Common Mortgage Mistakes for First-Time Homebuyers
The decision to buy a home can be exciting and thrilling. The process itself? Not all clear skies and a walk in the park. During the home buying process, borrowers unwittingly make easily preventable mistakes that can leave them with an expensive loan, a longer closing process, buyer’s remorse, or an unfortunate rejection of their mortgage.
The first step to avoiding these mortgage errors is proper education — here are 28 of the most common mortgage mistakes that first-time homebuyers make and how to avoid them.
Common Credit Mistakes
Lenders look at credit scores to find the current credit obligation and history of payment to help determine their mortgage financing eligibility. Luckily, we have a beginner’s guide on credit repair if your credit raises some red flags. These are some credit-related mistakes that can affect your mortgage.
1. Closing credit card accounts
Depending on how much you owe on your credit card accounts, canceling them may cause a drop in your credit score. Even if you rarely use your cards for purchases, a lengthy credit history can benefit your score. If possible, keep some credit accounts open to build an established history.
2. Cosigning a new loan
When you cosign a loan, you promise to pay off the loan if the primary borrower stops making payments. The promise comes up on your credit score as a potential financial burden, so even if you are not paying off that loan, it typically results in a lower credit score. It will also be added to your debts when qualifying for a mortgage since a cosigner is fully liable for the debt.
3. Falling behind on bills
Falling behind on bills can be reflected by your credit score, where it will remain for at least seven years. Since payment history is a central part of determining a credit score, falling behind on even one payment can have a sizable effect on your credit score. Cell phone and cable companies may also be able to record any delinquent debt on your credit if it goes unpaid.
4. Lack of established credit history
The length of credit history makes up 15 percent of a credit score, so a short or non-existent credit history can lower your credit score significantly. To establish your credit history, you should show three or more pieces of credit to your name. These credit pieces can be student loans, credit cards (each card = 1 piece of credit), builder loans, and car loans, among others. When these credit pieces have been open for three years or more, this demonstrates that the borrower can responsibly use credit.
5. Opening credit card accounts within 180 days of applying for a loan
A new credit account both lowers your average credit age and adds an inquiry to your credit report. Both of these things can result in a lower credit score.
Common Loan Mistakes
From who you work with to the loan product you choose, the loan process creates many opportunities for a borrower to make potential mistakes.
6. Assuming all lenders are the same
The services offered by mortgage lenders vary across the board; loan programs, customer experience, calculation of APR, and cost of service. Analyze your options before choosing your lender to make sure they are a reputable company, have been in the business for a long time, and have good reviews. Additional factors such as transparency and responsiveness come into play when looking for a great mortgage lender.
7. Assuming the loan closing is guaranteed
Optimism and finances combined pose risky hopes. Be ready to provide any requested documentation as soon as possible, restrict from adding on any new debt, and stay in town until your loan closes. Most obstacles can be avoided with a simple phone call, so it is best to be in clear communication with everyone assisting with your transaction. This can make closing your loan immensely easier.
8. Not considering an adjustable-rate mortgage when planning on short-term homeownership
Adjustable-rate mortgages (ARM) usually offer competitive rates for the pre-adjustment fixed-rate period of the loan, which commonly means a lower monthly mortgage payment. Fixed-rate periods on an ARM can be 3 years, 5 years, 7 years, or even 10 years. Always explore this option, especially if you don’t plan on living in your home for less than 7–10 years. Apart from ARM, there are other loan programs to consider depending on your situation.
9. Not being prepared for closing costs & prepaid items
Prepaid items (which are payments put into reserves to pay off future costs such as taxes, insurance, and interest once they are due) and closing costs can prevent a loan from closing if a borrower is not prepared to pay them. Be sure to check the estimate that your lender provides you with when you apply for your loan or obtain a closing cost estimate ahead of time.
