Top 10 Mistakes
(Home Loan Financing for All Situations)
If you're like most people, buying a home is the biggest investment you'll ever
make. Annual mortgage, taxes and insurance costs can range from 25% to 40% of
your gross annual income. By reading the information on this page, you're on
your way to protecting yourself, and making the home-buying process easier by
becoming an informed consumer. Read, talk to family, friends and real estate
professionals. You'll be glad you took the time to understand the process.
Top 10 Mistakes in Buying a Home |
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Looking for a home without being pre-approved.
Pre-approval and pre-qualification are two different things. During the
pre-qualification process, a loan officer asks you a few questions, then hands
you a "pre-qual" letter. The pre-approval process is much more thorough. During
the pre-approval process, the mortgage company does virtually all the work
associated with obtaining full-approval. Since there is no property yet
identified to purchase, however, an appraisal and title search aren't
conducted.
When you're pre-approved, you have much more negotiating clout with the seller.
The seller knows you can close the transaction because a lender has carefully
reviewed your income, assets, credit and other relevant information. In some
cases (multiple offers, for example), being pre-approved can make the
difference between buying and not buying a home. Also, you 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. They
don't want to waste your, their, or the seller's time. Many mortgage companies
will help you become pre-approved at little or no cost. They'll usually need to
check your credit and verify your income and assets.
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Making verbal (oral) agreements!
If anyone tries to make you sign a written document that is contrary to their
verbal commitments, don't do it! For example, if the seller says the washer
will come with the home, but the contract says it will not--the written
contract will override the verbal contract. In fact, written contracts almost
always override verbal contracts. When buying or selling real estate, abide by
this maxim: Get it in writing!
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Choosing a lender because they have the lowest rate. Not getting a written
good-faith estimate.
While rate is important, you have to consider the overall cost of your loan.
Pay close attention to the APR, loan fees, discount and origination points.
Some lenders include discount and origination points in their quoted points.
Other lenders may only quote discount points, when in fact there is an
additional origination point (or fraction of a point).
This difference in the way points are sometime quoted is important to you. One
lender will quote all points, while another lender may disclose an extra point,
or fraction thereof, at a later time--an unwelcome surprise.
Within 3 working days after receipt of your completed loan application, your
mortgage company is required to provide you with a written good-faith estimate
of closing costs. You may want to consider requesting a GFE from a few
lenders before submitting your application.
With a few GFEs to compare, you can get a feel for which lenders are more
thorough, and you can educate yourself regarding the costs associated with your
transaction. The GFE with the highest costs may not indicate that a
particular lender is more expensive than another--in fact, they may be more
diligent in itemizing all fees.
The cost of the mortgage, however, shouldn't be your only criteria. There
is no substitute for asking family and friends for referrals and for
interviewing prospective mortgage companies. You must also feel
comfortable that the loan officer you are dealing with is committed to your
best interests and will deliver what they promise.
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Not shopping around for a mortgage.®.
We recommend shopping for a loan with at least three mortgage companies before
you make a decision. There are countless stories of consumers who ended
up paying higher rates, or got a loan that wasn't right for them.
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Not getting a rate lock in writing.
When a mortgage company tells you they have locked your rate, get a written
statement detailing the interest rate, the length of the rate lock, and other
particulars about the program.
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Using a dual agent (an agent who represents the buyer and seller in the same
transaction).
Buyers and sellers have opposing interests. Sellers want to receive the
highest price, buyers want to pay the lowest price. In many situations,
dual agents cannot be fair to both buyer and seller. Since the seller
usually pays the commission, the dual agent may negotiate harder for the seller
than for the buyer. If you are a buyer, it is usually better to have your
own agent represent you.
Using a dual agent may make sense when you can get a price break (usually
resulting from the dual agent lowering their commission). In that case,
proceed cautiously and do your homework!
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Buying a home without professional inspections. Taking the seller's word
that repairs have been made.
