Having a mortgage is a big commitment that causes a person to spend a great deal of money. It is important to be savvy and understand how to get a loan that has a good interest rate and low fees. Here are the five biggest mistakes to avoid when applying for a mortgage loan.
1. Adjustable-Rate Mortgages
Although it may be tempting to take an adjustable-rate mortgage, this may be a big mistake. Unless a person plans on moving within five yeas, a fixed-rate loan is best. With an adjustable-rate loan, a person may begin with a low rate that balloons out of control in the future.
2. No Down Payment
It may be difficult to save for the conventional 20 percent down payment, but it is worth trying. Without a 20 percent down payment, a person is required to pay private mortgage insurance each month. Besides this expense, it makes it difficult to refinance or move. It is best to avoid FHA loans that require PMI until the loan is fully paid. A better alternative is paying PMI on a conventional mortgage and canceling this insurance after accumulating adequate equity.
3. Not Being Pre-Approved
Even through many potential homebuyers know how much they can afford, it is vital to understand how much the bank is willing to loan. Lending institutions look at a person’s credit score, income, and expenses. Without getting pre-approved for a mortgage, it is not possible to shop responsibly. Also, this competitive market requires a person to be pre-approved before making an offer.
4. Understand the Factors that Can Change a Mortgage
After a person receives an accepted offer and has been approved for a loan, it is vital to keep acting financially responsible. Until closing, a mortgage is not final. A person must remain employed and not take out new loans. With more debt, the borrowing limit may be compromised. Also, if the rate was not locked, an interest hike may occur. This means a person may qualify for less than necessary.
5. Not Checking Credit
Before applying for a mortgage, it is essential to verify a credit report. There are a number of free credit-monitoring services that allow an individual to access his or her report and examine it for mistakes. Errors are common and can lead to higher rates or rejections. It is advised to check a credit report a few month before applying for a loan. This provides time to make changes. Paying down high balances and paying on time are smart ways to improve a score.
The above mistakes commonly cause people a great deal of money when taking out mortgage loans. Knowing how to avoid the pitfalls will save headaches and allow individuals to save some cash. Understanding the rules will take the stress out of the process as well.