Getting a mortgage can be challenging since the real estate market turned upside down. For those individuals who do not shy away from a challenge, the interest rates and affordability of homes has never been better. Qualifying for financing is a challenge, but definitely not impossible if you do your due diligence and shop smart. Many homebuyers fall victim to the same errors that can end up costing them a lot of money, or worse, the home they want to buy. These are the top three mortgage mistakes buyers make, and how to avoid them.
The first mistake many would-be buyers make is not knowing what their credit rating is before they seek out a lender. Before you do anything, it is important to see where your credit scores are and what potentially negative items could be on your report. The mortgage crisis has tightened up lending restrictions, and having a solid credit rating is more important than ever, especially if you want to qualify for the best interest rates. Order copies of your credit report from each of the three major credit bureaus and review them carefully. Dispute or resolve any negative items on your reports and pay down any revolving credit accounts (like credit cards) to less than 20% of the credit limit to maximize your credit score and increase your chances of mortgage approval.
The second mistake many buyers will make is not knowing what is available to them. There are so many mortgage programs available in different terms and rate types, not doing some research ahead of time could cost you a lot of money. At the onset of the mortgage crisis, many homeowners learned these lessons the hard way. They did not understand the terms of the loans they signed, and in the end found themselves with no way out. Read every word of the contract, and take the time to investigate and understand what it all means. If you are looking at adjustable rate loans, you should know how the variable rate is set. Find out if there are penalties for paying late, missing a payment, or paying your mortgage off early. Learning every aspect of the mortgage options you have to choose from and every detail of the loan you choose will help you to stay out of trouble and allow you to deal with trouble if it finds you.
Finally, just because you can qualify for a mortgage does not mean the sky is the limit. A lender will qualify you for the maximum amount that the lending guidelines will allow, which is not necessarily in line with your budgetary restraints. One of the contributors to the current state of the real estate market is that buyers borrowed far more than they could comfortably afford. Before you look at a single home, take a long hard look at your financial status. Make out a budget with all of your living expenses, including savings, pocket money, and projected future expenses (such as braces for the kids or auto maintenance). Mortgage payments should be no more than 28% your monthly income, but if you have other debts, lifestyle costs, or major expenses in your future, you may need to limit yourself to a smaller mortgage. You should know what payment you are comfortable with before you look, and stick to your budget.
Buying a home is the single largest purchase many of us will make in our lifetimes. It does not make sense to make a purchase that significant and not do your homework first. Fix up your credit, understand what type of loan is best for you, and know your financial limits before you shop. Avoiding these three mortgage mistakes can keep you and your home on a solid financial foundation.
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