Is buying a new house on your to-do list this year? In 2019, the number of existing homes that sold reached 5.34 million and another 682,000 new construction homes sold, so you’re in good company.
Before diving in, learning about common mistakes with mortgages can help protect your finances. Even one small mistake can cost you extra money or put you at risk of your financing falling through before closing.
Keep reading to learn about seven common mortgage mistakes to avoid.
1) Ignoring Your Credit and Financial Situation
You might feel ready to buy a home, but will lenders agree? If you don’t know your current credit and overall financial situation, you might be surprised to find out you don’t qualify for a home loan or can’t get the rates you expect.
Pull your own credit report before lenders do so you can see what’s on it. If there’s an error, you might miss out on the best mortgage rates available.
If it’s accurate, you might realize your score isn’t where you want it to be. A high credit score gets you a lower interest rate on your mortgage, which saves you a significant amount of money over the life of the loan. Waiting to apply for a mortgage while you work on your credit might only delay your purchase for a short while, but it could make your mortgage terms a lot better.
Be realistic about your finances in general to ensure you can truly afford the cost of homeownership. Look over your budget and income to ensure you leave enough cushion to stay current on all bills.
2) Borrowing Too Much Money
Your lender decides how much money you’re approved to borrow. It’s not always the best decision to borrow the full amount, though. On paper, it might seem like you can afford a higher mortgage, but you know what feels comfortable to you.
Consider that your financial situation could change over time. You could lose a job, have an unexpected expense, or face other major life changes that makes a more expensive home suddenly too much to afford.
Getting pre-approved is an important part of the process, determining if you even qualify for a loan and how much you can get. Your loan could still get denied if things change, but the pre-approval makes it easier to buy a home and gives sellers more confidence in accepting your offer. It also gives you a chance to evaluate how much you feel comfortable borrowing.
3) Not Understanding the Terms
Mortgages come with a lot of jargon, including more acronyms than the average person can remember. If you’re not familiar with financial terminology or how mortgages work, it can be even more overwhelming.
Find a lender or a real estate agent who takes the time to educate you on the process. You want people on your team who will answer your questions in ways you can understand and who take time for you.
If you’re not confident in your understanding and you’re not getting help from your team, you might end up in a loan that doesn’t benefit you.
4) Accepting the First Loan
Getting a pre-approval is exciting and means you can go forward with your home search, but going with the first lender could mean you miss out on a better loan. Rates and terms can be drastically different when you start comparing lenders and types of loans.
You might also qualify for special mortgages, such as a VA loan if you or your spouse served in the military, or an FHA loan with a lower down payment for lower income borrowers. If you want to buy a home in a designated rural area, you might be able to get a USDA loan.
Looking into all of the loan types could get you lower interest, qualify you for a lower down payment, or offer other special perks. If you don’t shop around and consider different types of loans, you might miss out.
5) Skimping on the Down Payment
If you’re not in a position to put down the full, standard 20% down, you can still get a home. Some loans have very small down payment requirements, around 3.5%.
That lower down payment means you can buy a home sooner, but your payments will be a lot higher. You’ll also pay private mortgage insurance, which is an additional payment on top of your mortgage.
At the same time, you don’t want to drain your savings completely for a larger down payment. Owning a home often means surprise expenses. If you don’t have any savings, you’ll have a tough time paying for those things.
Waiting a little longer to save a larger down payment can make your new home more affordable.
6) Ignoring or Miscalculating the Costs of Home Ownership
Affording your mortgage payment each month is only one part of the equation. If you don’t figure in the other expenses of home ownership, you might find your budget is tight each month. You also have several expenses during the home buying process.
Common costs of buying and owning a home include:
- Inspection fee
- Loan origination fees
- Title fees
- Home warranty
- Homeowner’s insurance
- Property taxes
- HOA fees
- Extra furnishings for a larger home
- Higher utility bills
- Renovation costs
- Tools and lawn care equipment
- Routine maintenance
Create a thorough budget that includes those regular expenses to ensure you can afford everything. Plan to have money in savings for unexpected expenses.
7) Changing Your Financial Situation Before Closing
Your lender gave you the stamp of approval for your mortgage, but that doesn’t mean you’re completely in the clear. Before the sale closes, the lender does lots of checks, including running your credit again. If anything changes, you might not qualify for the loan anymore.
Some potential problems that could affect your mortgage include:
- Having late or missed payments on debt
- Opening new credit cards
- Closing old credit cards
- Charging large amounts to existing credit cards
- Taking out new loans
- Changing jobs
- Filing for bankruptcy
- Having a debt sent to collections
- Paying large amounts on old debts
Once you’re pre-approved, continue with your finances the way you always have. Don’t make any major changes, and aim to keep your credit score stable during that time.
Avoid Common Mistakes With Mortgages
By taking steps to avoid common mistakes with mortgages, you can secure the most financially beneficial loan for your situation. Going into the home purchase well informed makes the process less stressful.
Explore our finance section for more useful information.