10. Depositing unusually hefty bank deposits
Lenders look for borrower stability, so sporadically depositing money or moving large amounts of money between accounts may raise red flags. Your lender may even want to ask additional questions to analyze your situation. If this is the case, make sure all details are traceable and explainable — it is a government requirement for lenders to be on the lookout for any suspicious activity.
11. Choosing a longer-term for purchase/refinancing
Many people look at the smaller monthly payments of a longer-term loan and mistake that for being the more affordable option. This is true on a month-to-month basis, but looking at the big picture, it can be a far more expensive option. Because the interest on longer-term loans can be higher, you will be required to pay this for a much longer period. When refinancing, you may be able to choose fixed-rate terms of 10, 15, 20, or 25 years instead of taking your loan back out to 30 years.
12. Hastily choosing the lender with the lowest mortgage rate
Low interest rates don’t always equate to your best loan option. Lenders can adjust rates by modifying other parts of the loan, such as closing costs or the length of the loan term. A low interest rate in an advertisement can also be a short-term teaser rate that adjusts over time. The interest rate is an important part of choosing your lender, but there are many other factors such as reputation, availability, and closing costs to consider.
13. Ignoring your loan-to-value ratio
The loan-to-value ratio (LTV) is a percentage that is calculated by dividing the mortgage amount by the appraised value of the property. Lenders use this figure to assess the risk involved with the loan. In most cases, lenders require mortgage insurance (MI) for loans with LTV ratios over 80 percent, which could mean higher monthly costs. If you cannot get your LTV below 80 percent, aim for an LTV of 80 to 90 percent because it allows for lower mortgage insurance rates that are easier to get rid of. You can reduce your LTV ratio and your monthly payments by increasing your down payment.
14. Not checking for hidden fees
It is always a good idea to know exactly what you are expected to pay. This way, the cost of obtaining your loan will not be a surprise or too expensive for you to afford (which can result in you losing your earnest deposit). By reviewing the estimate that your lender provides after submitting a loan application, you will be better prepared for any surprise fees.
15. Not getting a VA loan if you qualify
VA loans are available to active-duty servicemen, veterans, and reserves. They come with numerable benefits such as a zero (0) percent down payment, competitive rates, and no mortgage insurance requirements, among others. If you are involved with the military, contact us to see how you can take advantage of this VA benefit.
16. Not disclosing all personal and financial details
Loan officers are looking to get the best possible loan package for your financial situation. If they don’t know the whole picture, they might set you up with a loan program that doesn’t meet your needs. There are many reports that your lender will be running throughout the loan process. By not disclosing all details you are also running the risk of transaction delays or loan denial. Depending on what information is excluded, you might also be at risk for mortgage fraud. Avoid this at all costs by being as honest as possible with your trusted loan officer.
17. Going on vacations during the transaction
Going on a vacation before the loan is closed can jeopardize your transaction. You will need to be accessible to help obtain any needed documentation or physically sign the loan documents with an approved notary.
Common Home Affordability Mistakes
Whether or not a home or loan is affordable is the number one question on most people’s minds when they are buying a home. Here are some tips to help you avoid a financial crunch.
18. Adding too much debt
Many people want to get a new car or furniture set to go along with their new home. However, this could backfire because it can raise your debt-to-income ratio and lead to the denial of your mortgage if you buy those new items. Avoid adding debt before closing and postpone making these purchases until after you have closed your loan. If you must take out credit or make a large purchase before closing your loan, make sure to consult with your loan officer beforehand.
19. Ignoring the true cost of ownership
When determining whether or not you can afford a home, some people make the mistake of doing things such as comparing their rent to their mortgage payment. The cost of homeownership goes beyond your mortgage payment and includes things such as repairs, property taxes, and insurance. Failing to set a budget that accounts for these additional costs can set you up to be house poor, so be sure to plan a budget that leaves you some wiggle room after your mortgage payments.
20. Letting the bank tell you how much home you can afford
When a bank sets your price range, they base it on your gross income. Since this doesn’t account for federal taxes which lower your net income or other expenses such as insurance, utilities, or property taxes, you could find yourself trying to buy a home that is far too expensive for you.
