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Make Sure You Avoid These 6 Mistakes When Getting a Mortgage
Buying your first home should be one of the happiest milestones in your life, but many new homebuyers get so caught up in the excitement that they make serious mortgage mistakes. Doing this can jeopardize financing and dreams of homeownership, but the worst part is that many of these mistakes are easily avoided with a bit of planning and thought.
If you’re getting ready to purchase a home, you need to steer clear of the biggest mortgage mistakes people make. Doing so will ensure a smooth buying experience and guarantee you’ll make the best decisions possible during the home buying process.
The 6 biggest mortgage mistakes to avoid
Failing to understand how mortgages work
Before you even think about home shopping, make sure you understand how the mortgage process works. Getting a home loan is a complicated process, and completing it takes anywhere from 30 to 60 days or more from the day you apply – and that’s assuming you have a squeaky clean financial record.
Preparing to apply for a mortgage takes even longer. Most homebuyers spend months, if not years, getting their finances in order to get approved for a loan.
To get a mortgage, you’ll likely need a minimum of a 3% down payment in cash, although a down payment of 20% or higher is recommended. Having more money to put down could get you a better rate and will help you avoid paying for private mortgage insurance.
In addition, you should be prepared to pay another 2% to 5% of the home’s value in closing costs, which can include application fees, origination fees, taxes and more. These fees can typically be tacked on to the amount you borrow, but you’ll then be responsible for paying interest on them.
[ Read: The Best Mortgage Lenders ]
Not reviewing your credit score
A good credit score is a must when applying for a mortgage. Exact requirements vary by lender, but in most cases, you’ll need at least a 620 to qualify for a conventional mortgage.
But don’t treat this number as a goal. Mortgage applicants with credit scores in the 600s may just barely manage to get approved, but they’ll be subject to sky-high interest rates that cost thousands over the life of the loan. The higher you can get your score, the better the terms you’ll qualify for.
Stretching your income too far
One of the most harmful mortgage mistakes homebuyers make is overestimating how much house they can afford. The good news is that lenders generally work with you to come up with a maximum price that fits within your budget. However, you shouldn’t just assume that you can afford a home just because a lender is willing to approve that amount.
One good method for deciding how much you can afford is the 28/36 rule. This rule can be used to calculate how much you can afford in housing payments each month. The idea behind this method is that most people can comfortably allocate up to 28% of their pre-tax income to mortgage payments, as long as total debt payments (including the mortgage, credit cards, student loans, etc.) don’t exceed 36% of their total income.
Still, you shouldn’t feel like you need to purchase property in the upper range of your budget using this method either. Buying a more modest home can be a great idea as you’ll have extra funds to put into savings or investments. Plus, you won’t need to worry about what happens if you lose some of your income.
Not saving up for a down payment
The home down payment gold standard was, at one point, 20% or more. These days, most homebuyers don’t put down nearly this much. As of January 2020, the average down payment was just 11.4%. These days, lenders accept down payments as low as 3% in some cases, allowing aspiring homeowners to make their first purchase years earlier than they would otherwise.
Just because you can purchase a home with a small down payment doesn’t mean you should, though. Saving up for a higher down payment has many benefits, including the potential to qualify for lower interest rates and avoid private mortgage insurance. You’ll also pay less in interest over the long haul since the amount of principal you borrow will be lower with a higher down payment. While a 20% down payment may not be attainable for everyone, it’s to your advantage to get as close as you can.
Not getting preapproved for your mortgage
You can get a general idea of how much you can afford to spend on a home, but there’s no way to know for sure until you get preapproved for a mortgage. One of the biggest mortgage mistakes is falling in love with a home before getting preapproved — only to find out it’s out of your price range.
Aside from the frustration of realizing you can’t afford a house you love, failing to get preapproved can have severe financial consequences — especially if you make an offer that’s accepted and later find out you can’t get approved for a loan. Any fees you’ve already paid for services, like appraisals or inspections, will be lost. If your agreement with the seller doesn’t include a contingency for financing, you could also lose your earnest money.
There’s another issue, too. Buyers who haven’t been preapproved for a mortgage have a higher chance of experiencing complications before closing, which means that many sellers won’t accept an offer until financing has been secured.
To avoid potential roadblocks and heartbreak, make sure you have a preapproval letter in hand before you start viewing properties.
Not shopping around for different loans, rates or terms
You may have heard this advice before, but any time you need financing, you should always shop around with multiple lenders. In almost all cases, different lenders will offer the same applicant widely varying terms, and you may be able to get a much better interest rate from one lender over another if you shop around.
The only way to find out what you’ll get is to ask for quotes from some of the best mortgage lenders and then compare the terms they’re offering. Don’t forget to ask your realtor if they have a recommendation for a lender and be sure to check with any financial institutions where you’re already a customer. Many lenders offer deals to long-term customers with existing bank accounts or loans — especially those who have a positive history of making on-time payments.
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