Top Mortgage Loan Mistakes to Avoid

Buying a house | Refinancing your house | Five Do’s

For most people, a home is the biggest investment they will ever make. However, few people do the research necessary to make a good buying decision. The home-purchase process is extremely confusing for most people. With a little bit of homework, and some advice from family and friends who have been through the process before, you can make this a little easier on yourself. There is no substitute for taking the time to educate yourself before you buy or refinance a house, which typically costs you 25% to 40% of your gross income!

COMMON BUYING A HOME MISTAKES

By far, the #1 home buying mistake is choosing a lender simply because they are recommended by your Realtor, or using the Realtor’s affiliated companies. While they have basic knowledge, your Realtor is not a mortgage finance expert! They are trained & licensed to help you buy & sell homes. They are NOT trained in mortgage financing! They may not know what’s the best loan for you. The Realtor only gets a commission when your house closes. As a result, the Realtor may refer you to a lender that is sure to close the loan, but not necessarily the lender that has favorable rates or fees. Also, many Realtors refer you to their friends in the loan business––who again may not be able to get the best loan for you. Even if the Realtor is very professional and looking out for your best interest, you should still do homework on your own.

New construction mistakes include selecting the builders “preferred lender” simply because they offer “rebates” and “will pay closing costs”. Nothing is free, and you always pay.  When you inform the builder you want to use your own financing, watch how they start acting crazy. This is because they make a small fortune when you fall for the preferred lender scam.

A very large portion of my business comes from Realtors referring clients to us (and we appreciate it!) But if you are already approved with a lender, and your Realtor or Builder is now ‘pushing’ or ‘forcing’ you to use their lender or title company, it almost always means they are being compensated for your business. Bottom line: You pay more! 

You are entitled to a second opinion, even if you have already been pre-approved for your home mortgage loan. Read More

Here in the Minneapolis, St Paul, MN area, I recently took a loan away from a large local Real Estate Company that very aggressively twists their real estate agent’s arms to get them to get you to use both the Real Estate Agents title company and mortgage company. I beat their mortgage company by $1500 in closing costs and 1/2% in interest rate. The title company I suggested the customer use was cheaper by $400. This local Real Estate Company has in their purchase agreement VERBIAGE even goes as far as making is sound like your loan won’t close if you use someone else for mortgage and title services.

We recommend shopping for a loan with at least 2 mortgage companies before you make a decision, the one your Realtor suggested, and someone else! Remember to GET A GOOD FAITH ESTIMATE IN WRITING. There are countless stories of consumers who wind up paying higher rates or getting a loan program that was not right for them because they blindly followed their Realtor’s advice.

Choosing a lender just because she/he has the lowest “quoted” rate or cost in the internet. While interest rate is important, you have to look at the overall cost of your loan. This includes looking at the APR, the loan fees, as well as the discount and origination points. Some lenders include origination points in their quoted points, while other lenders add an origination point in addition to their quoted points. So when one lenders says 2 points they mean 2 points, whereas another lender means 2 points plus 1% origination. Click HERE for closing cost information.

The cost of the mortgage, however, cannot be your only criteria. There is no substitute for asking family and friends for referrals and for interviewing prospective mortgage companies. Learn how to Pick a Good Lender. You must also feel comfortable that the loan officer you are dealing with is committed to your best interests and will deliver what he/she promises. Often, the company that has the absolute lowest quoted rate (far from everyone else) may not be telling you something. It is hard to compare apples to apples, when someone is slipping you an orange. Your mortgage company is required to provide you with a written good-faith estimate of closing costs within 3 working days of receiving the application. When you do receive one from each lender, CHECK THEM CAREFULLY! All lenders have basically the same fees and costs for doing your loan. If one lender is significantly lower, chances are they are not telling you something up front. Check the other Good Faith Estimates to see what is missing. Call me at (651) 552-3681. I will be happy to go over a competitors Good Faith Estimate with you. Also, be sure to read our article “Beware of the BAD, Good Faith Estimate”

Looking for a house without getting pre-approved. Do not confuse pre-approval with pre-qualification. During the pre-qualification process, a loan officer asks you a few questions and then says something like; “sounds like you should qualify for X amount”.

The pre-approval process is much more complete.

During pre-approval, the mortgage company does the same work as for final approval, except we don’t have an actual address (so we can’t do an appraisal or title search.) Once you are pre-approved, you become like a CASH BUYER and have more negotiating clout with the seller. In some cases (especially in multiple offer situations), being pre-approved can make the difference between getting the home and not getting a home. In other instances, homebuyers can save thousands of dollars as a result of being in a better negotiating situation.

Most good Realtors will not show you homes until you are pre-approved because they do not want to waste your time, their time, and the seller’s time.

