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Avoiding the Seven Deadly Mortgage Mistakes

There are so many things that can go wrong when you obtain a mortgage; it is no wonder it is such a daunting process. A recent MSN.com Money article highlighted the seven biggest mistakes lenders and mortgage brokers see, and discussed some of the ways you can prevent them from happening.

Mistake #1
Having Bad Credit
It is far too easy to just cross your fingers and hope everything related to your personal credit will be okay. However, by not checking what your credit report says and what your FICO score is, you could be in for a nasty surprise. Your FICO score is a three-digit score that is used in the majority of mortgage lending decisions. If you get your credit report and FICO score (available for less than $15 from places such as www.MyFico.com) far enough in advance, you can challenge any errors and make some real headway into correcting anything that is making your score lower than you would like.

Mistake #2
Borrowing Too Much
Many new homeowners fail to realize just how many additional expenses are involved in a new home. In addition to a mortgage payment (which is usually higher than your old rent payment), there are taxes, higher bills, maintenance and repairs, as well as a ton of other things that crop up. Most lenders are happy to give you up to 33 percent of your total income, when you should be aiming more in the region of 25 percent.

Mistake #3
Avoiding First-time Homebuyers’ Programs
Such programs, which are often sponsored by your state, county or local city government, can give you better interest rates, and more appealing terms. Check out the housing agencies for your state, county and city to see what they can offer you.

Mistake #4
Failing to get Pre-approved
When house hunting, you’ll have much more weight with home sellers and their agents if you already have a loan lined up. This means getting pre-approved. Don’t confuse this with pre-qualified. Being pre-qualified simply means that a lender has figured out approximately what you can afford, based on how much you make, and how much debt you currently hold. Getting pre-approved is a far more vigorous process, which involves actually applying for a loan, submitting tax returns and pay stubs, as well as a raft of other information.

Mistake #5
Not Shopping for Rates and Terms
By shopping around, you can ensure you are getting the best rate, and you can try and haggle out of some of the excessive fees lenders charge – such as $150 for pulling your credit report, something which only costs them $15. The other advantage to shopping around is that you make sure you are getting a loan appropriate for your credit score.

Mistake #6
Not Planning for Closing Costs
Closing costs include all those expenses you have to write a check for at closing, and include things such as taxes, title insurance, points, attorney’s fees, prepaid homeowners insurance and other lending fees. This amount can be anywhere from 2 percent to 7 percent of the cost of your new home, and you cannot just put it on your credit card! The best way to properly plan is to get a good faith estimate from your lender as early as possible.

Mistake #7
Running out of Money
Getting a mortgage, paying fees, moving house, buying new things, fixing moving damage, fixing unexpected items – these things happen to all of us, and for some, it usually means running out of money after closing. The best plan is to have enough in savings so that after your down payment, after closing costs and after general moving expenses, you have three months’ worth of reserves. By reserves, we mean enough money to pay every monthly expense you have. Having such a reserve will greatly reduce the stress on a process that is stressful enough.

There are always mistakes waiting to happen - the best you can do is plan appropriately to avoid them the best you can. This doesn’t have to be a scary process, just follow these tips, and plan ahead!

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