It’s understandable. Looking for a new house is exciting. Checking out all the new listings and finding the one that is everything you ever wanted is just downright fun!
However, this often leads to people treating the mortgage as an after-thought. Don’t be that person! Shopping for a mortgage is an important step. If you take mortgage shopping seriously you could save yourself tens of thousands of dollars over the next 30 years.
Here are some common mortgage mistakes people make, and how you can avoid them.
Mistake #1 Doing the House Search Before the Mortgage
As exciting as it may be to go house hunting, you absolutely need to make sure you’ve got your mortgage buttoned up first. Why? There are a couple of reasons for this.
First, having the loan process well underway before you shop makes you a more competitive buyer. Most seller’s, under the advice of their own Realtors, will not seriously consider offers from buyers that don’t have a loan pre-approval. There’re good reasons for this…
Not having a pre-approval is a strong signal that the buyer is not serious about buying a home. Even with a pre-approval, there are still a million things that can go wrong. So, an offer without a pre-approval is generally not considered to be worth the paper it’s printed on, as it will most likely not materialize into an actual closing.
If you want to be an even more competitive buyer, you can get pre-approved like you mean it! This means that we go a step further and actually start underwriting your loan before you’ve selected a specific house. So your loan will pretty much be ready to go by the time you find a home, setting your offer apart from the rest. Get pre-approved like you mean it now.
Secondly, looking for a home before securing a mortgage can cost you money. If you find the home of your dreams but don’t yet have a mortgage, you’ll need to scramble at the last minute to get everything together. You may not have time to shop around for the best pricing or to make preparations that can help you qualify for better pricing. This time crunch can force you to go with a more expensive option that you may have otherwise been able to avoid, costing you thousands over the life of the loan.
Mistake #2 Not Comparing Different Loans Correctly
New home buyers can often be seduced by a lower rate, but fail to take fees into account. The truth is that there is a lot of variation from one lender to the next. They all generally offer the same rates, but have different fees and pricing for those rates.
To accurately compare different lenders I would recommend you take the “3-bottoms” approach.
First, so that you are comparing apples to apples, choose the same interest rate from each lender you are comparing.
Second, have them create an estimate for you that shows the bottom line cost that accounts for all lender fees, costs, and credits. Make sure they are showing ONLY their own fees, and not including estimations of title insurance and escrow fees, or make your own adjustments for these fees.
Title and Escrow companies charge varying fees for these services, but these companies are usually chosen by the seller. So, your lender generally has no control whatsoever over these fees. The problem is that if one lender under-estimates these fees, they could mislead a buyer by showing lower total closing costs than other lenders.
The third step is where the “3-bottoms” comes into play. For each lender, ask them to prepare this analysis for your target interest rate, the immediately lower rate, and the immediately higher rate. Having this analysis for 3 different rates will help paint a very clear picture of your options and help you make the most informed decision.
Mortgage brokers, like us, use several different lenders. They can do this analysis for you, and select the best lender for your specific needs and situation. Also, a broker’s compensation is typically exactly the same regardless of which lender they place your loan with. This way, you really do get the best option available to you.
Mistake #3 Falling for the Gimmicks
When you start shopping around for a mortgage you will undoubtedly be exposed to a barrage of marketing hooks.
“You don’t pay the closing costs,” or “We pay your mortgage insurance” are very tempting, but ultimately empty promises. You most certainly do pay those costs, even if it doesn’t look that way.
Lender-paid mortgage insurance is nothing new, and is available from most lenders. They simply charge more, either directly to you, or they roll it up into a higher interest rate. Those “don’t pay closing costs” loans will be paid for the same way… by you, through a higher rate.
That being said, many buyers do prefer to pay for closing costs with a higher rate rather than writing a check for the costs up front. So, while paying a higher rate to avoid closing costs may be preferential, just understand that any lender can do this for you. Just shop around for the best overall pricing, targeting rates that will offer enough credit to accomplish this.
Mistake #4 Not Budgeting for your Discretionary Spending
Lenders determine how much you can afford to borrow based on your technical debt-to-income ratio. This ratio is defined by analyzing your debt obligations like credit card, car, student loan, and other monthly payments. What they don’t look at is all of the other money you spend.
Do you dine out often, grab drinks with friends, travel regularly, or enjoy any pricey hobbies? This kind of spending along with your phone and energy bills are not factored into a debt ratio. Basically, it’s important to determine your personal cost of “having a life” when deciding how much you can spend on a home.
Take a thorough and honest look at your spending habits and determine how much you need to set aside to maintain your standard of living. Or, perhaps you will decide that you need to cut back. Either way, just make sure that you understand what your spending needs are on a monthly basis and communicate that to your lender.
Mistake #5 Not Understanding the Paperwork
There are two documents you should be looking for during the mortgage process: The loan estimate, and the closing document.
1. The Loan Estimate
The lender will send you a loan estimate early on when you submit an application. This document will outline the terms of the loan such as APR, interest rate, payments, terms (30 year, 15 year), total cost, and how much cash you will need at closing.
2. The Closing Document
Things will inevitably change over the course of the transaction. The final closing document will look similar to the loan estimate, except that all of the numbers will be final.
You should compare this document to the original estimate to look for variations. If you come across anything that concerns or surprises you, call your lender immediately. These changes can potentially cost you a lot of money, so make sure that everything is correct and on the up-and-up.