If you’re thinking of taking the plunge into the housing market, applying for your first mortgage can seem intimidating. The process is at times misleading and confusing, which is why many people view buying a house as one of the scariest times in their lives.
When the time comes for you to buy a house, here are 7 mistakes you should do your best to avoid.
1. Not doing your research
Taking out a mortgage is a huge financial commitment and you shouldn’t take it lightly. When you shop for a car, you probably do hours of research and go on several test drives before making a decision. A home is easily the cost of several cars.
When you head into the home buying process it would be best to know the ins and outs of the industry. Understand points, closing costs, APR, various disclosure forms, amortization and mortgage insurance. Knowing what your real estate agent is talking about will make you an informed buyer. Informed buyers make smarter decisions.
You should also find a good online mortgage calculator and practice figuring out monthly payments for different houses. You’ll want to know what the cost of the house is going to be to your wallet before you fall in love with something you can’t afford.
2. Getting the wrong credit report
Before you ever apply for a mortgage, you should check out your credit report. Make sure everything on it belongs to you and do your best to clear up any discrepancies before you apply.
You should also know that there are 4 different types of credit reporting agencies out there, but usually mortgage lenders look to the FICO score to make their determination. Make sure you know what your FICO score is independent of other agencies.
3. Not shopping around for a mortgage
Like any big purchase, shopping around is the easiest way to save a ton of money. Shopping around for a mortgage is easy and will save you thousands of dollars in the long run. Just because a lender tells you they have lower rates than the competition doesn’t mean you have to believe it.
Every lender has different qualifications for their mortgages as well, so while you may only be an average applicant at one institution, you may be a highly preferred client at another, which means lower rates, lower payments and a lower total cost over the life of the loan.
You don’t have to stick to the major banks for a mortgage either. Check out local banks and even credit unions to find hidden bargains with better customer service and perks.
4. Focusing only on the interest rates
Interest rates are the most advertised component of any mortgage, but on their own they mean very little. Borrowers often get caught up on the interest rates and ignore other money pits such as fees, closing costs and harsh terms that come with big penalties.
Don’t be fooled by artificially low interest rates. If you are looking at a bank that is significantly lower than the competition, you need to ask yourself why. Often times there are fees and charges that make the mortgage with the lower rate more costly than the higher rate mortgage at the competitor.
5. Not remember about additional costs
Mortgage payments aren’t just principal and interest. It’s also homeowners insurance in the form of an escrow payment, along with property taxes and mortgage insurance if your down payment is less than 20 percent of the purchase price.
These additional costs will boost your monthly payments by a significant amount, so it’s important to take them into consideration when deciding if you can afford the house.
6. Not reading the closing documents
When you go to sign your mortgage, you’ll be given a stack of papers to sign. Many buyers zone out and mindlessly sign any document that’s put in front of them because they assume that it’s a standard procedure that everyone has to go through to own a house.
Instead of turning into a zombie, ask for a copy of your documents in advance of your closing so you have a chance to look them over and ask questions about things you don’t understand. You can also hire a lawyer to review the documents and throw out any red flags for you.
7. Giving in to sales pressure
Remember that a loan is a product and banks are basically just retailers. They will work to sell you on their loan and get you to sign up as soon as possible. Some banks will even pressure you into making a commitment before you’re ready with expiring rates and windows to make a decision. They might even throw out a special deal if you sign right away.
Remember that whatever deals you are offered today will be there tomorrow. If they aren’t, you probably didn’t want to do business with the bank in the first place. If it’s an interest rate you’re worried about, rates don’t change much in the course of 24 hours and while they may go up, they may also go down.
Dedicate the necessary amount of time to finding the right mortgage for your needs. With such a huge commitment, you need to be prepared both mentally and financially before you proceed.