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5 Common Mistakes Made When Financing a Home

You are about to enter into the largest financial commitment of your life- a home mortgage.  No two transactions are exactly alike.  Unfortunately, too many homebuyers do not take the necessary time and consideration they should in choosing the correct financing for their individual situation.  Your lender should take the time to ask you questions about your past, your present and your future.  What are your goals for this transaction?  How long do you anticipate living in this home?  Are you expecting additions (or subtractions) to the number of inhabitants?  Is your income expected to dramatically change over time?  Are retirement income and assets issues important to you now?  What about the school district?  public transportation? shopping?  Many of these questions, and dozens more, could alter what may be the best loan choice for you.

Information is the key to making the right choice.  Even if this isn’t your first home, technology has changed the process, the players and consumer options so dramatically that you need to read this report.  Below is a listing of the most common mistakes people make in the home buying process.

1.  Not Finding The Right Lender

While there are many factors you should choose in deciding which lender you want to be with, there are two major ones- the type of lender and their reputation.  First, there are three types of lenders- mortgage brokers, mortgage bankers, and traditional banks.  Only mortgage bankers are empowered to actually approve your application, lock in your rate, and close your loan, while incorporating an expansive product line, entrepreneurial nature, and industry-specific expertise.  A lender’s reputation can be garnered from a few sources: a referral from a Realtor, attorney, or financial planner, or by contacting the Better Business Bureau and/or the State Banking Department, or even requesting a list of past clients from the lender (so that you may contact them and ask for their experiences).

2.  Not Looking Deeper Into Rate Quotes

There is more to consider in evaluating a loan quote than merely interest rates.  Other fees and costs should be looked at- like points, origination fees, underwriting fees, application fees, doc prep fees, and so on, to determine the actual cost of your loan.  Further, you have to ask your lender if the rate they are quoting can be locked in and for how long, often lenders quote a price based on a ten day closing which is not typically reasonable.  Further, if you are not yet in contract, many lenders will not lock in your rate; therefore, how honest is a quote that cannot be locked in?

3.  Automatically Taking A Fixed Rate Mortgage

Often an Adjustable Rate Mortgage (ARM) can be a fiscally wise move.  If this loan is short term (because you expect to move in 3-5 years, for example), an ARM can save you significant money monthly.  If you expect to have future increases in income (due to scheduled pay raises or just graduating from school, for example), an ARM can help you qualify for more mortgage money now- which could let you buy a bigger, more expensive property than you might otherwise afford.   Just because your parents or a friend has a fixed rate mortgage, does not mean you should not explore the advantages associated with an ARM.

4.  Not Really Knowing How Much Money You Will Need

Besides the typical closing costs which will be disclosed by your lender via their Good-Faith Estimate and Truth-In-Lending Disclosures (points, title insurance, recording fees, escrows for real estate taxes and insurance, etc.), there are other costs that many people forget to take into consideration.  Among those costs are your attorney’s fee, a moving company, potential adjustments with the seller, repairs to the new home, and new furniture, for example.  Being caught short is no way to start in your new home.

5.  Not Getting Pre-Approved For A Mortgage

Statistics have shown that an “all cash” buyer is able to negotiate a better price (that is, lower price) for a home purchase, typically 3% or more.  Therefore, being an “all cash” buyer gives you the ability to save thousands of dollars in a home purchase.  Going through a true pre-approval process, where your lender reviews and analyzes your credit, income and assets can make you the equivalent of an “all cash” buyer.  Unfortunately, many borrowers get “pre-approval letters” that aren’t worth the paper they are written on because the issuing lender has yet to review the appropriate documentation.

Hopefully, these tips will help you make informed decisions as you go through the mortgage process.

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