Becoming a home owner is a part of the American dream. You get to stop making your landlord wealthy and start building equity for yourself - it’s a big step towards financial stability. With all the benefits of owning a home, it’s also important to remember the possible pitfalls of the process as well.
D. Shane Whitteker is the owner and chief broker at State College mortgage broker Principle Home Mortgage. He and his team specialize in helping his clients in State College and beyond to safely navigate the home buying process. We sat down with him in his State College offices to discuss some of the mistakes people can make when buying a home.
Common mistake: Not taking 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 - in State College or anywhere else in Pennsylvania - will work with your realtor to find out this information before you’re even under contract.
Keep in mind: Just because you can afford the payment, can you afford the upkeep on a home?
Consulting with a professional is a good idea - a home purchase may be the largest expense in your lifetime.
“Speaking with your mortgage broker when you’re serious about a property is important. 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,” Whitteker says.
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.
Common mistake: Not understanding the fees that go into getting a mortgage
What are all the fees associated with getting a mortgage?
There are two types of fees associated with obtaining a mortgage; those paid before closing and those paid at closing.
Prior to Closing Fees
- Appraisal: Paid by the borrower shortly after your intent to proceed with a lender and is paid directly to the appraisal management company. Costs range from $450-600 typically.
- Home Inspection: Optional. Your realtor and you would discuss this, but speaking with a mortgage broker to decide if you should have a home inspection is a great idea too! This fee would be paid after the sales agreement is signed as often the sales agreement is contingent on a satisfactory home inspection. Costs range from $200-400.
- Other Inspections: Elected optional inspections that you discuss with your realtor, such as water, radon, pest. Sometimes these inspections can be mandatory depending on the loan type. If mandatory, often these fees can be paid at closing instead of prior to closing. Fees for different inspections will vary.
- Credit Report: To complete an application for a mortgage, your credit report must be issued to the mortgage broker. This fee is around $25 per applicant.
- Other: It is possible to have other prior-to-closing fees depending on the type of home you wish to purchase. If you’re looking at a double-wide manufactured home and applying for an FHA loan, you will need to have an engineer inspect the foundation. It’s best to speak with your mortgage broker to determine what will be needed in your scenario.
- Flood Insurance: If the subject property is in a flood zone, flood insurance will be required by the lender. Flood insurance must be paid in full by the borrower prior to closing. Cost associated will range widely depending on the size of the type and amount of coverage, property location, flood zone, and the age of the structure. The average cost of flood insurance is $700-1500 per year, but speaking with an insurance agent is the only way to truly determine the cost for a property.
Fees at Closing
- Title insurance (Lender’s policy): Title insurance protects the buyer and the lender against any future ownership claims in relationship to the property, as well as unknown liens against the property, fraud, forgery, or encroachments. The lender’s policy is paid by the borrower as the lender requires their lien against the property be in first position.
- Title insurance (Owner’s policy): The lender’s policy does not cover the owner, thus it is a good idea to have an owner’s policy for title insurance. Costs range from a few dollars to hundreds, and are based upon the different in the purchase price of the home, and the loan amount.
- Homeowners insurance/Hazard insurance: As long as a mortgage exists on your home, the lender will require you to keep homeowner’s insurance on the home to protect against damages such as fire or natural disaster. Cost of homeowners insurance vary depending on the price of the home, the amount of coverage, and several other factors. Generally at closing, the first year’s premium is paid in full, with another 3 months paid into escrow if there is an escrow account.
- Up-front mortgage insurance premium or Funding fee: This premium is paid at closing on government backed loans (FHA/VA/USDA) to help entities such as the Federal Housing Administration (FHA) insure loans for borrowers. The cost of this fee can range from 0% (in special cases) to 3.3% of the purchase price.
- Origination charge/Mortgage points: A charge from the lender for processing the paperwork associated with a new loan. Typically this fee is 0.5 to 1% of the purchase price.
- Broker fee: When you’re using a mortgage broker, the broker does not receive compensation until you close on your loan. These fees can vary depending on the market but are required to be 3% or less of the loan amount.
- Title fees: Fees associated with the title insurance related to the closing that include items that the title company may have incurred expense for in relation to the search and also required expenses associated with the title insurance policy.
- Transfer tax: While this differs from state to state, in Pennsylvania the state realty transfer tax is 1% of the purchase price, typically split between the buyer and seller. There is also a local realty transfer tax whose rate is typically 1%, again typically split between the buyer and the seller. This money is split between the PA Department of Revenue and local municipalities.
- Escrow account: This account is managed by the bank. As the lender does not want to risk you not paying your property taxes, an escrow account is created to pay both taxes and insurance. Each month, part of your mortgage payment is a payment into the escrow account, and at closing is when the escrow account is started. The amount need at closing varies as it is based on the costs of your homeowners insurance and local property and school taxes.
- Odd days interest: It is the only upfront payment of interest in a mortgage and mainly designed so that there is not a partial payment made and the amortization schedule is properly scheduled.
- Flood cert fee: Charge for the certification as to whether or not the property is in a flood zone.
