5 Common Mortgage Mistakes First-Time Homebuyers Make
For many first-time homebuyers, just the idea of a mortgage can be terrifying. A home mortgage will most likely be the biggest loan that they will ever take out, after all. The act of simply applying for a mortgage can be overwhelming as well, especially when it comes to navigating all of the paperwork, terminology and fees that are unfamiliar to those who have never gone through the process before. If you are a first-time homebuyer, then be sure to avoid making the following five common mortgage mistakes as you prepare to go through the homebuying process:
Not getting a mortgage pre-approval
Many first-time homebuyers don’t even realize there’s such a thing as a mortgage pre-approval. By getting pre-approved for a mortgage, you’ll have a better idea of what you can afford. The last thing you’ll want to do is spend months looking at homes only to have your mortgage application rejected once you’ve finally found your dream home.
A mortgage pre-approval will prevent you from wasting time looking at houses you can’t afford. It will also give you bargaining power when it comes to making an offer to a seller. Buyers with mortgage pre-approval letters have proof that they have secured their financing, which means any deal they make is less likely to fall through before closing.
Not determining your budget before applying for a mortgage
A lot of homebuyers will look at the figure of the loan amount the lender has approved and assume that this is their budget. You should determine what your actual budget is before you go through the mortgage approval process because sometimes the mortgage amount may be higher than what you can afford. Remember, you don’t have to use the full amount provided by your loan, and doing so can be a mistake if you can’t afford it.
Determine what you can afford by taking into account your household income, your living expenses and any other financial obligations you might have. Keep in mind not just the mortgage payments you’ll be making, but also the costs of living in a house, from the property taxes to the homeowner’s insurance to the utility costs, when determining your budget. That elegant penthouse in d.c. that you have been eyeing might cost you a lot more than you budgeted when you put into account monthly condominium fees.
Not comparing lenders before taking out a mortgage
Even though your current financial standing and your financial history will not change from one lender to another, the mortgage terms often will. Don’t just assume that the terms offered by the first lender you go to will be exactly the same as every other lender in town. Go to several different lenders and compare their terms. You may even be able to negotiate by using one lender’s offer against another in order to get the best deal on a mortgage.
Not saving up for the down payment
Not everyone can afford to put down a big down payment, but you should save up as much as you can. If you can put down at least 20 percent, not only will a lender be more likely to offer you better interest rates, but you also won’t have to pay for private mortgage insurance. If you put less than 20 percent down on a house, a lender will require private mortgage insurance in order to protect the financial risk they are taking in lending money to you. By making a larger down payment, you can avoid paying private mortgage insurance, which can be as much as a couple hundred dollars a month.
Not understanding the fees involved with a mortgage loan
There are a number of fees involved in the mortgage process that you might not know about. For example, loan origination fees, processing fees and underwriting fees. These are costs that you will want to know about so that you aren’t surprised at your final settlement. Additionally, you may be able to negotiate with your lender. If you have good credit and a good financial standing, a lender may be willing to waive certain fees or at least decrease them.
When you receive your final settlement, make sure that the fees on the initial loan estimate provided by your lender are similar to the fees listed on the final settlement before signing any paperwork. Irreputable lenders may try to increase the fees substantially in an attempt to take advantage of less knowledgeable borrowers.
If you are a first-time homebuyer, then there’s no getting around the mortgage process unless you have the money to pay for a house out of pocket. Unfortunately, many don’t fully understand the mortgage application process and therefore tend to make a number of mistakes. Such mistakes can impact the terms of their mortgage or even their ability to buy the house they want. These are five of the most common mortgage mistakes that first-time homebuyers make that you should be sure to avoid.