Eight Common Mortgage Mistakes and How to Avoid Them

Applying for a mortgage can be a challenging experience.  For many people this debt can be two to three times their annual income.  When applying for a mortgage, they are confronted with piles of paperwork, flurries of fees, and obtuse terms such as amortization tables to title insurance. 

Regardless if one is a college professor or a bus driver, most people don’t understand the mortgage process.  In this confusing and pressure laden environment, it’s easy to make errors.  Here is a list of the eight common mistakes that lenders and mortgage brokers see, and what you can do to prevent them.

1. Not Fixing Your Credit
Mortgage Brokers are confounded by the number of buyers who apply for a mortgage with their fingers crossed, hoping that their credit will allow them somehow to qualify for a loan.

At least 6 months prior to applying for a mortgage, obtain copies of your credit report and your Fico credit score.  The Fico score s the three-digit number used in 75% of the mortgage-lending decisions.  This will allow you plenty of time to challenge any errors on your report and ensure that they are removed by the time you are ready to apply for a mortgage.  You can also see the legitimate factors that are hurting your score and do something about them, such as paying off an overdue bill or paying down credit card debt.

2. Not looking for First-Time Home Buyers Programs
These programs are sponsored by state, county or city governments.  They offer better interest rates and terms than you’ll find among private lenders.  Some are tailored for people with damaged credit, while most programs can help people with little saved for a down payment.

3. Not Getting Pre-Approved for a Loan
Many people confuse being “pre-qualified” with being “pre-approved.”  Pre-qualification is a casual process, where the lender estimates how much money you can borrow based upon your income, your debt, and cash available for down payment.  Pre-approval on the other hand is an actual loan approval.  The borrower typically submits tax returns, pay stubs and other information.  The bank will verify this information and checks your credit report.  Based upon this information, the bank then agrees in writing to make the loan.

In hot real estate markets, the house hunter who is merely pre-qualified is not as strong as one that is pre-approved.

4. Borrowing Too Much Money
Many people take the biggest loan that they can, figuring that their incomes will eventually increase enough for them to afford the payments.  Many first time homebuyers do not have a clear idea of how expensive homeownership can be.  Your mortgage payment consists of principal repayment, interest expense, real estate taxes, and homeowners insurance, which is otherwise known as “PITI.”  In addition, expect higher bills for utilities, repairs, and maintenance that you faced as a renter.  Prudence dictates limiting your PITI to 25%--33% of your gross income.

5. Not Shopping Around for Rates and Terms
Many borrowers with good credit end up with loans meant for people with poor credit.  These “sub-prime” loans carry higher interest rates, and are therefore more profitable, so less ethical lenders and brokers may push them.  To avoid this, be informed about the prevailing interest rates for someone with a similar credit score, and you will save thousands of dollars in unnecessary interest payments.

6. Paying Junk Fees
Lenders can boost their profits by adding on various fees.  Some fees may be legitimate, while others may be inflated.  The time to challenge junk fees is not when you are about to sign the loan papers.  Use a mortgage broker to compare the fees of lenders.  Ask about the interest rate, the points charged to the rates (each point is 1% of the total loan amount), and any other fees the lender charges.

Once you have chosen a lender, you will be given a Good Faith Estimate of the closing costs, which should include all the fees being charged with that particular mortgage.  Review these with your broker.  If they seem excessive, speak with the bank, and then if necessary seek a bank with more favorable terms.

7. Not Planning for Closing Costs
On the closing day, you will be expected to write a check for a number of expenses, which typically include attorney’s fees, taxes, title insurance, prepaid homeowners insurance, points and others lenders fees.  These fees are collectively known as “closing costs,” and they are typically between 2% to 7% of the purchase price of the house.  Plan for closing costs by reviewing the Good Faith Estimate from your broker or lender as early as possible.  Make sure you have adequate cash on hand to cover these costs.

8. Not Having Enough Cash on Hand After Closing
After scraping together enough money to pay for closing costs, many homebuyers have nothing left in the bank to pay for any unforeseen expenses.  This puts them at risk for defaulting on their loan payments.  In order to reduce this risk of the borrower defaulting on his payments, many lenders are requiring borrowers to have enough money in savings to cover 3 to 6 months of PITI expenses.

Keep these eight mistakes in mind when seeking the right loan for your dream home.  Becoming familiar with them can help save you from paying unnecessary fees and higher interest payments in the years to come.