Buying a home is one of the biggest decisions you can make, and its likely the largest purchase you will ever make. So its no surprise that there are multiple ways you can trip up.
Getting a mortgage is about more than having your offer accepted and signing on the dotted line. (Or hundreds of dotted lines, which is what it feels like at the closing table.)
Here, our experts reveal the top seven landmines in the mortgage process and how to avoid them.
1. Neglecting to check your credit before starting the process.
Approaching mortgage lenders without having some idea where your credit lies is like going to an important job interview without checking for spinach in your teeth. Im amazed at people who apply for a mortgage and theyre shocked at things on their credit report, says LearnVest Planning Services certified financial planner Ellen Derrick. They say, I had no idea that I forgot to pay my Best Buy card!
Mortgage lenders are going to go through your credit report with a fine-toothed comb, and theyre going to make decisions based on how creditworthy you appear to be, including whether to offer you a loan at all
or at what rates. If you dont check your credit score first, you stand to lose money, or your potential dream home.
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What to do instead: Ideally, youll check your credit well before you begin hunting for a home, and work to increase your score if you need to, or dispute errors on your report, since those can take time to rectify. Youre entitled to a free credit report from each of the three bureaus (Experian, Equifax and TransUnion) once a year, and you can pull those from AnnualCreditReport.com. If there are errors, fix them. (Some examples: Any accounts listed that arent yours, accounts incorrectly listed as being in collections, incorrect large balances reported, or incorrect late payments reported.) The bureaus have 30 to 45 days to investigate the issue and fix it accordingly. Use free resources, like Credit Karma or Credit Sesame, to get an estimate of your credit score for TransUnion and Experian. If you want to see your actual FICO scores for each credit bureau, buy them outright (about $15 to $20 each) instead of committing to unnecessary and expensive monitoring when you sign up for a free trial.
2. Applying for new credit simultaneously.
When youre applying for a mortgage, your credit is under serious scrutiny. Apply for a new credit card and your credit score will dip temporarily due to the application credit check, which counts as a hard inquiry on your account for about 12 months. The same goes for closing an old accountit will affect the amount of credit you have available, which will negatively affect your score. (Note: For car or home loans, all credit inquiries made within about two weeks of each other count as one inquiry, so when youre shopping around for mortgage brokers, be sure to submit all of your loan applications around the same time.)
What to do instead: While applying for a mortgage, hold off on opening up a Macys store card or applying for a car loan. You really have to watch where you step in terms of your credit, says Greg McBride, senior financial analyst at Bankrate.com. You dont want to open up any lines of credit and you dont want to close any out. Just keep doing what youve been doing. And of course, continue making on-time payments and chipping away at any debt.
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3. Choosing a mortgage lender without shopping around.
Youll want to find a mortgage lender early in the process so you have a relationship with him or her when you find the home of your dreams. By doing so, youll be able to kickstart the mortgage process by getting pre-approved, which means you can put in a serious offer quickly (should the need arise), and once you sign a contract, applying for the mortgage itself will take less time. Even if interest rates and loan terms are similar across different lenders, final costs and fees at each lender might not be. Ask them about the fees for title insurance, Derrick says. What are the attorneys fees? Document prep fees? Because lenders are eager for your business, some will even offer a cash incentive for going with them, such as $1,500 back to you at closing. In fact, if one lender is offering cash back but another one isnt, ask the lender whos holding outhe may change his tune if it means earning your business.
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What to do instead: Ask home-owning friends and co-workers whether they had a good experience with their mortgage lender. I can tell you which ones I would not recommend, Derrick says, because they never close on time, theyre always late with paperwork, and that kind of stuff can cause deals to fall through. Then check in with at least two or three lenders so you have an idea of whats out there. (While youre at it, look at our checklist on getting a mortgage.) In addition to the interest rate and loan terms, have each furnish you with a breakdown of your total costs so you can compare.
4. Skipping pre-approval.
Pre-approval means basically going through a mortgage application process with a lenderfilling out paperwork, verifying incomein order to be pre-approved for a loan of a specific size even before youve found a house to bid on. Its a great way to find out how much house a lender thinks you can take on, and it will give you some real specifics to work withincluding an interest ratewhile youre house hunting. Plus, getting pre-approved is the best way to tell a potential seller that youre serious, Derrick says. Not getting pre-approved doesnt mean you wont be able to get a mortgage, but the pre-approval sure makes the process go a lot easier.
What to do instead: Just tell your mortgage lender youd like to get pre-approved. Youll have to provide paperwork, which can include pay stubs, W-2s, bank statements, tax returns, and relevant loan documents. Once youve had an offer accepted on a house, youll merely have to give the lender the address and details of the offer to move forward with the mortgage process. (You could also decide you dont love that lender and want to go with a different mortgage lender after the pre-approval. If so, youll have to go through all the paperwork again and it will require another hard credit check.)
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5. Taking on a loan thats too big.
It may seem like youre comparing apples to apples when you trade rent for a mortgage payment. But there are more expenses to consider when you buy a home, and you have to make sure you can afford to pay for them all. Im still seeing people who arent even in the right ballpark when it comes to looking for a mortgage, Derrick says. Mortgage lenders are going out of their way to qualify people for more than they can truly afford. If you bite off more loan than you can chew, you may find yourself eventually facing the sale of your home (or foreclosure) when you cant make the payments.
What to do instead: Along with your mortgage payment, make sure youve accounted for property taxes, homeowners insurance and maintenance costs that average about 1% of the homes value every year. Have home sellers furnish copies of 12 months of utility bills. And when youre pre-approved for a mortgage, Derrick recommends taking the lenders top number and lopping 20% off of it so you arent stretched to the limit. Another good metric? Find out what payments would be for a 30-year fixed mortgage on the house. If you cant afford a house based on a fixed-rate mortgage at todays low rates, McBride says, you dont need a different mortgage, you need a different house.
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6. Signing loan documents you dont understand.
People dont ask enough questions, Derrick says. They just walk into it and think its as simple as taking out a loan to buy a sofa at the furniture store. But its very complicated. A mortgage is about more than just the monthly payment. Its about how much youll pay over the life of the loan and what your interest rate will be throughout. For instance, the monthly payment will be lower on a 3/1 adjustable rate mortgage, a common loan in which the first three years of payments are fixed and for the remainder of the loan the interest rate adjusts annually. That means your interest rate could go down or up in three yearsand so could your monthly payment. Its not necessarily a bad thing, Derrick says. But you should know what it means.
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What to do instead: Make sure you understand what kind of loan youre getting, what the payments will be from beginning to end, how much interest youre paying, and whether youll have a fixed interest rate, or whether it will be fixed for a limited time before becoming variable. Also, do you know how much money youll have to bring to the closing table with you? Many lenders require you to pay property taxes and insurance up front, and it could be a big check. The fees are something people dont think about until they get to closing, Derrick says, and the numbers on the page may look very different from what they looked at two weeks before.
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7. Trying to time the market.
It can be tempting to try to time your home purchase so you lock in the lowest possible rate on a mortgage, either by dragging the process out if rates seem to be headed down, or jumping in before youre ready. People are waiting for rates to get absolutely perfect before they do something, Derrick says. But if you actually run an illustration over a 30-year mortgage, the difference between an interest rate of 3.75% and 3.70% is minute.
What to do instead: If youve found a house, and you love it, and you can afford the mortgage, go for itdont worry about chasing after a mortgage rate thats ever so slightly lower than what you can get now. On the other hand, if you dont have enough money for a good down payment, dont leap into a house before youre ready, just because rates are low.
By Kate Ashford