Not getting a rate lock in writing. When a mortgage company tells you they have locked your rate, get a written statement which details the interest rate, the length of the rate lock, and details about the program. It is a common practice to “tell you” your loan is locked, with the loan officer hoping rates will go down. If rates go down, he wins, making more money. If rates go up, they make some excuse about why your loan isn’t lock. Bottom line. You pay… Get it in writing!

Using a dual agent (an agent who represents the buyer and the seller on the same transaction). Buyers and sellers have opposing interests. In most normal situations, dual agents cannot be fair to both the buyer and seller, and they represent sellers more strongly than buyers. If you are a buyer, it is much better to have your own agent who will be on your side. The only time you should even consider a dual agent is when you get a price break from using a dual agent. If that is the case, then tread carefully and do your homework!

Making verbal agreements! If an agent tries to make you sign a written document that is contrary to his/her verbal commitments, don’t do it! For example: if the agent says that the washer will come with the house, but the contract says that it will not––the written contract will override the verbal contract. In fact, written contracts almost always override verbal contracts. Buying a house is a very complex process, but it’s a lot easier when everything is in writing.

Buying a house without a professional inspection. Taking the seller’s word that they have made repairs. Unless you are buying a new house with warranties on most equipment, it is highly recommended that you get a property inspection, and a roof inspection. This way, you will know what you are buying. Inspection reports are great negotiating tools when it comes to asking the seller to make repairs. If a professional home inspector states that certain repairs need to be done, the seller is more likely to agree to do them.

If the seller agrees to do the repairs, have your inspector verify that they are done prior to close of escrow. Do not assume that everything has been done the way it was promised.

Not shopping for home insurance until you are ready to close. Start shopping for insurance as soon as you have an accepted offer. Many buyers wait until the last minute to get insurance, but then they have no time left to shop around.

Signing documents without reading them. Do not sign documents in a hurry. Whenever possible, try to get documents that you will be signing ahead of time so you can review them. It is advisable to ask for a copy of all loan papers that you are signing a few days ahead of the closing. This way you can review them and get your questions answered. Do not expect to read all the documents during the closing. There is rarely ever enough time to do that. Bottom line. Ask if you are unsure. A good loan officer will always be happy to explain everything to you. Although it is impossible to attend all closings, our loan officers usually do… We will be available to answer any questions that come up!

Making your moving plans too tight. Example: you expect to move out of your prior residence on a Friday and into your new residence over the weekend. So you give notice to your landlord to end your lease on a Friday and arrange for movers to come to your house on Friday. Then, your loan closing gets delayed until the next Tuesday. You now may be homeless! New tenants could be moving into your apartment, and the movers are going to charge you for wasting their time. You could be forced to live in a motel for a couple of days!

A Better Plan: allow for a 5-7 day overlap between closing and moving. In the long run, it is not nearly as expensive and it will sure give you peace of mind.

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COMMON REFINANCING YOUR HOME MISTAKES

Refinancing with your current lender without shopping around is by far the biggest refinancing mistake. Your current lender may not have the best rates and programs. There is a general misconception that it is easier to work with your current mortgage company. In most cases, your current mortgage company will require the same documentation as other companies. This is because most loans are sold on the secondary market and have to be approved independently. So even if you have been very good at making payments to your existing lender, they will still have to do their verifications all over again. Also be aware that your current lender may appear to cost less because they say they have no, or very low closing costs. When you calculate the higher interest rate vs. closing costs with a new lender, the new lender with lower rates almost always wins. Remember that there is no such thing as a free lunch. Click Here for Closing Cost Information 

Not doing a break-even analysis. Find out what the total cost of the refinance is, then figure out how much you will save every month. Divide the total cost by the monthly savings to get the number of months you will have to stay in the property to break-even on your refinancing costs.

Example: if your refinance costs $2000 and you save $50/month your break-even is 2000/50=40 months. You should refinance if you plan to stay in the house for at least 40 months.

Note: The break-even analysis only works if you are refinancing to save money. If you are refinancing to switch from an adjustable to a fixed, get cash out, or from a 30-year loan to a 15-year loan, it is much more difficult to perform a break-even analysis.

Not getting a written good-faith estimate of closing costs. Your mortgage company is required to provide you with a written good-faith estimate of closing costs within 3 working days of receiving the application. When you do receive one from each lender, CHECK THEM CAREFULLY! All lenders have basically the same fees and costs for doing your loan. If one lender is significantly lower, chances are they are not telling you something up front. Check the other Good Faith Estimates to see what is missing. You would be surprised at the number of lenders who “forget” to put everything on their estimate (usually escrow’s). Again, there is no such thing as a free lunch. All “REAL” Good Faith Estimates should be within a couple of hundred dollars of each other. closing cost information. Or Click HERE for information on how to avoid a “Bad, Good Faith Estimate“

Paying for an appraisal when you think that the house may appraise too low. Check county tax records, and home value estimation web sites to get an idea of value. While these sites are not perfect, it can give you an idea of your value. Pay attention to same and similar homes in your neighborhood. What have they recently sold for? Do not waste your money on a full appraisal if you are doubtful about the value of your house. Talk to your loan officer about your estimated value.