21. Not having enough cash on hand after closing
Pulling all of your money out of savings to meet the down payment and closing costs can leave you susceptible to unexpected expenses such as house repairs. Leave a cushion in your savings in anticipation of these kinds of surprises.
Common Home Search Mistakes
Getting financing for your dream home is one thing, but tracking down your dream home is another.
22. Not researching a home’s HOA
Not all Homeowner Associations are created equal. Some HOAs have monthly fees that are higher than their residents’ mortgage fees. Some HOAs offer more amenities for the same price as other HOAs. Some HOAs have restrictive rules on pets or home businesses that might affect your lifestyle if you are not careful. If you find a home that is part of an HOA that you’re interested in, read the fine print on what they offer, what they charge, and what they expect from you as a part of their community. It is also a good idea to look at their financials and history of neighborhood and property improvement.
23. Getting pre-qualified but not pre-approved
Getting pre-qualified involves providing your lender or bank with a portrait of your financial circumstances based on your income, assets, and debt, which gives you an idea of how much you can expect to be approved for. However, since it does not include things like your credit report and financial history, the number that you receive during pre-qualification is not a sure thing. Pre-approval goes more in-depth by reviewing your credit report and conducting extensive financial background research. Getting both a pre-qualification and a pre-approval will give you a better idea of what you can afford and gives you leverage when you make your offer since it reflects that you are a more serious buyer who knows that they can receive appropriate financing for the home.
24. Hiring the wrong real estate agent
Many people choose their real estate agent based on popularity alone. Popularity can be driven by many things such as a large marketing budget or aggressive tactics, so it should not be used as a sole barometer for the quality of the real estate agent. Research your real estate agent before hiring them by talking with recent clients or looking at review sites such as Yelp. Reviewing licensing info or industry awards are also useful in finding out whether or not you should hire a real estate agent.
25. Not researching the neighborhood
While home shopping, you might come across a home with a lower-than-expected price that checks all of your boxes — the right amount of bedrooms, backyard size, etc. — but there is more to a home than its features. Neighborhood factors such as crime rates, traffic/noise, school proximity, and quality of public services can outweigh the benefits of your home and leave you with buyer’s remorse. Thoroughly investigate the property by talking to the neighbors, making multiple visits at different times (a Monday evening can be far different from a Saturday morning, for example), and look at local media such as newspapers or blog posts so that you can be sure that the neighborhood is right for you.
26. Skipping the home inspection or pest inspection
Skipping these inspections can save you some money in the short term, but can leave you with an expensive headache in the long term. The price of repairing rot, interior plumbing, termite damage, or anything else that would have been spotted in an inspection (and subsequently repaired by the seller) can rapidly add to your homeownership costs.
27. Only taking real estate advice from friends and family
Solicited or not, people in your life will likely want to give you advice on home buying. While your friends and family mean well, they run the risk of giving you outdated or outright incorrect advice. Because of this, you should get informed advice from a professional before making any decisions on your home or loan.
28. Underestimating the transaction timeline and length of the home buying process
Every home, loan, and borrower is different, and the length of the home buying process is no exception. Some borrowers can move into their homes in a few weeks, while others may take longer to work through the process. Avoid setting unrealistic expectations for yourself by being ready for a 30–45 day process.
Learning From the Mistakes
By understanding common errors, you can better avoid them and increase your chances of homeownership success. It is our goal to make sure all homeowners have a smooth and successful transaction. Preparing yourself financially and maintaining open communication between all parties involved with the transaction are the best steps to take.
Knowledge is key, which is why we invite you to join our free homebuying bootcamp, a unique online course intended to help first-time homebuyers learn the entirety of the process and become confident in purchasing their dream home. If you have any questions or need any assistance with a home loan transaction, feel free to contact us at any time and we’ll help you along every step of the way.