In America, as in many countries around the world, homebuyers have access to several different paths they can choose when it comes time to finance their real estate purchases. However, in understanding those financial options, prospective borrowers must understand that no single path is ideal for every borrower. There are instances when homeowners make missteps along the way that prevent them from achieving the best financing terms possible at any given time during the transaction process.
There are some things you can do to make sure your home loan experience goes smoothly. Here are the most common mistakes people make with home loans and how you can avoid them.
There is no way around it. Some words used in mortgage contracts won’t make sense to everyone during the first read-through. Not knowing what these terms mean can cost you big money. Also, you need to know how to calculate mortgages, since mortgage rates differ from one lender to another. For example, suppose you don’t know that points are prepaid interest for borrowed money and help reduce your interest rate. In that case, you might be tempted to ask the seller of the home to pay them for you, since it’s not fair that they get away with this benefit while all other kinds of loans require points to be paid by the borrower. Asking your real estate agent or listing agent to explain everything in detail is also beneficial because most people working in real estate deal with loan issues like this daily.
Since it is virtually impossible to know what rates will be available in 3 years, five years, or even next year, you want to shop around for the best terms before purchasing a new property. This usually involves picking up the phone and speaking with several lenders, so they have an opportunity to market their products to you. Please don’t fall for it when they try to hard-sell you on their development during this call. The mistake commonly made is assuming all lenders offer the same terms and rates. Since every situation is unique, this is rarely true. It pays to shop around before committing yourself in writing with any mortgage lender.
Applying for pre-approval on your home loan means you will be offered a specific amount based on your income, assets, and credit score. This protects you if the price drops so much over the next few weeks or months that you cannot buy the home otherwise. It also guarantees that there won’t be any mess-ups over the amount you are approved for when you apply for financing at closing.
For example, suppose you have $50,000 in savings and get pre-approved for a purchase that is $250,000, then any time during the property purchase process when they review your ability to buy this home. In that case, they will consider whether or not you could afford it without financing. This decreases the chances of being rejected at closing because you did not have enough money to pay for it otherwise.
It is a good idea to get your credit report and examine it for any errors at least three months before you consider buying real estate. One creditor can prevent you from getting approved for a loan by reporting that you have too much debt, or aren’t making payments on time, which can hurt your chances of getting a mortgage. There are stories out there of people who had perfect credit scores and loans approved until someone decided to start harassing them by calling their creditors and making false accusations about them. These will also show up on the borrower’s credit report, raising their risk profile in terms of ability to make monthly mortgage payments.
It is relatively common for new homebuyers to base their mortgage payments on what they will be earning in the future. For example, self-employed and whose business is growing steadily might choose to finance a home based on an anticipated increase in revenue and earnings six months from now. This can work sometimes, but not always. If you do this and your income doesn’t increase as much or at all. You may find yourself with financial problems if it takes longer than expected to sell your property. You are having trouble making monthly payments without any other type of income coming in.
When borrowing money to buy your property, closing costs are fees charged by lenders, title companies, and other professionals to finalize the loan. Typically, your lender will provide you with a reasonable estimate of what these fees should be, and if not, they can usually be found on most websites like this one.
To give you an idea of closing costs: a 3% down payment on a $200,000 loan equates to approximately $5,700. If the borrower puts 3% down and has a 30 year 730 FHA mortgage, for example, the fee would be 1.75% (which comes out to $5300), and the interest rate would start at 4.80%. The total cost upfront would be about $7800 or 10%. The monthly payments over 30 years would be about $1545/month.
Your real estate agent can also help you avoid costly mistakes, like putting more money down than you need to; or even locking your interest rate in too early. They are usually well-versed in getting a loan and how everything works, so make sure to talk to them about the details before signing the papers. Most people working in this industry will tell if something doesn’t look right with your request. Whether it be good news or bad news, letting you know either way is only fair since they don’t want their clients making any big mistakes that could keep them from closing their transactions without giving them any second thoughts.