10 COMMON MORTGAGE MISTAKES TO AVOID
10 COMMON MORTGAGE MISTAKES TO AVOID
Getting a mortgage - whether you're in State College or anywhere else in Pennsylvania - can be a complex process. Here are 10 common mortgage mistakes people make, as well as tips and advice from Pennsylvania mortgage expert D. Shane Whitteker of State College-based Principle Home Mortgage on how to avoid them.
What is a rate lock, and why is it important to get when shopping for a mortgage?
A rate lock is in reference to the interest rate on a mortgage being “locked” or held at a certain interest rate for a period of time. The lender guarantees that the interest rate initially offered and accepted by the borrower will remain the same during the specific period, typically 30, 45, or 60 days. It is important to get a rate lock when interest rates are projected to rise. Everyday interest rates change in their cost to the borrower, so if a rise is projected, it is a cost savings at the closing table.
"A mortgage broker who watches the market is best able to suggest when to lock your interest rate," Whitteker says. "Some banks do require that the interest rate is locked before the loan can be disclosed to the borrower."
Expert tip:Speak with your mortgage broker about the current climate in the market and what they think is the best thing to do with regards to your rate lock.
Mortgage mistake #2:Going with the lowest rate from a lender who isn’t local.
Use a mortgage company that isn’t locally based and you’re setting yourself up for potential problems.
"In today’s business world, so much is done through digital technology that working with a local lender isn’t always the borrower’s best option," Whitteker notes. "It’s important to take into consideration what’s important to you through the mortgage application process, as well as in the long run. Finding the lowest interest rate does not always mean less money at the closing table, but it does mean lowered payments for the life of the loan. What’s truly important is good communication and support, both during the buying process and in the long term. A mortgage broker works with many banks, many of whom are national companies, so you can get the best of both worlds – a mortgage broker who’s available to take your calls and questions, a lower rate, and service after the closing date."
Expert tip:A mortgage broker takes everything into consideration when shopping for the best loan product for your situation. Be sure to address your concerns for potential problems with your mortgage broker at the beginning of the transaction so they can help alleviate your stress.
Mortgage mistake #3:Not knowing the jargon
For example, what’s the difference between a mortgage pre-qualification and a mortgage pre-approval? Is it a mistake to only get a pre-qualification? Why?
The difference between pre-qualification versus pre-approval is a bit of a grey area. Different housing markets will use these terms interchangeably or consider them two completely different documents. Typically, if there is a difference in your market, a pre-approval is the stronger of the two. Often a pre-qualification is issued without the lender or mortgage broker pulling credit and analyzing your financial documents. A pre-qualification is issued based on the discussion had with the lender or broker and their confidence in your scenario’s approval by a bank. A pre-approval is typically issued after review of financial documents, credit report, and employment history. This is a stronger document in a fast housing market because your scenario has been verified with the lender or mortgage broker.
"Every field has its own jargon, but the mortgage industry’s jargon can be particularly intimidating due to their acronyms and the importance of a mortgage in a potential borrower’s life. There are many online mortgage dictionaries available, but there’s no need to study them if you are with a good mortgage broker," Whitteker says. "A mortgage broker who cares for their client’s understanding of the process will explain it in a way you can understand. A great mortgage broker is there to answer calls and questions as they arise and help you navigate the mortgage industry world."
Expert tip:When shopping for a home loan, take into consideration how many questions you have about the process. If you’re the type of person who loves to ask questions, a mortgage broker who is readily available to answer them is key! Getting stuck in a big bank’s call queue to ask a question to a different representative every time you call in can be very frustrating.
Mortgage mistake #4:Assuming all mortgages are the same
Can I assume all mortgages are the same? What is the difference between mortgages available?
All mortgages are not the same, but they do fall into several major categories such as FHA, Conventional, VA, Reverse, Renovation, One-Time-Close, Non-QM and Refinance.
