Buying a home and securing a mortgage can seem like a combination marathon and obstacle course – and rightly so in some cases. Don't let the process distract you into making fundamental errors that cost you significant money, such as:
- Buying An Unaffordable Home – Just because the bank approved you for a $400,000 mortgage does not mean you should buy a $400,000 house – especially if you have minimal down payment money. People often fail to build in the ongoing costs of home ownership – a typical estimate is between 1-2% of the cost of the house for maintenance alone, not to mention taxes, insurance and other fees.
If you stretch your budget to the edge to buy now, you have no room for any disruptions, even those unrelated to the home. Unexpected medical expenses, replacing a wrecked car, a drop in income… any number of things can put you into spiraling debt.
In short, do not overextend yourself. Take into account all of your debts and those that are likely to follow, and add a safety cushion. For example, are you planning to add to your current family, or start one? Your expenses will rise significantly.
- Not Checking Your Credit – You may have had an exemplary credit background, but there could be erroneous information in your credit file that could force you to pay a higher rate, or even cause you to be disqualified for a loan.
It is important to check your credit well before you start shopping – six months is best. If there are errors, it will take you some time to get the error rectified, and if there are legitimate problems with your credit, it may take even longer to improve your credit score.
Assuming your credit is good, go a step further and get pre-approval from a lender. This way you will not waste time looking at homes for which you cannot qualify.
- Not Understanding Terms – Failing to understand the terms of your mortgage can lead you into making unwise decisions. There is no shame in asking for clarification or interpretation. Do not sign any documents that you do not understand. Also, if you have done your homework you may be able to negotiate to reduce various fees within your closing costs.
- Focusing Only on the Interest Rate – Do not wait for the absolute lowest interest rate and risk scrapping a good deal. If you are so close on cash now that a 0.1-0.2% rate increase can cause trouble with making your monthly payments, you are buying too much house.
You can make a bigger difference by making sure you lock in the rate upon approval of the loan to avoid any surprises at closing – then, once you have bought the house, make an occasional payment toward principal in the early years. It can make a massive difference on the overall interest that you pay – even more than the rate. Find an amortization schedule calculator that can help to show you the difference.
- Not Shopping Around – Not only should you shop around for homes, you should shop around for lenders. Interest rates are quoted on an average, and you may be able to secure a better deal through competition. An experienced mortgage professional who represents multiple financial institutions can assist you in this search.
Keep your focus on the important things and pay attention to details, and you will successfully navigate the marathon of home purchasing. Feel free to put a finish line across the front stoop, and cross over it while your new neighbors cheer and hand you cups of water. You deserve it.