if you
sell the home or refinance later on, if you choose to pay your
closing costs up front and other factors. To figure those out, you
need to use a mortgage calculator to work through the different
loan scenarios.
5 - Not planning for secondary costs
Secondary costs include the fees discussed in #4. However, they
also include additional costs that will affect the size of your
monthly mortgage payment, including property taxes, homeowner's
insurance and mortgage insurance (if your down payment is less than
20 percent of the purchase price).
These additional costs can easily boost your monthly mortgage
payment by one-quarter to one-third, so it's important that you
anticipate them when figuring out how much of a mortgage you can
afford. Private mortgage insurance, or PMI, by itself usually costs
about one-half to one-percent of your loan amount annually, so it's
similar to boosting your interest rate by that amount.
6 - Not reviewing closing documents
When it comes time to close on your home and sign off on the
mortgage, you'll be presented with a ton of papers to sign. Many
people simply nod and sign off one after the other, assuming
everything must be in order because this is just how it's done,
right?
Copies of your mortgage documents must be delivered to you in
advance of closing. Be sure to review them and ask your loan
officer about anything you do not understand. To be extra safe, you
might hire an attorney for a few hundred dollars to review them for
potential red flags.
7 - Submitting to pressure
Loan officers are salespeople. They want to close the deal. For
that reason, some of them will try to pressure borrowers into
committing to a mortgage offer before they're comfortable in doing
so. They may say a certain interest rate is good for this day only,
or that they can offer you a special deal on closing costs if you
sign immediately. It's similar to the tactics car salespeople
use.
What you need to remember is, if they're offering a deal today,
the same deal will still be there tomorrow. It's true, interest
rates may fluctuate from day to day, and even by the hour, so you
may see some difference there if you don't lock in. But in most
cases rates won't vary a great deal over a few days and they could
even go down, so not signing right away is unlikely to hurt
you.
This article was first published on MortgageLoan.com at:
http://www.mortgageloan.com/seven-mortgage-mistakes-avoid-9272