- Tax cert fee: Charged by some lenders to verify the accurate real estate taxes on a property,
- Any inspections not paid up front: If any inspections on the home are still due at the time of closing, they would be included at settlement as a cost.
- Proration of real estate taxes: Payment to the seller back for any time that you are going to occupy the property where the seller has already paid the taxes for that time period.
- Recording fee for mortgage and deed: Paid to the county courthouse. Fee depends on the county and the number of pages recorded.
Keep in mind: There are many moving parts to a mortgage transaction, from the real estate agents to the recorder of deeds, and everyone has a fee.
While this all may seem like a ton of paperwork, Whitteker says it’s mostly just standard procedure.
“Don’t let yourself get overwhelmed by the number of fees. Many of them are non-negotiable and standard procedure. Your mortgage broker will present you a loan estimate very early in the mortgage process. This loan estimate presents all the fees in a very straight forward manner,” Whitteker says.
Expert tip: Talk to your mortgage broker to discuss where to save money and where to spend money during the mortgage process. They are great at breaking down the financial lingo.
Common mistake: Getting more home than you can comfortably afford.
What is a good way to calculate how much home you can realistically afford? What does the term “house-poor” mean?
If your non-credit report obligations are high and you purchase a home for the maximum amount you were pre-approved for, people refer to this scenario as being “house-poor” because there is not a lot of money left over each month after you pay all your bills. It is very important to understand what your family’s goal are in the purchase of a home and how they relate to the rest of your life goals. You need to account for the cost of living beyond simply being able to afford your mortgage payments, as well as the ability to save for emergencies and special occasions. Speaking with a licensed professional like a mortgage broker can help you decide how your mortgage payment should fit into your budget.
According to Principle Home Mortgage’s Whitteker, a good plan is essential.
“Proper planning and realistic expectations are important to keep in mind. If your life plan involves children, it’s important to consider both home size and budget,” Whitteker says.
Expert tip: It’s important to be up-front and honest with a mortgage broker. Your concerns are our priority. One of the most important parts of my job is calculating for a pre-approval, so we can help you decide a comfortable budget for the home.
Keep in mind: Ask questions and don’t let HGTV dictate what a home should be. The home you can afford and be comfortable in is just right for you!
Common mistake: Not understanding the difference between a fixed rate mortgage and an adjustable rate mortgage.
What’s the difference between these mortgage types, and why is it important for a mortgage shopper to understand the difference?
The difference between fixed rate and adjustable rate mortgages is whether the interest rate remains the same throughout the life of the loan, or whether it changes based upon market conditions. A fixed rate mortgage stays the same, where an adjustable rate mortgage starts off with a low rate for a few years then adjusts slightly to the current market conditions, typically adjusting on a yearly basis. It’s important to understand what type of mortgage you are getting because the mortgage payment does change over time with an adjustable rate.
Keep in mind: Understand what type of loan you are signing up for because if you don’t, you may be surprised down the road when your mortgage payment increases!
Whitteker says each loan has its merits - it’s all about your specific situation.
“There are great reasons to use both of these loan products,” Whitteker says. “If your job requires you to move every few years, considering an adjustable rate mortgage may be beneficial to you. If you are buying that ‘forever home’, it’s best to consider a fixed rate mortgage.”
Expert tip: While we can’t always be certain of what our future holds, discussing with your mortgage broker the length of time you plan to own that particular home is important.
Common mistake: Not understanding APR
What is APR, and how does it impact a home buyer’s mortgage costs?
The annual percentage rate (APR) reflects the cost of borrowing the money to purchase a home and takes into account the interest rate and other fees associated with having a mortgage. This percentage is higher than the interest rate. The APR can be found on your loan estimate that your mortgage broker is required to provide to you.
Keep in mind: While APR should be taken into consideration when deciding which loan product best suits your needs, it is not the only factor.
Whitteker advises anyone with questions about APR when considering buying a home to consult a mortgage broker.
“Your mortgage broker is the best person to discuss APR in comparing loans. At first glance you might dismiss a loan product due to the APR but it may be the better option given your scenario,” Whitteker says.
Expert tip: Speak with the experts to better understand APR when comparing mortgage loan estimates.
Common mistake: Changing jobs before getting a mortgage
Can I change jobs before I get a mortgage? Why is job continuity important when getting a mortgage?
The simple answer to whether you can change jobs before getting a mortgage is no, but in cases where you are staying within the same field of work and taking a better job opportunity, it can be ok to do so. It’s best to discuss this with your mortgage broker to determine if now is the right time to switch jobs. Job continuity shows the lending bank that you have steady employment, making you more likely to pay your mortgage on time, and continue to be able to afford your mortgage payments.
Keep in mind: If you’re counting on the raise at the new job to increase your pre-approval amount, this isn’t always the case. Typically your pre-approval amount is based on an average you have earned in the last 24 months.
Whitteker says to make sure you’ve got everything figured out - with the help of a mortgage broker - before changing jobs.
“Don’t assume that new job will help you get the house. Don’t change jobs without talking to your mortgage broker. Any major life changes during the loan process should be discuss with your broker so they can advise you on the proper steps to take so the loan doesn’t fall apart.”
