Buying a home is the one of the greatest investments you will ever make. For this reason, it’s important to avoid expensive errors, especially when applying for a mortgage. Here are 15 common (and costly) mortgage mistakes to avoid.
Mistake 1: Not Improving Your Credit Score
Lenders consider you more creditworthy when you have a high credit score. With a good credit history, you can qualify for a larger loan, a lower interest rate, and a lower monthly payment, so be sure to do everything you can to improve your credit score before shopping for a home loan:
- Payment history can account for up to 35 percent of your credit score, according to Equifax. You are more likely to improve your credit score if you pay your bills on time. Make sure you pay off or reduce your credit cards, auto loans, and other obligations that affect your rating.
- Your credit score is also influenced by amounts owed, so watch out for red flags like minimum-only payments. The fact that you have made three late payments and dipped into your credit line to cover living expenses may indicate your financial situation needs improvement.
- You must know your credit score before you speak with a broker. Make sure you know your financial situation and that any concerns you may have are addressed. When you're ready to buy a home, you'll be in a much better position if you give yourself six months to fix your credit report errors and identify potential problem areas.
Mistake 2: Making a Major Purchase Before Your Loan is Approved
Making major purchases during the loan process is another big no-no that could affect your ability to qualify for a loan. Large purchases will stand out during a credit check and affect your debt-to-income ratio, especially if you're taking on a long-term obligation like a car loan.
We also recommend avoiding purchases such as appliances, furniture, vacations, etc., as they may also impact your financial health. Wait until AFTER you've received your loan before committing to that new washer and dryer.
Mistake 3: Changing Jobs
As with making a large purchase, a job change may call into question your ability to repay the loan. Here too, lenders consider your repayment ability when deciding whether to loan you money, and changing careers may have a negative impact. On the other hand, switching jobs within the same field may be an advantage if it means more money. Any changes to your situation like this should be discussed with your lender, so there are no unpleasant surprises down the road.
Mistake 4: Getting Pre-Qualified vs. Pre-Approved
A mortgage pre-qualification is simply the result of meeting with a broker (or lender) to assess your ability to buy a home. You'll discuss your income, household expenses, assets and liabilities, and other factors that may affect your ability to borrow - but you won't be issued a loan. This step in the mortgage process simply tells you what you may be able to afford.
In contrast, a pre-approval means you've provided a broker with written proof of income, expenses, credit rating and other financial details. After reviewing your finances, the lender will issue a written commitment to loan you a particular sum (at a locked-in interest rate) for a home purchase. When it comes time to shop for a home, pre-approvals are a must as they let you know how much home you can afford (saving you time and money) and ensure you're taken more seriously by Edmonton home sellers.
Mistake 5: Not Shopping Around or Shopping Around Too Much
It's essential to do your research and shop around if you want to find the right mortgage loan (and interest rate) for your needs.
But be careful not to overdo it. Talking to several lenders can result in multiple inquiries into your credit report, which can hurt your credit score overall. Doing your shipping around within a shorter time frame is also critical to avoid inaccurate comparisons. As the market is constantly changing, what is true today may not be true tomorrow.
Mistake 6: Choosing the Lender with the Lowest Rate
Focusing solely on a low-interest-rate loan can cost you money if you're not careful. Many other financial factors are at play when it comes to choosing the right loan, including the annual percentage rate (or APR), loan fees, etc.
The APR is particularly important since it represents the total annual cost of borrowing, expressed as a percentage of the loan principal. In addition, lenders calculate their APRs differently. For example, some lenders may not include specific fees in their APR, such as loan application fees and mortgage life insurance.
In short, make sure you're comparing apples to apples when shopping for different lender rates. Pay attention to the difference between discount points, which the lender charges to lower your interest rate, and origination points.
Mistake 7: Not Understanding the Terms of Your Loan
With so many loan options to choose from, make sure you understand what you're agreeing to before signing on the dotted line. Besides a low-interest rate or monthly payments, other factors may affect your loan. Are you committing to a fixed or variable rate? What are the terms?
Points can also affect your loan. As prepaid interest charged by the lender, one point equals one percent of the face amount of your loan. Some points are paid upfront; others are bundled into the loan, saving you money initially but costing you more over the life of your loan.
Be sure to ask questions if you need more clarification. Even though a broker can explain the details, it is up to you to decide whether a particular loan program fits your lifestyle, budget, and long-term goals.
Mistake 8: Opting for the Wrong Loan
There are a wide variety of loans available to cater to buyers. What are your needs? How long do you plan to live in your new home? Are you subject to moving for work? Are you planning on a family or near retirement? These are just a few of the many questions you'll want to ask yourself when considering the right mortgage.
