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Houston Mortgage Company
Top Ten Mortgage Mistakes
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.
-
Moving to Worcester
If an agent tries to make you sign a
written document that is contrary to
their verbal commitments, don't do
it! For example, if the agent 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!
-
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.
-
Choosing a lender because they are
recommended by your RealtorŪ.
Your Realtor is not a financial
expert. He or she may not know
which loan is best for you. Your
Realtor gets a commission only when
your transaction closes. As a
result, the Realtor may refer you to
a lender who will close your loan,
but who may not have the best rates
or fees. Also, many Realtors refer
you to one of their friends in the
loan business--who also may not have
the best rates or fees. Although
most Realtors are professional and
concerned about your best interests,
you should do your own homework.
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, because
they blindly followed their
Realtor's advice.
-
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.
-
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 most
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.
The only time you should consider
using a dual agent, is 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!
-
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.
-
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.
-
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.
-
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.
Refinancing your home
-
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.
-
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.
-
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.
-
Paying for a home appraisal when you
think the appraised value may be too
low.
Have the appraisal company conduct a
Desktop/drive-by appraisal 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.
-
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).
-
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.
-
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.
-
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.
-
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!
-
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.
Getting a home equity credit line.
-
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.
-
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.
-
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.
-
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.
-
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.
-
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.
-
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.
-
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%, your effective
rateis12% * (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.
-
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.
-
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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Your Credit Rating
Although income and assets play a
major role in approving a mortgage
loan, your credit history is
critical in the outcome of this
process and the interest rate at
which credit is granted.
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Mortgage Programs
All
mortgage loan programs plans can be
divided into categories in two
different ways. First, conventional
and government loans. |
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