"Every borrower’s situation is different than the next, so there is not a universal loan product or a “one size fits all” mortgage. Not every borrower qualifies for every type of loan product; for example VA loans are only for veterans. At the same time, not every bank has access to or specializes in every type of loan product on the market," Whitteker says. "As a mortgage broker is signed up with many banks, they generally have access to all the different types of loan products available. Unlike your local bank that may only offer one FHA loan, a mortgage broker may have 5 banks that all offer FHA loans and will shop for the best option for your situation."
Expert tip:Let someone else help you shop for a mortgage. A mortgage broker will take the time to discuss and analyze your situation, then shop their banks to find the best loan product for you. Take advantage of their expertise!
Mortgage mistake #5:Not knowing what to ask your broker.
What should I ask my mortgage broker?
You should ask your mortgage broker anything and everything you question about the loan process. It is their job to be an expert in their field and help you find the loan for your situation. They are your liaison between you and the mortgage bank so that you don’t have to interpret what the bank wants to know. A mortgage broker who has been in the business for a long time has seen many different family scenarios and can answer any question, or knows who to ask for the right answer.
"Don’t be afraid to ask questions as your mortgage broker is your partner through the mortgage loan process," Whitteker advises. "After 17 years in the mortgage loan industry, I’ve helped so many families get to the closing table that I’m not a stranger to answering any question that may arise."
Expert tip:While doing online research on your own may answer some of your questions, it’s best to ask an expert for their opinion on your personal situation. Every family has their own story so the internet can’t be that specific.
Mortgage mistake #6:Not understanding the variables
What are the variables to take into account when getting a mortgage?
Considering that you are about to embark on the largest purchase in your life, there are several factors to weigh beforehand. While shopping online may give you an idea of what the mortgage rate market is like on a given day, looking at rates doesn’t give you the entire picture. You want to find a mortgage broker who is available to you to answer questions, explain the fees associated with the loan, and guide you to making a good decision for your situation. That may not be the lowest rate!
Since there are plenty of different places to get a mortgage, it is also important to take into account how long a particular loan officer has been in the business. A loan officer with a long history in mortgages is more likely to understand your situation and have helped a similar client before. Their knowledge of lending guidelines and variety of available loan products will be explained so that the best product is found for you. Going with a mortgage broker gives you a wider range of products, options, and programs as they have access to many banks who offer a variety of loan options.
Finally, once you’ve selected your mortgage broker and enter into the stage where your documentation is reviewed by the lending bank, you have someone to be the liaison between you and the bank who can decipher what additional information the bank is requesting. Communication is key through this process and crucial to getting to the closing table on time.
Remember that the information available online is general and not specific to your scenario.
"So often I speak with clients who are given nothing more than a loan estimate from competitors, were sold on it with a sales pitch, then never make it to the closing table because the competition doesn’t try hard enough," Whitteker says. "A mortgage broker is often an independent small business that cares about their clients and wants to see that family achieve their dream of homeownership. We know how to review your situation, can find the product that works best for you, and be there for every question along the way."
Expert tip:Unless you are a professional loan officer, the process of getting a mortgage is overwhelming and confusing on your own. Find the mortgage broker who helps straighten out the variable and presents them in a way you understand.
Mortgage mistake #7:Lack of knowledge about debt to income ratio and credit scores
What is debt to income ratio, and why is it important to understand when getting a mortgage? Why can adding debt hurt your chances at getting a great mortgage? Why is your credit score important to know when you’re trying to buy a house?
In the mortgage world, there are two debt-to-income ratios that are discussed: front end and back end ratios. The front end ratio is all of your debts and obligations in relation to your income. The back end ratio is the same debts and obligations, plus the proposed mortgage payment, in relation to your income.
It’s important to understand that these ratios do become a factor to how your loan is structured. High debt-to-income ratios don’t necessarily mean you’re ineligible for a mortgage, but there could be compensating factors the bank will require, such as having enough in your savings account to cover the down payment, closing costs, and then have enough left over to cover 3 future mortgage payments.
