3 Mistakes Borrowers Make During the Home Loan Process
The home loan process can be daunting -- especially if you’re a first-time home buyer who doesn’t know what to expect. Fear no more. We took some time to discuss common mistakes that happen throughout the home loan and purchase process, to better prepare you for what not to do.
1. Starting the home loan process too late
An American Financing assistant manager says, “People tend to start the process backwards. We always suggest to get financing approved before the home search. This allows us to assess your needs and get you quickly pre-approved. Every now and then, customers call in and say that they want to put an offer in on a home, but are not approved. While it’s perfectly acceptable to find a home first, there’s only so much we can do in a short time before another buyer -- with pre-approval -- comes in and gets their offer accepted. This is especially true in hot, seller’s markets like Denver. That’s why we always recommend getting approval going 30-60 days prior to shopping.”
Let’s consider the stumble across your dream home scenario. Say you’re passively searching for homes and surprisingly come across everything you’ve always wanted and more. Talk about a piqued interest level. The price point seems reasonable, so you begin actively researching mortgage lenders to see where you can find the best rate, hopefully in the shortest amount of time. Only now you find out, your spouse’s less than perfect credit, or your rather high debt-to-income (DTI) ratio are limiting the amount to which you qualify. It can be heartbreaking. Why not avoid it altogether and learn upfront what you can afford.
Not ready or committed to starting the home loan process? No worries. You can start slow by consulting a home affordability calculator.
2. Focusing too much on the rate
An American Financing sales manager says “a lot of home buyers -- and even homeowners looking to refinance -- spend too much time concentrating on the rate without regard to anything else. Don't be rate driven. In a lot of cases, a lower principal balance with fewer fees has a lower payment than a lower rate with higher fees.”
Not to mention the fact that interest rates generally don’t move much. The right property comes along rarely enough that overemphasizing rates can cost you—especially now, where home prices continue to rise around the country.
To put things in perspective, rate increases raise monthly mortgage payments but not as much as home buyers expect. A quarter-point change isn’t likely to alter the monthly payment on your mortgage by more than $20-$30, at the most. For example: on a $200,000 home with a 30-year mortgage, the expected increase of a quarter of a point translates to paying roughly $30 more per month.
3. Buying more house than necessary
An American Financing mortgage consultant says that “buyers find most long-term success when figuring out what they can afford, how much they can put into a down payment, and then sticking to the plan. Creating a budget and determining a comfortable monthly payment is key. Just because you are approved for a higher loan amount does not mean you have to overextend yourself. Live within your means, and you'll be better prepared to avoid financial losses. If something were to happen and you needed to quickly sell or rent the property -- remember, markets change. If you bought the largest home in the neighborhood, that might not help when it comes to selling.”
Buying a home is likely the biggest purchase you’ll make. And, a good rule of thumb is to spend 28 percent of gross income on housing. Regardless of the pre-approved loan amount, take the following into consideration:
- Down payment. The more you can put down, the less likely your chances are of having to pay monthly mortgage insurance. And, the less you put down, the higher your monthly payment. Be sure to ask yourself if the monthly payment is worth accepting the higher loan amount. Should you find the home of your dreams, it just may be. But you’ll want to strongly consider your financial situation and talk it through with an advisor or mortgage consultant before making a rash, emotional decision.
- Homeownership costs. Don’t become house poor by purchasing too much home. You’re going to experience utility bills, potential issues (like water heater or roof replacement), and even home furnishing costs. According to a recent report shared by Zillow and Thumbtack, small, overlooked home expenses can cost homeowners an average of $9,080 a year.
- Investments (retirement). Can you put more money aside for your 401k or IRA? It may make more sense to invest in your future than to invest in a larger home or a home in a more expensive neighborhood. Still, do your research. A home itself makes for a great investment. If you choose the right property and location, the equity you’re building may bring a greater return than other financial investments.
Take your time to prepare before committing to a home investment. And, always remember you have options. Options in mortgage lenders, properties, realtors, and loan programs. When you’re ready to experience the journey toward home ownership, choose to work with a company that has your best interests in mind and is focused on your schedule.