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Homebuyers avoid these common Mortgage Pitfalls

Written by MKTLIST Blog Team Published On : November 03, 2017 1420
Homebuyers avoid these common Mortgage Pitfalls

While talking your first step in the house purchasing process, the best way to secure your first home buying experience, is to learn from the errors that the previous home buyers have made. Below is the compiled list of the most frequent mistakes of first-time home buyers to educate the audience about what pitfalls to avoid.

NOT CHECKING YOUR CREDIT REPORT BEFORE APPLYING FOR A MORTGAGE:

One of the basic factors in determining whether you got a mortgage loan or not is a credit report, which shows an entire history of your past financial activities. Being uninformed about your credit score is like not brushing your teeth before visiting a dentist. Credit score has a huge impact in securing the best rate. If anyone has a credit score less than 680 which is the minimum credit score to get the best rates, should be prepared to pony up for a higher interest rate and will likely qualify for a smaller mortgage. Advance and timely checking of your credit score gives you knowledge and therefore an opportunity to improve your score. Perhaps there was a medical emergency or divorce, there are highly reliable adults, who keep up with their financial obligations. Some people simply need a few more years than others to become fiscally responsible.

THINKING IT’S ALL ABOUT THE RATE:

In the race of getting the possible cheapest mortgage rate, it is important to find the best deal that meets your needs. A significant difference can occur to your interest costs over your mortgage term due to change in a few percentage points. Jumping at the cheapest rate without making sure that it contains all the characteristics you want, might harm you. You must be careful that it does not stick you with higher-than-normal penalties you should need to break your mortgage early. Some people are OK with a large penalty if it saves them money upfront on the rate. It is important to remember that penalties on certain “no-frills” mortgages can end up costing thousands of dollars, canceling out any rate savings.

NOT UNDERSTANDING THE IMPORTANCE OF A DOWN PAYMENT:

Down payment seems as a big and invincible hurdle to home ownership to many first-time home buyers, specifically in regions where prices have accelerated into the stratosphere. Buying home is not a piece of cake, there are many obstacles that a buyer encounter in the market. According to Trulia’s American Dream Survey, consumer said that the biggest challenge to homeownership was saving enough for a down payment. Down payment is the amount that a buyer pays from his/her own pocket right at the beginning while purchasing a house. But a major question that arises here is how much you need to put down.

 A smart rule of thumb is always try to put 20 percent down. Following are the reasons why you should love the idea of a 20 percent down payment.

IMPROVED CHANCE YOU WILL ACTUALLY GET THAT MORTGAGE:

The biggest reason behind why you should come up with 20 percent is that in today’s mortgage marketplace, many banks will only give you a mortgage if you come up with at least that much money prior to purchasing a house.

THE CONSUMER FINANCIAL PROTECTION BUREAU JUST CHANGED ALL THE RULES:

The Consumer Financial Protection Bureau just issued new “Qualified Mortgage” rules, according to which home buyers are now supposed to meet a 43 percent debt-to-income ratio. That means that after you add up mortgage payments, property taxes and other debt, like revolving credit card balances, car or student loans, your total debt has to be less than $43 for every $100 in income you earn per month. In this way putting 20 percent down reduces the size of your monthly mortgage payment, making you more likely to qualify for and afford a mortgage.

A SMALLER MONTHLY MORTGAGE PAYMENT:

Every home buyer loves to pay less. More money down means you borrow less, which in turn will lead you towards a smaller mortgage, which means you will always have a smaller, more affordable monthly mortgage payments.

A LOWER INTEREST RATE = YOU PAY LLESS OVER THE LIFE OF THE LOAN:

With 20 percent down the interest charged on a loan is often lower than the interest with less money down. Your lower interest rate will save you thousands over the life of the loan.

NO PRIVATE MORTGAGE INSURANCE (PMI):

Mostly lenders require an extra insurance from home buyers who obtain loans in which the down payment is less than 20 percent of the sales price. Therefore, Putting 20 percent down allows you to avoid private mortgage insurance (PMI).

INSTANT EQUITY BUILDING:

Down payment allows you to build an instant equity in your home. A 20 percent down payment immediately puts equity into a property when you purchase it. That down payment safeguards you if the market turns downward temporarily.

NOT SETTING A BUDGET:

As a home buyer it is important to be a realistic and thorough person in the establishment of a budget. Preparing a budget can be a boring and tedious thing to do and that is not entirely incorrect, but on the other hand it serves as a powerful tool in drawing a clear picture of your financial situation and laying the framework for ensuring that you can afford all of the hidden (and not so hidden) costs associated with buying a home.

It is important to plan for both short term and long term. Short term costs includes:

  • Land transfer taxes.
  • Legal fees.
  • Home inspection/appraisal fees.
  • Down payment (this is kind of a big one).
  • Mortgage insurance.

Then there are the ongoing costs of home ownership. Previous owners will know what to expect, but first-time buyers may be caught off guard with sudden expenses after moving in, such as:

  • Appliances and furniture.
  • Condo fees/Property taxes/Property insurance.
  • Utility costs.
  • Renovations/repairs (furnace replacement, new shingles, etc.)
  • And everything else, down to tools, and yes, even a dehumidifier.

As far as long-term planning is concerned, scoring a great rate might need you to be prepared for the possibility that the rates will rise and that you may need to renew into a higher rate in the future.

The other real advantage of creating a budget is that you may discover that you cannot find a home you’ll be happy with that falls within your budget. Then you can make a plan to lower your debt and reduce your spending before you resume looking for your first home.

NOT SHOPPING AROUND FOR A MORTGAGE:

Because interest rates and closing costs fluctuate over a period of time, it is important to seek for different mortgage lenders. Before committing to your first home loan it is wise to get at least three no-obligation home loan quotes, if you want the best rates and most favorable terms.

SKIPPING MORTGAGE PRE-APPROVAL:

A written assessment by lender of how much money they will lend you on the basis of your income, living expenses and repayments of your existing loans. The mortgage pre-approval stage is essential to your peace of mind as you shop for your first home, as it gives you a very good idea of the home you will be able to afford.

BLINDLY FOLLOWING THE ADVICE OF YOUR REAL ESTATE AGENT:

As a first-time buyer, it is mandatory to do your own due research and diligence in the process of home buying. There is no doubt that a real estate agent plays a vital role on behalf of both a seller and a buyer, but it is still advisable to make sure to make your own pros-and-cons list, run the numbers, and be as objective as possible as you consider the facts about the homes you view.

VISITING THE PROPERTY ONLY ONCE:

It is absolutely vital to conduct an in-depth survey to know the condition of the property you are investing in. It is possible that the first house you visit will actually be the right one for you, but you should still visit the house a few times before submitting an offer. Once you sign the closing papers, there’s no room for buyer's remorse. You cannot ask for a refund. Visiting a property multiple times, and at different times of day, can help you make a confident, informed decision as to whether you should purchase a particular home.

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