Common Home Loan Pitfalls
Purchasing a home is an exciting – yet stressful – time. Unfortunately, there are a number of mistakes that home buyers can make that can cause delays at closing or termination of the loan altogether. The following are five of the most common home loan pitfalls buyers face when purchasing a new home.
1. Spending too much on a home
While lenders are legally prevented from approving a loan with a monthly payment that is more than 35% of a households income, most financial advisors recommend that buyers spend no more than 28% of their monthly income on their mortgage.
Being approved for a large mortgage doesn’t necessarily mean buyers should borrow every dollar available to them. Many first-time buyers find themselves “house poor,” or in a situation where their mortgage and other household expenses leave them unable to afford much else – or even on the brink of a financial disaster.
2. Ignoring credit scores
Credit scores are one of the most important factors in mortgage application approval. Because of this, those preparing to purchase a new home should regularly check their credit score – and take active steps to improve it. Checking your own credit does not negatively impact a person’s credit score; reviewing their credit report before applying for a mortgage gives buyers the chance to correct any inaccuracies before heading to the bank.
How good a buyer’s credit score is can also impact the interest rates they qualify for. Those with the highest credit scores are considered low-risk buyers and often qualify for the lowest interest rates. Buyers with good or average credit scores may still get approved for a mortgage, but often face much higher interest rates.
3. Not shopping around for lenders and loans
It is exceedingly rare that potential homebuyers look at only one house before buying. Yet, many buyers go with the first lender they meet with for their mortgage.
There are pros and cons for every lender – and every type of home loan. Different lenders can offer different fee structures, different promotions, or different interest rates. Likewise, there are benefits to considering different loan structures beyond the traditional 30-year, fixed-rate mortgage. A good lender can discuss available options with buyers to help them find the right loan.
4. Applying for another loan
While a new Mercedes may look beautiful in the driveway of your new home, the middle of the homebuying process is not the right time to make any other big purchases. Taking out a new loan, making major purchases, or other major changes to credit can all cause financing to be delayed – or dropped altogether. Instead, wait to buy new furniture or apply for a personal loan until after closing.
5. Ignoring the hidden costs of homeownership
The down payment is not the expense at closing. Instead, buyers should be prepared to cover a variety of other costs at closing – as well as once they become homeowners. Depending on the details outlined in their agreement, buyers may be expected to pay for the home inspection, appraisal, title fees, or loan origination fees. Likewise, homeowners insurance, home warranties, and other routine maintenance are ongoing expenses that should be budgeted for.
by Author, Sep. 30, 2020