Unless you're buying a new home with warranties on most equipment, it is highly
recommended that you get property, roof and termite inspections. These
reports will give you a better picture of what you're 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 made, the seller is more likely to agree to making them.
If the seller agrees to make repairs, have your inspector verify the completed
work prior to close of escrow. Do not assume that everything will be done
as promised.
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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 and find they have no time
left to shop around.
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Signing documents without reading them.
Do not sign documents in a hurry. As soon as possible, review the
documents you'll be signing at close of escrow--including a copy of all loan
documents. This way, you can review them and get your questions answered
in a timely manner. Do not expect to read all the documents during the
closing. There is rarely enough time to do that.
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Making moving plans that don't work.
You expect to move out of your current residence on Friday and into your new
residence over the weekend. Also on Friday, your lease terminates and the
movers are scheduled to appear.
Friday morning arrives: bags packed, boxes stacked, children under arm and the
dog on a leash; you're sitting on your front door stoop awaiting the arrival of
the movers.
Your phone rings. Your loan closing is delayed until the following
Tuesday. The new tenants turn into your driveway with a weighted-down
U-Haul and the movers pull up across the street.
You ask yourself, "Where's the nearest Motel 6 and storage facility? How
much will the movers charge for an extra trip? Can we afford it?"
How can you avoid such a disaster? Cancel your lease and ask the movers
to show up five to seven days after you anticipate closing your transaction.
Consider the extra expense an insurance policy. You're buying peace
of mind--and protecting yourself from expensive delays.
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Top 10 Mistakes in Refinancing Your Home |
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Refinancing with your current lender without shopping around.
Your current lender may not have the best rates and programs.
Believing it's easier to work with your current lender is a common
misconception. In most cases, they'll require the same documentation as
other lenders and mortgage brokers. This is because most loans are sold
on the secondary market and have to be approved independently. Even if you've
been good at making payments to your existing lender, they'll still have to
process the verifications all over again.
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Not doing a break-even analysis.
Determine the total transaction costs and how much you'll save each month by
lowering your monthly mortgage payment. Divide the transaction costs by
the monthly savings to determine the number of months you'll have to stay in
the property to recoup your refinancing costs.
For example, if the costs of refinancing total $2000, and you save $50 per
month, you break-even in 2000/50 = 40 months. In this case, you
should only refinance if you plan to stay in the home for at least 40 months.
Note: The above example is suited to comparing two similar loans when
the intent is to lower your monthly payment and recoup transaction costs
relatively quickly. Other refinancing transactions require different
kinds of analyses which are beyond the scope of this document. Other types of
refinancing transactions include exchanging a fixed rate for an ARM, or a 30
year mortgage for a 15 year mortgage.
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Not getting a written good-faith estimate of closing costs.
Within 3 working days after receipt of your completed loan application, your
mortgage company is required to provide you with a written good-faith estimate
of closing costs.
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Paying for a home appraisal when you think the appraised value may be too low.
Have the appraisal company conduct a desk-review appraisal (typically at no
charge) and provide you with a range of possible values. Your mortgage company
can ask an appraiser to do this for you.
Do not waste your money on a complete appraisal if you believe the home is
unreasonably priced.
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Using the county tax assessor's value as the market value of your home.
Mortgage companies do not use the county tax assessor's value to help determine
if they'll originate your loan. They, like real estate agents, usually use the
sales comparison approach (formerly known as the market data comparison
approach).
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Signing documents without reading them.
Do not sign documents in a hurry. As soon as possible, review the
documents you'll be signing at close of escrow--including a copy of all loan
documents. This way, you can review them and get your questions answered
in a timely manner. Do not expect to read all the documents during the
closing. There is rarely enough time to do that.
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Not providing your mortgage company with documents in a timely manner.
When your mortgage company asks you for additional paperwork--get cracking!
They're trying to get you approved! If you don't quickly respond to
your broker's requests, you could end up paying higher rates should your rate
lock expire.
