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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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