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Securing a mortgage is an important step in buying the home of your dreams.
You may not realize how many options you have when it comes to home financing
Make your home search more effective (and less frustrating) by figuring out how
much you can afford
If you already own your home, refinancing may be an attractive option.
Applying for a mortgage can be a daunting experience.
It's not enough that you're agreeing to take on the biggest debt of your life,
one that represents two to three times your annual income. You're also
confronted with piles of paperwork, flurries of fees and a tidal wave of terms,
from amortization to title insurance, whose meaning is fuzzy at best.
"Whether it's a professor at Stanford or a ditch digger," said San Francisco
mortgage broker Leon Huntting, "most people don't understand the loan process."
In this confusing and pressure-filled atmosphere, it's easy to make some
mistakes. Here are some common ones that lenders and mortgage brokers see, and
what you can do to prevent them.
Not fixing your credit
Mortgage brokers say they're confounded at the number of buyers who apply for a
mortgage with their fingers crossed, hoping their credit will allow them to
qualify for a loan.
Before you even think about applying for a mortgage, obtain copies of your
credit report and your FICO credit score. Your FICO score is the three-digit
number that's used in 75% of mortgage-lending decisions. You can order your FICO
score on the Web for a fee of $12.95, which includes a copy of your credit
report. (See link at left.)
Doing this at least six months in advance should give you plenty of time to
challenge any errors on your report and ensure that they're removed by the time
you're ready to apply for a loan. You can also see the legitimate factors that
are hurting your score and do something about them, such as paying off an
overdue bill or paying down credit card debt.
Not looking for first-time home buyers' programs
These programs, typically sponsored by state, county or city governments, often
offer better interest rates and terms than you'll find among private lenders,
said mortgage consultant Diane St. James. Some are tailored for people with
damaged credit, while most can help people with little saved for a down payment.
Some of these resources are listed on St. James' educational Web site, ABC
Mortgage Consulting (see link at left). You can also call the housing agencies
for your state, county and city to see what they offer.
Not getting pre-approved for a loan
Many first-time borrowers confuse being "pre-qualified" with being
"pre-approved." Pre-qualification is a pretty casual process, where a lender
tells you how much money you probably can borrow based on how much money you
make, how much debt you already have and how much cash you have for the down
payment.
Getting pre-approval, by contrast, is a much more rigorous process and involves
actually applying for a loan. You typically submit tax returns, pay stubs and
other information. The lender verifies the information and checks your credit.
If all goes well, the lender agrees in writing to make the loan.
In a hot or even warm real estate market, the house hunter who is only
pre-qualified is a cooked goose. Home sellers and their agents give much more
weight to offers being made by buyers who already have a loan lined up.
Borrowing too much money
Many people take out the biggest loan they possibly can, figuring that their
incomes will eventually increase enough to make the payments comfortable. But
few first-time buyers have any clear idea of how expensive homeownership can be.
Not only will you shell out more for mortgage payments than you probably did for
rent, but you'll also need to cover property taxes and homeowners insurance, as
well as higher bills for utilities, maintenance and repairs than you faced as a
renter.
Lenders are perfectly willing to let you overextend, knowing that you'll
probably forgo vacations, retirement savings and new clothes for the kids rather
than default on your mortgage.
"Mortgage money … is way too easy to get," said Ted Grose, president of the
California Association of Mortgage Brokers. "People tend to overbuy … and that
can really stress family life. It's also a formula for foreclosure."
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