Expert tip: If you’re in certain fields, such as healthcare, and you have a contract for work, you don’t always need 2 years of work history. Talk to your broker about special programs for high education job fields.
Common mistake: Not getting a licensed mortgage broker to help you.
What can a mortgage broker do to help make the mortgage process easier on the buyer? Why should a person retain a mortgage broker?
A mortgage broker is your advocate and liaison with the lending banks. They typically have partnered with several banks so they have access to a variety of lending programs. With access to several banks, you have a personal shopper in your mortgage broker. They take into account your concerns and your goals, then help you decide which option is going to best for you in your scenario.
Keep in mind: Mortgage brokers are more personal (typically a smaller office setting), more available (no call center to go through) and know the local market because they’re local to you, all while working with major national lending banks to find the best option for you.
“Mortgage brokers work harder than your local or big banks because their livelihood is helping you buy your home and relying on you and your realtor to enjoy the process, thus creating referrals and more business for the broker shop,” Whitteker says. “We take pride in our business and helping our neighbors.”
Expert tip: Shopping small and local when it comes to mortgages doesn’t always mean high costs. Mortgage brokers work with some great banks to find you the best option.
Common mistake: Not understanding mortgage discount points
What are mortgage discount points, and how do they work?
Mortgage discount point, mortgage points, discount points, and “buying down the rate” are terms for the same action. They are a cost to the borrower from the lender at closing for a reduced interest rate, thus lowering your monthly mortgage payment.
Keep in mind: If you want to “buy down your rate” remember that it will increase your closing costs.
“It’s important to discuss with your mortgage broker what’s most important to you in your mortgage transaction,” Whitteker says. “Everyone wants a great rate, but if you’d spend a little more for a better rate, let us know.”
Expert tip: Don’t let seller assist go to waste! Talk to your mortgage broker about buying down the rate towards the end of the transaction when final number start to become clearer. Don’t wait too long though otherwise you may delay closing.
Common mistake: A lack of understanding about the term of your mortgage.
What are a mortgage’s “terms”? How can someone shopping for a mortgage learn more about the different terms?
The term of the mortgage is the length of time you will be making payments. Terms can range from 10 years (120 months) to 30 years (360 months). While your payment will be higher with a shorter term, over the life of the loan, you pay less in interest when compared to a 30 year term. A mortgage broker can provide quotes for different loan terms and discuss the benefits for your scenario.
Keep in mind: Don’t assume that your mortgage must be 30 years. Even reducing the term of the mortgage to 25 years will save you money over the life of the loan.
According to Whitteker, there are ways to save money over the life of your mortgage loan by shortening the term.
“Every family’s needs are different, but if you consider a home that’s less than your pre-approval amount, you may be able to shorten the term and save yourself money in the long run.
Expert tip: Knowing what you need in a home is important. Finding the loan product with the terms and rate that fit your needs is important too. A mortgage broker can present different options and help you weigh the benefits of each.
Common mistake: Failing to document large deposits.
Why is it important to track all large deposits?
A large deposit is considered to be 1% of the purchase price (or more), but the lending bank and underwriter use their discretion when questions arise in regard to large deposits. Any large deposit needs to have documentation (paystubs, tax refunds, gifts from family with supporting bank statements) to prove the funds were obtained in a compliant way. Funds that cannot be tracked (cash deposits) cannot be used in closing on a mortgage loan.
Keep in mind: Always speak with your mortgage broker before you decide to deposit a check or cash from an unverifiable source.
If you have any questions about what constitutes a large deposit, Whitteker recommends you consult a local mortgage broker.
“Your birthday check from Grandma for $20 isn’t going to set off red flags for the lending bank, but a large deposit of cash will,” Whitteker says. “Even though you sold that motorcycle that’s been in your garage for 5 years to help pay closing costs, if not done properly, you may run into a problem and not be able to count those funds at the closing table.”
Expert tip: Your mortgage broker can guide you on the best practices concerning deposits during the mortgage transaction. Proper transfer of title, receipts, and notarized documentation may save you from disaster.
Common mistake: Not organizing financial documents.
Why should a person shopping for a mortgage have their financial documents well organized?
Buying a home isn’t normally an overnight decision. As you consider the possibility, reach out to a mortgage broker and find out what documents you’ll need to get pre-approved, and what documents the bank may request from you given your scenario. Properly organized documents save time during the mortgage process. If you’ve lost important paperwork, it most likely can be ordered from the organization, but that could hold up closing.
Keep in mind: Organizing important financial documents before applying for a mortgage make the process so much smoother! You won’t be digging through boxes in the basement looking for a tax return because you’ve found the house you love but the market is so hot it may only be available for a few hours.
“Speak to a mortgage broker before you ever start house shopping,” Whitteker recommends. “If you go to an open house without a pre-approval, you may be sorely disappointed when you can’t afford the home. Proper organization of financial documents speeds the transaction and makes it less painful.”
Expert tip: Be prepared to provide all types of different documentation based on your scenario. A mortgage broker who’s been in the business a long time will be able to recommend what to gather before the process even starts.
To learn more about getting a home mortgage in State College – or anywhere else in Pennsylvania – contact Principle Home Mortgage today!