When you’re looking to buy a house, it’s easy to get wrapped up in the search – spending time comparing locations, bedrooms, even the tiling in the bathroom. Unfortunately, this due diligence in the house search often leaves buyers exhausted on making choices as far as the mortgage is concerned – costing them thousands in the long run.
While it’s important to spend the time finding a home that you’re in love with, it’s equally important to find a mortgage that suits your needs and put you in the best financial position in the long run. That’s why today, we’ll be looking at the common mortgage mistakes that buyers make and teach you how to identify and avoid these pitfalls.
Ignoring your credit score
The mortgage rate you receive is ultimately a function of many factors, including external market factors that you don’t have control over. However, one of the components that you can control, and does have a major impact on your rate, is your credit score. Lenders like to see a solid credit history when extending these large loans, and as such, the lower your credit score, the higher your interest rate will be, resulting in a higher cost over the life of the loan.
If you’ve already built a solid credit score – no need to worry. But if you have little to no credit, are attempting to rebuild, or just would like to save more money on your loan – consider holding off on your home purchase to bolster your score.
Underestimating total costs
Homes, and mortgages, are complicated products, with more costs to consider than just the “sticker price”. From appraisals, inspections, insurance, and other closing costs, the expenses add up – and it’s important to budget for these. Failing to budget for these costs can make for, at the least, an expensive surprise, and at worst, losing out on your dream home. Typically, expect these closing costs to be around 2-5% of the total loan principal.
Skipping the home inspection
Home inspections, which are conducted by trained professionals with the goal of providing buyers with a complete picture of the house beyond what the untrained eye would catch, are invaluable to ensuring you are purchasing a home without any hidden flaws. However, due to the upfront costs adding up, some homebuyers will elect to pass on this step, which opens a host of financial and safety risks.
Common problems picked up by inspectors include foundational issues, faulty wiring, plumbing issues, among others, which can cost thousands of dollars to replace. By budgeting for the home inspection, homebuyers can save thousands, maintain peace of mind, and find points that may allow for further negotiation on the home price.
Only consulting one lender
When shopping for a mortgage, it is important you are working with a lender you can trust. Different lenders will offer different loan products, rates, and terms, along with differing levels of expertise and service. While it may feel uncomfortable to consult with multiple lenders the payoff for this level of effort will be invaluable. If you feel pressured for a commitment by any of the lenders you meet with, that may be a sign to avoid that lender altogether.
Making too small of a down payment
While a 20% down payment is not required, this is a popular amount as it allows you to avoid additional costs such as private mortgage insurance, while also bringing you to a lower monthly payment.
Down payments between 3-10% can also be made, with the caveat being that your monthly payments over the life of the loan will be higher, and you will need to pay private mortgage insurance, a policy designed to protect your lender, until you reach 20% equity in your home. The good news is that there are down payment assistance programs that first-time homebuyers may qualify for, which can help ease the financial burden up-front. These programs differ by location, but researching the programs you may be eligible for can save you thousands of dollars and help you in your journey to homeownership.
Not getting pre-qualified and pre-approved
Both pre-qualification and pre-approval are steps that you take while in the homebuying process that give you, your lender, and your real estate agent a snapshot of your financial situation. Pre-qualification, which is one of the first steps you should take in the homebuying process, is a soft inquiry into your finances, and gives you an idea of how much you can afford to spend on a house. This will save you time and energy in allowing you to focus your search on homes that fit your unique financial situation and can help your real estate agent with your search as well.
Pre-approval is a harder inquiry into your finances and is the best thing you can do to prove your creditworthiness to a lender. This process will typically be meticulous, so ensure that you have answers to any questions about financial decisions you have made, such as prior credit card debts, car loans, etc. Pre-approval is a valuable tool to have in your arsenal, as it can give you a competitive advantage when putting in an offer on the home, as it shows that you are a serious buyer and gives the seller confidence that you can secure a mortgage.
Skipping either of these steps can ultimately make your mortgage process more time-intensive, and possibly cause you to miss out on a home you were otherwise capable of purchasing.
Buying more home than you can afford
While the pre-qualification and pre-approval give you an upper bound for how much home you can buy, it is important to consider that this is the maximum amount the lender thinks you can reasonably afford – but that is not the same as how much you should reasonably spend. It’s easy to get excited by a high pre-approval, but that excitement can quickly turn to stress if you buy a home that, while on paper you can afford, in practice forces you to cut corners in other aspects of your life.
Everyone’s financial situation is different, so even with equal pre-approval amounts how much one homebuyer can safely spend could be vastly different from another. It is important to consider your entire financial picture thoughtfully when deciding how much to spend, rather than taking the number your lender provides as an end-all.
Minnwest Bank is here to help you grow
Minnwest Bank is here to empower you with knowledge to make informed decisions about your mortgage journey. Choose Minnwest Bank as your mortgage lender, and you’ll gain a team that’s always in your corner. We take time to get to know you, your family, and your financial goals, so we can provide the expert guidance to help you achieve your dream of owning a home. And through the life of the loan, help is always a phone call or visit away.
Learn more about our mortgage programs and reach out to a Mortgage Banker in your community today.