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Not getting a rate lock in writing.
When a mortgage company tells you they've locked your rate, get a written
statement detailing the interest rate, the length of the rate lock, and other
particulars about the program.
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Drawing against your home equity credit line before you refinance your first
mortgage.
Many lenders have "cash-out" seasoning requirements. If you draw
against your credit line for anything other than home improvements, they'll
consider your first mortgage refinance transaction a "cash-out" refinance.
This creates stricter lending requirements and can, in some cases, break
your deal!
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Getting a second mortgage before you refinance your first mortgage.
Many mortgage companies look at the combined loan amounts (i.e., the sum of the
first and second loans) when you are refinancing only your first loan. If
you plan on refinancing your first loan, check with your mortgage company to
see if having a second loan will cause your refinance to be turned down.
[Back to the top of this page]
Top 10 Mistakes Getting a Home Equity Credit
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Not checking to see if your credit line has a pre-payment penalty clause.
If you are getting a "NO FEE" credit line, chances are it has a pre-payment
penalty clause. This can be very important (and expensive) if you are
planning to sell or refinance your home in the next three to five years.
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Getting too large a credit line.
When you get too large a credit line, you can be turned down for other loans.
Some lenders calculate your credit line payments based upon the available
credit, even when your credit line has a zero balance. Having a large credit
line indicates a large potential payment, which makes it difficult to qualify
for loans.
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Not understanding the difference between an equity loan and a credit line.
An equity loan is closed--i.e., you get all your money up front, then make
payments on that fixed loan amount until the loan is paid. An equity
credit line is open--i.e., you can get an initial advance against the line,
then reuse the line as often as you want during the period the line is open.
Most credit lines are accessed through a checkbook or a credit card.
Credit line payments are based upon the outstanding balance.
Use an equity loan when you need all the money up front--e.g. home improvements
or debt consolidation.
Use a credit line if you have an ongoing need for money or need the money for a
future event--e.g., you need to pay for your child's college tuition in three
years.
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Not checking the lifecap on your equity line.
Many credit lines have lifecaps of 18%. Be prepared to make high interest
payments if rates move upwards.
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Getting a credit line from your local bank without shopping around.
Many consumers get their credit line from the bank with which they have their
checking account. Shop around before deciding to use your bank.
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Not getting a good-faith estimate of closing costs.
Within three working days after receipt of your completed loan application,
your mortgage company is required to provide you with a written good-faith
estimate of closing costs.
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Assuming that the interest on your home credit line/loan is tax deductible.
In some instances, the interest on your home credit line is NOT tax deductible.
It is beyond the scope of this document to provide tax advice or quote from the
IRS code. Contact an accountant or CPA to determine your particular
situation.
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Assuming a home equity line is always cheaper than a car loan or a credit card.
A credit card at 6.9% can be cheaper than a credit line at 12%, even after the
tax deduction. To compare rates, compare the effective rate of your
credit line with the rate on a credit card or auto loan.
Effective rate = rate * (1 - tax_bracket)
Example: If the rate of the home equity credit line is 12% and your tax
bracket is 30%,
youreffectiverateis12% * (1 - 0.3) = 12% * 0.7 = 8.4%
If your credit card is higher than 8.4%, the credit line is cheaper.
Besides the interest rate, you may also want to compare monthly payments and
other terms of the loan.
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Getting a home equity credit line if you plan to refinance your first mortgage in
the near future.
Many mortgage companies look at the combined loan amounts (i.e., the first loan
plus the equity line/loan) even though they are refinancing only the first
mortgage. If you plan on refinancing your first loan, check with your
mortgage company to determine if getting a second line/loan will cause your
refinance to be turned down.
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Getting a home equity credit line to pay off your credit cards if your spending
is out of control!
When you pay off your credit cards with your credit line, don't put your home
on the line by charging large amounts on your credit cards again! If you
can't manage the plastic, get rid of it!
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