Speaking with a mortgage broker about your debt-to-income situation will better help you understand where you stand today. Credit score is also a factor in obtaining a mortgage but isn’t always the defining number that the internet and advertisements make it out to be. Different lenders may have different programs available to clients depending on credit score, so it’s important to speak with a mortgage broker who has access to many banks and many loan programs to find the one that best fits your situation.
"While you can read online about debt-to-income and credit scores and how they affect mortgage loans, the best advice is going to come from a knowledgeable mortgage broker," Whitteker advises. "Be honest and upfront with your mortgage broker about your financial situation and debts. The best mortgage brokers will help you plan for a mortgage if your finances aren’t great, so don’t be afraid to ask for advice."
Mortgage mistake #8:Lack of knowledge about the benefits of mortgage down payments
Why is it important to save for a mortgage down payment?
There are many factors that play into the upfront costs of homeownership. Depending on your debt-to-income ratio, credit score, and financial situation, you may or may not qualify for down payment assistance. Typically the down payment is 3.5% of the purchase price, but can be as little as 0%, or as much as you want to put down. A bank account with more available funds looks better to a lending bank when you’re looking to get approved, but is not always a big deal. As you begin to plan for a home purchase, speak with a mortgage broker to find out how much you should plan on needing at the closing table.
While many people will tell you that you need 20% down to buy a house, you don’t need to unless you want to. Many people will also tell you that you don’t need any money down to buy a house, but that’s only in very specific situations.
"A mortgage broker will explain the fees and costs associated with a home purchase," Whitteker says. "It’s important to have savings for the purchase so you’re not jumping into something you’re not really prepared to do."
Expert tip:Open a bank account that is purely for saving funds to purchase a home and watch how quickly it grows!
Mortgage mistake #9:Opening new lines of credit or increasing the limit your current line of credit
Why do new credit lines or increased credit limits potentially hurt someone searching for a great mortgage?
When applying for a mortgage, a bank will look to see that you have at least 3 lines of credit that have been open for more than 12 months that are in good standing. New accounts do not count as they do not have the payment history to show you’re a responsible borrower. The more accounts you do have open, the greater your ability to spend as each card has a spending limit. A mortgage broker will look at your credit history and determine if your credit worthiness is going to be acceptable by the guidelines set forth by lending institutions.
"Always talk to your mortgage broker before making any major purchases during the mortgage process. You may be close to the limit for debt-to-income guidelines and the smallest change could make a difference," Whitteker says.
Expert tip:Before shopping for a mortgage, work on paying down your existing debts. Also, remember that new credit lines do increase your debt-to-income ratio!
Mortgage mistake #10: Failing to take the total cost of owning a home into account
What are the factors which contribute to the true total cost of home ownership? Why is it important to consider these costs?
The expenses that factor into the true cost of home ownership include taxes, insurance, the mortgage payment, and occasionally home owner association fees. These are the costs that the lending bank will consider when determining your debt-to-income ratio in relation to the payment on the home. Other costs can include electricity, natural gas, water, sewer, and maintenance. When home shopping, it’s important to talk to your mortgage broker and realtor if you are concerned about the total cost of home ownership for a property. A good mortgage broker will work with your realtor to find out this information before you’re even under contract.
"Speaking with your mortgage broker when you’re serious about a property is important," Whitteker advises. "Their years of experience will help you ask the right questions of the seller and help you get the deal you need for your situation."
Expert tip:Before you begin the process of home shopping, speak with a mortgage broker and determine a fair estimate for the true cost of home ownership at your price point. If you spend a few months living on that budget, you’ll have a better idea if you can afford the home. Ask yourself: Just because I can afford the payment, can I also afford the upkeep on the home?
To learn more about how you can get a great mortgage, contact Pennsylvania mortgage broker D. Shane Whitteker at State College-based Principle Home Mortgage. They specialize in helping their clients to navigate through the mortgage process.