February 21, 2011 (Jeff Alan)
It’s a brave new world out there. There are more homes for sale than political promises, but getting a mortgage loan has never been tougher. The housing crisis has resulted in a boon of new regulations, with new mortgage-lending regulations to protect you from predatory lenders and many new underwriting rules to protect lenders from defaults by borrowers as well.
Knowledge is King and in the world of mortgage lending that knowledge cold save you many thousands of dollars, not only at the time of your closing, but years later in higher payments that could have been lower. If you want to buy a home today without overpaying for a mortgage loan, you’ll have to come to the table with a little mortgage market savvy, a serious job, excellent credit, sufficient liquid assets and limited debt.
Oh and by the way…they don’t take blood or first born anymore. Here is our list of 10 mortgage mistakes that can kill your deal:
1. Check your credit before applying: Long before you begin searching for a mortgage, you should know where you stand in the credit score department. After all, a bad credit score can bump up your mortgage interest rate several percentage points or leave you with no approval at all. Be sure you check your credit early on (several months in advance) to check for errors or take care of anything on your credit report that you didn’t know about. Can’t think it won’t happen to you? Think again. Some people have been surprised to find out that unpaid late fees on movie rentals showed up as collection accounts on their credit records…without their knowledge.
2. Applying for new credit alongside the mortgage: Keep your impulses for that new LED TV in check, avoid applying for any other type of credit before and during the mortgage application process. Whenever you apply for new credit, you’re seen as a greater credit risk, at least initially. If you happen to apply for a credit card or auto loan around the same time you apply for a mortgage, your credit score might get dinged enough to kill your eligibility or bump up your interest rate. Not only that, new regulations require that your credit record be checked at the beginning of the loan process and at the end to insure this does not happen. They’re going to know so don’t do it.
3. Get an education: Learn everything you can about mortgage loans before you begin. Think about it, you’re going to be applying for a product that someone is going to earn a commission on at the end of the process. Do you think they really have your best interest in mind? There are many honest and carrying mortgage professionals out there, but why test your luck. Luckily today there are far fewer mortgage choices out there and with interest rates so low, most would suggest a fixed rate mortgage. But if you’re on the edge of qualifying, an adjustable rate mortgage (ARM) may be a better fit for you. Stay away from “exotic” loans…that’s how we got where we are today.
4. Not shopping around: Just because you’re pre-approved with one bank doesn’t mean you need to obtain financing from them. Be sure to shop around with multiple banks and lenders and even consider a mortgage broker. A broker can shop your rate with a number of banks concurrently and find you the lowest rate with the best terms. And don’t be afraid to shop brokers…remember they’re getting paid a commission too! A recent survey by LendingTree revealed that only 40 percent of all mortgage shoppers got more than one quote, yet 96 percent of all shoppers will shop around for anything else. Why wouldn’t you shop around for something that could save you potentially thousands of dollars? And don’t forget to factor in closing costs! One thing to watch…different lenders can charge different fees and sometimes use different names for the same fees. Don’t be afraid to ask and negotiate.
5. Failing to look at the total payment: A common mistake made by prospective home buyers is not factoring in their property taxes and insurance premium into their overall mortgage budget. Along with the principal and interest, the debt-to-income ratio (DTI ratio) used to determine if a borrower will qualify for a certain mortgage payment, is calculated by dividing the proposed cost of PITI by gross monthly income. The lender or a real estate agent will be able to estimate the property taxes, but shopping around for homeowners insurance before you look for a home will give you an idea of what insurance will cost. Insurance policy costs can differ greatly.
6. Do not lie on your application: New tougher lending guidelines make the age old practice of fibbing on your mortgage application very difficult. So if you’re a job hopper or get that urge to over-inflate your income…don’t. It could cost you a mortgage. Making false statements on your mortgage application is mortgage fraud, a felony punishable by up to 30 years in federal prison, a $1 million fine, or both. If lenders discover false information they can call the loan due and ruin your credit.
7. Forgetting to lock your rate: Mortgage rates change daily and sometimes several times daily. All those mortgage quotes you obtain are just quotes until you actually tell the bank, lender, or broker to “lock it in.” Once locked, your rate is guaranteed for a certain period of time, be it 7 days, 15 days, or a month. But never assume your rate is locked until you get it in writing! And if you’re going to play the “interest rate” game hoping to lock in the lowest rate, play at your own risk. I’ve seen more lose that have won.
8. Not getting pre-approved: Before shopping for a home, make sure you can actually qualify for financing by getting a pre-approval. A mortgage pre-approval is more robust than a simple pre-qualification because the bank pulls your credit and looks at your income, assets, and employment. Your DTI ratio will also come into play to ensure you know exactly how much you can afford. Having a pre-approval tells sellers your serious about the purchase and may give you an advantage over an unapproved buyer. You can learn more about pre-approvals here.
9. Understand the costs: Scrutinizing loan costs and fees means going beyond just the annual percentage rate (APR), which includes only your actual interest and any additional costs or prepaid finance charges you finance. Extra costs include closing costs, commissions, points and other fees that may or may not be financed with the mortgage. The real costs of homeownership also includes maintenance and repair, annual property taxes, homeownership fees, homeowners insurance, and renovating and remodeling.
10. Reading your loan documents: It’s your responsibility to read and accept the terms of your new mortgage. It’s one of the most heard excuses of the housing bust,”I didn’t know.” Sure, it might be a pain to go through all the loan documents at signing, but it’s a bigger pain to sign up for something you don’t want or agree with. Take the time at closing to ensure you understand everything you’re signing, and thereby agreeing to. And don’t be afraid to ask questions! Otherwise, you could wind up with a mortgage with predatory terms and no place to turn. If you’re not sure, bring a lawyer! It may cost you a little more, but a bad loan will cost you far more! Don’t trust an escrow company to be unbiased. As I learned in my time in real estate…many escrow companies are owned by real estate agents.
Knowledge is King!
Tags: mortgages, mortgage-lending regulations, housing crisis, lenders borrowers, underwriting rules, credit check, mortgage loans, fixed rate mortgage, adjustable rate mortgage, ARM