Simple Mortgage Mess-Ups
Taking on a mortgage can be a scary experience. You’re about to take on the biggest debt of your life, and you will have to jump through unbelievable hoops to do so. You have to fill out mountains of paperwork, pay costly fees and charges, and try to make sense of things like private mortgage insurance and amortization. Needless to say, a lot could go wrong in this process. To help you avoid making a big mistake with your mortgage, we’ve listed the top eight mortgage mess-ups below.
- Not checking your credit. You should never apply for a loan as important as a mortgage without first checking out your credit. You can order your credit score for about $15 online, which includes a copy of your credit report. Do this six months before you apply for your mortgage so you can correct any errors in advance.
- Ignoring first-time homebuyers’ programs. City, county, or state governments often sponsor these programs that allow first-timers to qualify for lower interest rates than they would with a private lender. Some can even help people with credit challenges or little money for a down payment.
- Not obtaining pre-approval. Some new homebuyers conflate the terms “pre-approval” and “pre-qualification.” The two are actually very different—pre-approval involves actually applying for a loan. You have to submit tax returns, proof of income, and other information to get pre-approved. You will be more appealing as a buyer if you have pre-approval prior to shopping for homes.
- Overborrowing. Mortgage money is relatively easy to get, which proves too tempting for many borrowers. Homebuyers end up over-borrowing to buy a house that is far beyond their means. This ends up placing an extraordinary strain on your budget and can quickly lead to foreclosure.
- Not comparison shopping. When looking for your mortgage loan, you should get quotes from at least two or three different lenders. Before you shop, you should find out the prevailing interest rate so you know whether you’re getting a good deal.
- Paying unnecessary fees. Once you find a lender, get a good-faith estimate of the closing costs that includes an itemized list of every charge. Ask your lender to explain each charge and try to negotiate any fees that seem excessive.
- Not saving for closing costs. Homebuyers tend to underestimate the magnitude of closing costs, which can easily add up to thousands of dollars. Make sure you allow for this in your budget. You should plan to pay 2%-7% of the house’s selling price in closing costs.
- Running out of cash after closing. Closing costs can be so expensive that many buyers are cleaned out after they close on their home loan. This is a perilous situation to put yourself in because you will be in a financial bind if something goes wrong with your house in the first few months.