When you are looking for a new home, whether you are a first-time buyer or a seasoned pro, getting a mortgage can seem like a huge task. This may be in part because many people are misinformed about the process.
When going through the steps to getting approved for a first-time mortgage, it's important to get the right information and secure a loan that fits your budget and meets your needs. Check out the common mortgage mistakes below to avoid learning the hard way.
1. Not Pre-Qualifying For A Loan
Many people don't take the time to pre-qualify for a mortgage because they feel that it is not a guaranteed loan, so why bother. However, being pre-qualified for a mortgage gives you several advantages.
First, it gives you a baseline on what you can spend on a home. There's no use getting your heart set on a home you can't afford to finance. Second, it gives you leverage during negotiations. If there are several offers on a home, the seller is more likely to pick the bid placed by someone who already knows that they can qualify for a loan. Finally, mortgage lenders move a little quicker when you're already pre-qualified as it makes approving the loan much easier.
2. Not Shopping For A Mortgage
Many well-wishers will tell you that you should simplify the mortgage process by going to the bank you use for the loan. They'll tell you that this makes it easier for you to manage your finances and since the bank knows you, you will receive a good deal. The truth is, you should shop for your loan just like you shop for a new home.
Different institutions offer different mortgage programs, with different fees and rates attached to their loans. Each of these fees should be reviewed, and it's a good idea to put their quotes through a mortgage calculator to see who is really offering you the best deal on the loan. And remember, even as little as half a percentage point in interest can mean a significant difference in the amount you must repay.
3. Not Understanding Loan Types
You will hear friends and family members tell you to avoid this type of loan or that type of loan. Others will say that you should only get a fixed rate loan, while still others swear by adjustable rate mortgages. It can quickly become confusing.
Look at the different type of loans that are available and determine which fits your lifestyle the best and which will be the most beneficial to you. For example, if you will only remain in your new home for a few years, a variable rate mortgage may be a better deal. However, if you plan on living in your new home for the long term, then a fixed rate mortgage may be your best option.
4. Borrowing The Maximum Amount
You will hear many people, including some of the lenders, encourage you to borrow to the maximum amount that you are pre-qualified for when you are seeking a loan. Their excuse is that you should be able to have the biggest and the best home since you have already been pre-approved.
The truth is, some lenders will approve you for amounts with repayment terms adding up to 50 percent of your income. This is a significant amount of your income when you consider you must also pay insurance and taxes on the property.
It's wise to make a budget that factors in your monthly expenses in addition to your mortgage payments. You will feel a greater sense of security when you live within your means; you never know what curveballs life may throw at you.
5. Not Reading The Fine Print
“All mortgage documents are the same.” You will hear that from just about everyone, even the lenders on some occasions. The truth is, every mortgage document is different. While they may all include the same basic information, they may have some important clauses that are specific to that lender.
Some of these issues may include penalties for refinancing the loan before a certain time has passed, early payoff penalties, or interest rate changes if you make a late payment. Always take the time to read and understand the documents before signing.
Getting a mortgage may require research and staying well-informed about your mortgage options to avoid big mistakes, but there's no mistaking it'll be worth your while in the long run.