Mortgage Mistakes to Avoid Part II

Getting a mortgage is exciting, but it can be pretty stressful, too. After all, a mortgage is likely the largest financial transaction you’ll make in your lifetime, so for most borrowers, the pressure’s high to get everything right. In order to alleviate some of that pressure and help reduce your mortgage-related stress, we compiled a list of mortgage mistakes that you can avoid to ensure your transaction goes through as smoothly as possible. We started the list back in April, but decided to expand on that post with a few extra points.

Take a look at the following mortgage mistakes to avoid. If you have any questions or concerns, don’t hesitate to discuss them with your loan professional.

Mistake No. 1 – Bankruptcy or Foreclosure

OK, so this may seem like a no-brainer, but it’s still worth mentioning. Having a bankruptcy or a previous foreclosure on your record can severely hamper your ability to get a home loan. It’s not impossible, but it will probably take a lot more time and effort.

Mistake No. 2 – Making Late Payments

If you have an existing mortgage, be sure to make your payments on time, every time. We know that sometimes life throws a curve ball and a late payment here and there may be unavoidable. But to ensure you get a good mortgage at an affordable rate, avoid making any late payments.

Likewise, late payments on things like rent, utilities, or credit cards can have a negative effect on your credit standing so make sure you’re paying for all services and repaying all of your debts in a timely fashion.

Mistake No. 3 – Not Locking in Your Rate

Don’t be tempted to “wait and see if rates get lower.” After mortgage rates bottomed out following the economic downturn, they’ve been increasing – albeit very slightly. Right now, mortgage rates are staying very close to historic lows, but they are most likely not going to fall much lower, if they fall at all.

By locking in your mortgage rate, you’re ensuring that you’ll have a good rate on your home loan, even if rates rise after you submit your application and it goes to underwriting.

Mistake No. 4 – Trying to Refinance a Home You Just Tried to Sell

Mortgage lenders may be too keen on giving you a refinance loan for a house you don’t really want. Therefore, don’t attempt to apply for a refinance within six months of listing your home on the MLS.

If you try to sell your home and you don’t get any interest within the first few weeks, go back to the drawing board and reevaluate your home selling strategy. This may require lowering your asking price, hiring a home stager, making some minor home improvements, or hiring a different real estate agent. Most housing markets are sellers markets right now, as demand for housing is high, so just be patient, do what you can to attract serious buyers, and enlist the help of professionals when needed.

Mistake No. 5 – Doing Things That Will Alter Your Credit

Your credit score and credit history are two major factors that contribute to whether or not you get approved for a home loan. By doing any of the following just before or just after applying for a mortgage can seriously alter your chances to get approved – and not in a good way.

• Opening a new credit account/credit card
• Making large or excessive charges on existing credit cards/accounts
• Closing a credit card account (pay it off if you must, just don’t close it!)

Mistake No. 6 – Not Checking Your Credit Before Applying

While we’re on the subject of credit, make sure you investigate yours before you apply for a mortgage. Better yet, check your credit report well in advance – the very minute you think you might want to buy a home. Why? Because credit report errors are more common than you think and they can sometimes take months to get resolved. Better to get a head start on that now rather than wait and risk the possibility of getting turned down.

Mistake No. 7 – Ignoring A Home’s True Cost

A lot of mortgage borrowers get themselves in trouble when they fall in love with a house they can just barely afford. Let’s use an example to illustrate.

Say you’re pre-approved for a $200,000 loan. You find a really nice 4-bedroom brick ranch for $189,000. With a 20% down payment and a 30 year fixed rate of 3.92%, your monthly principal and interest payment would be around $715. Sure, technically it’s within the range that the bank is willing to lend you, and $715/month seems pretty good for such a big house, but when you look at the whole picture (taxes, insurance, HOA dues, maintenance costs, utility costs, etc.) that house may wind up actually costing you more than $1,200/month. Unfortunately, your monthly income is only about $3,000. That means a whopping 40% of your monthly income is going to housing costs…yikes! That’ll leave very little money left over each month for things like car payments, health insurance, and luxuries like going out to dinner or taking a vacation.

Instead of the 4 bedroom ranch for $189,000, perhaps something like a 3 bedroom modular for $159,000 would be a better choice. With a 20% down payment and a 3.86% interest rate, your monthly principal and interest rate would be around $597. Plus, a smaller home would likely have lower utility costs, lower taxes, and may be less expensive to insure. Also, if you can find a home that is not part of an HOA, that will save you even more money. That could put your monthly housing costs somewhere around $850, which is 28% of your monthly income. Much better!

Please note, the figures in this example are simply for educational purposes. Interest rates will vary by program and different borrowers will have different financial criteria. If you’d like to run the numbers for your own scenario, contact the home financing professionals at Luxury Mortgage. 

Be sure to check back on our blog for more home buying information and mortgage-related advice.