Your first home purchase is a learning experience. With so many steps in the process, it’s understandable if you make a few mistakes along the way — but most mortgage mistakes are avoidable if you take the time to research your options and understand your personal financial picture. Here are some common mistakes to avoid.
Mistake #1: Not shopping for interest rates
Interest rates can change on a daily basis, so while one lender may have the lowest rates one week, this may not be the case the following week. In addition, the rates advertised may be only for highly qualified individuals, or for a mortgage product that doesn’t meet your needs. Every mortgage lender uses slightly different lending guidelines, so it’s important to actually speak with different lenders, not to just go by their advertised rates. Provide the lender with a short description of your financial situation before asking for a quote for comparison purposes.
Mistake #2: Failing to include points and other fees into your total costs
Interest rates are not the only cost associated with getting a mortgage. If a certain lender’s rates are lower than the market average, they may try to make up the difference by charging fees or points. Buyers may agree to prepay points to “buy down” their interest rate. Also ask about closing costs, including administration fees, the cost of title insurance and the appraisal amount.
Mistake #3: Waiting too long to review your financial information
If you need to improve your credit to qualify for a better interest rate, close any inactive credit accounts and pay down some of your debt to improve your FICO score and lower your debt-to-income ratio. Gather necessary financial information like recent tax returns, bank statements and pay stubs in case the lender requests backup. You don’t want to be scrambling the day before settlement to validate your income or savings.
Mistake #4: Not finding the right mortgage for you
Friends or family may recommend mortgage products, but everyone’s financial situation is different. In today’s market, a wide variety of long-term and shorter-term mortgage loans are available to meet your needs. If you plan on moving again in the near future, an adjustable-rate mortgage or balloon mortgage may be preferable to committing to a longer-term fixed-rate loan. Be sure to make time to sit down with your lender and go over loan options before you make a final decision.
Mistake #5: Not knowing what you can afford
Understanding how much you can afford in a home is an important first step to obtaining a mortgage loan approval. No one wants to go through all the work of applying for a mortgage only to be declined for insufficient income. A good mortgage calculator will give you a basic idea of how much you can afford in a monthly payment.
The best ways to prevent mortgage mistakes are to obtain a preapproval before buying and to keep the lines of communication open with your lender.
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