For example, a 7-year fixed-rate mortgage is ideal when rates are low, and you plan to be in your home for the long term. On the other hand, an adjustable-rate mortgage may be the right choice if you plan on moving soon (i.e. you can benefit from low rates before higher rates take hold).
Here again, take the time to evaluate which loan best suits your budget and your life circumstances.
Mistake 9: Neglecting Prepayment Penalties
Your mortgage lender may charge you a prepayment penalty if you:
- Pay more toward your mortgage than the allowed additional amount
- Break your mortgage contract
- Switch lenders before the end of your mortgage term
- Pay your mortgage off in full before the end of your term, including when you sell your home
A prepayment penalty can cost thousands of dollars. That's why It's important to know when they apply and how your lender calculates them. Prepayments or lump-sum payments can be made on open mortgages without penalty. (Source: Government of Canada)
Mistake 10: Withholding Information from the Lender
Your loan is based on a variety of factors, including:
- Size of the loan
- Credit rating
- The type of home you’re buying
- Your ability to document income and assets
Your broker may struggle to qualify you for a particular loan if you provide inaccurate or incomplete information.
Mistake 11: Signing Without Reading
There is nothing more exciting than buying a new home. For this reason, many new homeowners neglect to review their paperwork. Give yourself ample time to review all loan documents before signing. Feel free to ask questions if you are unsure what something means.
You can also rely on your Edmonton REALTOR® to help you with paperwork throughout the home buying process, as well as answer any questions you might have.
Mistake 12: Borrowing the Maximum Amount
Just because you're pre-approved for a specific mortgage amount doesn't mean you should take it.
Make sure you've realistically assessed all the costs associated with buying a home beforehand, including your monthly mortgage payment, property taxes, utilities, insurance, maintenance, repairs and other obligations. First-time buyers are especially susceptible to overlooking the initial costs of new home ownership.
Note: Financial experts suggest limiting your housing costs to no more than a third of your gross income.
Mistake 13: Forgetting to Budget for Closing Costs
Upon completing a home purchase, buyers must pay closing costs and fees. In general, closing costs account for one to three percent of the home's sale price.
Closing costs may include:
Land Transfer Tax- Land title transfer tax is a mandatory fee the buyer pays when property ownership is transferred from the seller.
Title Insurance - Title insurance aims to protect buyers from losses caused by potential title defects.
Legal Fees - Legal fees are generally associated with your lawyer's services - such as title searches, mortgage preparation, registering your home, general administration, etc.
Property Insurance - On closing day, home buyers must provide proof of property insurance to their lender. Depending on the policy, basic property insurance covers the replacement of your home in case of a fire or natural disaster. Payments can be made monthly or annually.
Property Appraisal - In cases where a lender is unsure of a property's current market value, a professional evaluation may be required. When this occurs, the lender will receive an estimate of the property's "true" value from an appraiser hired by the buyer. By doing this, the lender is reassured that they won't be "overpaying" for your mortgage.
Additional closing costs may include:
- Statement of Adjustments
- Land Survey Fee
- Estoppel Certificate (applicable to condominiums)
- Moving Expenses
Mistake 14: Neglecting to Secure Home Insurance
Most lenders require proof of home insurance before issuing a loan. If you wait until the last minute to buy home insurance, you may not have time to shop for the best deal.
Mistake 15: Not Partnering with An Edmonton Realtor®
Not only can an experienced Edmonton REALTOR® help you find the right mortgage broker and lender, but they can also help you find the right home easily and affordably. Here's what to look for:
An Excellent Track Record - Customer feedback and reviews can provide valuable information about an agent. When considering a REALTOR®, ask them for a list of previous clients you can contact. Look at the agent's online reviews to see what past and current customers have to say and be wary of agents who can’t provide references.
Full Team Support - It's important to note that some of the best agents have a well-trained team behind them. This is why we recommend using an agency-supported REALTOR®. In addition to the specialized services provided by your agent, reputable real estate agencies offer their own customer support services.
A Positive Vibe - When buying a home, working with someone you enjoy and with whom you have a good relationship is essential. Choose someone who understands your unique needs and wants, and you'll have a great experience.
Are you thinking about buying a home in Edmonton? Don't hesitate to get in touch with us. We also invite you to check out our comprehensive blog and/or take advantage of any one of our free buyer's resources:
- Home Buyer Guide – Learn everything you need to know about buying a home in Edmonton with this easy-to-follow guide.
- 20 Common Mistakes to Avoid When Buying a Home - There's no doubt that buying a home can be an overwhelming experience, which can lead to costly mistakes. Preparation is the key to avoiding these common pitfalls! Let us show you how with our free guide!
- Six Tips That Make Home Buying More Affordable – Making home-buying more affordable is easy with these tips!
Photo credits: shutterstock.comPosted by Terry Paranych on
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