Buying a home is probably the biggest financial decision any of us ever makes, especially if it's our first house. While you might focus on finding that perfect house, you also should spend time thinking about how you will pay for it. Luckily, you can do a lot of the legwork needed to get the perfect mortgage before you start house hunting. In fact, not doing so is the third of the seven expensive mistakes that too many homebuyers make.
Avoiding all seven mistakes and getting financing for your home arranged in advance takes time but it doesn't need to be difficult. Investing your time and effort now can pay you back many times over by ensuring that your monthly payments will be in line with what you can afford and are willing to spend.
Mistake Number One is talking to lenders before checking your own credit report for mistakes. If you find mistakes, give yourself time to get them corrected. You are entitled to one free credit report every year from each of the big three credit reporting agencies: Equifax (800) 685-1111 or online at www.equifax.com, Experian (888) 397-3742 or www.experian.com, and Trans Union (800) 888-4213, or www.transunion.com. Each credit report has information on how to correct mistakes. It is also now possible to get all three credit reports from any of the three agencies.
Mistake Number Two is dealing with the wrong lender. Ask friends and relatives about their mortgage lenders and if they were satisfied with both the service and the loan. Talk to at least three different lenders and ask them all the same basic questions about interest rates, points and the cost of the loan. Compare their answers. Compare their personalities. Do you like them? Do you trust them?
Mistake Number Three , as mentioned earlier, is looking for a home before you look for a mortgage. In fact, you should get pre-approved for a mortgage and then go looking for a home that mortgage can buy. Some real estate agents won't even take you house hunting until they see your letter of approval. Getting pre-approved, however, means a lender has actually examined your credit history, pay stubs, and all the other required paperwork and approved you for a loan for a specific amount of money. When you couple that amount with the down payment you plan to make, you will know how much house you can afford.
Don't bother getting pre-qualified. There is a difference, and getting pre-qualified is virtually useless. There is no real credit-checking involved in pre-qualification, just conversation, and no money is loaned until the checking is done.
Mistake Number Four is borrowing either too much or too little money. Just because you're approved for a loan of $250,000, for example, doesn't mean that you must borrow all $250,000. The approval amount simply is a ceiling limit.
The key point to remember is that you determine how much -- or how little -- you want to spend for a house and how big a monthly payment you want to make. From a profit standpoint, the lender wants to loan you as much money as possible, and the real estate agent wants to sell you the most expensive home possible. You, however, set the limits, so be realistic. You want a comfortable home, both living-wise and payment-wise. So tell the real estate agent what price range you are interested in, and if you don't like what the agent shows you, find another agent.
Mistake Number Five is failing to plan for the unexpected. Tornados and other natural disasters such as floods, tsunamis, earthquakes, and wildfires, can strike without warning. So can illnesses and injuries, job lay-offs, and other physical and fiscal disasters. One of the first questions you should ask yourself is how long you and your family could manage without a paycheck. How much money do you have in savings, stocks, bonds, or bank Certificates of Deposits? Financial planners suggest you have at least enough money on reserve to cover you and your family's expenses for three full months if the paychecks suddenly stopped or you had to cover a medical or other emergency.
Mistake Number Six is not knowing everything you should about your specific loan. That includes why you got this particular loan instead of a different one. There is the traditional 30-year fixed-rate conventional loan where your monthly payment will be the same for the life of the loan. You can also get similar loans for 15, 20, and even 40 years. There are also adjustable-rate mortgages (ARMs) that start with a lower interest rate that later can adjust up or down. There are interest-only loans where you pay only the interest without having to reduce the principal for a specified number of years.
Each of these types of loans makes sense for certain people in specific circumstances. With a conventional loan, you know what the payment will be for as long as you keep the loan. If you have an ARM, however, those payments can change. Do you know when? Do you know how much they can change? How often? No one buys a home without examining it thoroughly, from top to bottom. You should do the same with your mortgage.
Mistake Number Seven is not knowing the full cost of home ownership. If you've always been a renter, you might be in for a few surprises. As a renter, the landlord is responsible for maintenance, upkeep and repairs. The landlord also pays the property taxes and special assessments. Once you sign the final papers, those responsibilities are all yours, and they can be expensive. So you should make a list and estimate these costs when you are figuring how much you can pay toward your home each month.
It is fairly easy to avoid the seven expensive mistakes of getting a mortgage. All it takes is a little forethought, time and effort. Once you have taken care of them, you can then focus on what the process is all about -- looking for that perfect home.
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