Thinking the county tax assessor’s value is the market value of your house. Mortgage companies do not use the county tax assessor’s value to determine whether they will make the loan. Instead, they use a real current market-value appraisal – which may be very different from the assessed value.

Signing your loan documents without reviewing them. Do not sign documents in a hurry. Whenever possible, try to get documents that you will be signing ahead of time so you can review them. It is advisable to ask for a copy of all loan papers that you will be signing a few days ahead of the close of escrow. This way, you can review them and get your questions answered. Do not expect to read all the documents during the closing. There is rarely ever enough time to do that. Bottom line: Ask if you are unsure. A good loan officer will always be happy to explain everything to you in advance. Although it is impossible to attend all closings, we usually do. Plus whenever possible, the closing occurs right in our office. We will be there to answer any questions that come up!

Not providing documents to your mortgage company in a timely manner. When your mortgage company asks you for additional paperwork, jump on it! Do not complain. They are trying to get you approved, not trying to hassle you unnecessarily! Jump through the hoops as quickly as possible. Borrowers who do not respond to requests for documentation quickly enough can end up paying higher rates if their rate lock expires.

Not getting a rate lock in writing. When a mortgage company tells you they have locked your rate, get a written statement, which details the interest rate, the length of the rate lock, and details about the program. It is a common practice to “tell you” your loan is locked, with the loan officer hoping rates will go down. If rates go down, he wins, making more money. If rates go up, they make some excuse about why your loan isn’t lock. Bottom line: You pay!

Pulling cash out of your credit line before you refinance your first mortgage. Many lenders have “cash-out” seasoning requirements. This means that if you pull cash out of your credit line for anything other than home improvements, they will consider the refinance to be a “cash-out” refinance. This leads too much stricter requirements and can, in some cases, break the deal.

Getting a second mortgage before you refinance your first mortgage, or new second mortgages. Mortgage companies look at the combined loan amounts (i.e. the first loan plus the second) even when they are refinancing the first mortgage.

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FIVE MORTGAGE DO’s

Here’s the good news: People looking to get into a home can certainly do so with hundreds of different loan options!

Now for the bad: It’s going to take a lot of patience, restraint and some careful planning to get there. That loan officer sitting across the table in January won’t look kindly on the new Lexus you bought at Christmas or the stack of credit card bills on the kitchen counter. And if you’ve only managed to put away $1,000 in savings by then, it’ll be time to forget about the $300,000 beach house. Although there are some low down payment programs (like FHA loans), down payment assistance programs (like the MHFA Start UP program) and even no down payment programs (like USDA and VA loans), not everyone qualifies for these programs. Most people should plan on having some money for down payment.

To pull the purchase off, try heeding some of the guidelines below that our experts suggest. It may not always be fun, but doing so will help get you where you want to go.

1. Make loan, credit card, and other debt payments on time, especially over the months leading up to the filing of your mortgage application. It sounds simple, but every 30-, 60- or 90-day delinquency on a loan or credit card is going to reduce the credit score the lender ends up considering as part of the loan file. That score, in turn, will determine how good a loan you get — if you get one at all. Click here for credit score details.

2. If something has to be missed, miss the credit card payment first, followed by the payment on any installment loan you might have and finally, the payment for an existing mortgage. That’s because credit scoring systems look at the performance of similar loans first when deciding what type of score to assign. It will give the most weight to the performance of another mortgage, for example, then the performance of something like an auto loan, which features fixed payments and a fixed rate the way many mortgages do. Lastly, it would evaluate the payment performance of so-called “revolving” loans, like credit cards, which feature variable payments that fluctuate with the outstanding balance.

“If you had to prioritize — and we would hope you wouldn’t be in that situation — pay your mortgage loans, pay your installment loans, pay your revolving loans.”

3. Consider paying off more debt and putting down a smaller amount at closing. The move leaves borrowers with larger mortgages, but it will allow them to replace non tax-deductible, high-interest rate debt with lower-rate mortgage debt that features deductible interest.

4. Get the mortgage first if multiple financial obligations are going to pop up in the near future. Numerous credit inquiries, such as new applications for credit cards, can hurt a borrower’s credit score, especially if they’re filed in the months prior to the home loan review process. It is harder to get a mortgage than a new car loan. Buy the house first, then buy the car!

5. Increase the size of the down payment you’re able to make by saving as much as possible, as often as possible. Don’t put the savings into something volatile, such as an individual stock. But evaluate money market or other accounts that offer reasonable rates of return, automatic payroll deductions or other financial incentives to save.