A new construction home with a loan.

9 Common Home Loan Mistakes

Getting a home loan is an exciting thing, but it is also a serious financial matter. If you are in the process of getting a home loan, there are a lot of potential pitfalls in your way. Take a look at 9 common mistakes that people make before and after taking out a home loan. Hopefully, you can avoid making them.

1) Buying Too Much House

When you are approved for a home, you will be approved for a certain loan amount, but that does not mean that you have to spend every dollar.

When deciding how much to approve you for, your lender will try to do their best to determine how much you can afford. The amount they come up with might not be an amount that will allow you to live the same lifestyle that you are used to. They may not take into account your regular expenses for things like entertainment and travel. If you spend the full amount that you are approved for, you may have little money left over to do all of the things you like to do.

Buying a cheaper home may allow you to maintain your current lifestyle without any sacrifices. It may also give you extra money each month that you can put towards savings and investments.

The last thing that you want to do is be “home broke”, so purchase below your means whenever possible.

2) Making Big Purchases Before Closing

When you are getting ready to purchase a home, you want to avoid making any major purchases. You want to show a stable financial picture so that your underwriter will have an easy time approving you.

Once you get your approval, things should stay the same, which means making no major purchases.

Many people make the mistake of thinking that once they are approved for a loan, they are good to go. They find a house and start the closing process and then make a major purchase for something like a house full of furniture or even a new car. Make this mistake and it may come back to bite you.

Before close, your lender will do another credit pull. If your debt to income ratio or credit score has changed, you risk losing your home.

Don’t take chances. Avoid making any major purchases until the ink is dry on your loan contract.

3) Not Getting Pre-Approved

There is a big difference between getting pre-qualified and getting pre-approved.

With a pre-qualification, a lender is qualifying a borrower for a mortgage based on the information that the borrower has submitted. A pre-approval will involve the lender actually reviewing the information, looking at debt to income rations, etc. This is the step that happens after a pre-qualification.

Only being qualified might mean that you could fall in love with a home only to lose it after the approval process. In addition, getting a pre-approval will bear more weight to home sellers. It means that your finances have been thoroughly reviewed and that your offer is a legitimate one.

You may be excited to start the process, but get an approval before looking for homes.

4) Taking On Debt After Closing

If you did everything right, you took on no new debt before applying for a loan and until you closed on your home loan. You made it through a credit freeze, but now is not the time to go crazy.

Try to stay disciplined after closing on your home and stay out of debt. The temptation will be to open new lines of credit to pay for all of your initial new home needs. You will want to buy a lot of things for your home, but remember that these are wants and not needs. Resist the urge to charge up credit accounts and instead, buy things for your home over time.

Taking on debt after closing on a home can make your finances hard to manage. Avoid any new debt until you are used to making your new home mortgage payment and paying all of the extra expenses that come with home ownership.

5) Underestimating The Cost Of A Home

Which brings us to our next mistake, underestimating the cost of home ownership.

If you are new to home ownership, you may be only looking at your mortgage payment, but there are a lot of extra expenses that go into owning a home. Your escrow account will cover things like property insurance and taxes, but there are more expenses to come.

You need to budget for expenses such as HOA fees, increased electricity costs, higher water usage, lawn care, maintenance, etc. These expenses can easily add another 300 dollars to 400 dollars to the average home owners monthly budget.

When figuring out how much of a monthly payment you can afford, be sure to consider all of the extra little expenses that can add up in a big way.

6) Not Educating Yourself On Mortgages

As a borrower, you should educate themselves on all of the loan programs that are out there, even if you are convinced that you know which loan to pursue.

Many people depend on their mortgage broker to help them decide on a loan, but this can be a mistake. Your broker may have their favorite loan programs, because what they are concerned most with is closing on a loan. They might prefer to go FHA, for example, when a USDA loan might actually be better for a borrower. Some loans are more of a hassle for brokers but might actually be more beneficial for consumers. In this example, a USDA loan is often more work but will have lower mortgage insurance costs and can be had with no down payment.

Before applying for a loan, look at all of the loan options on the market and determine what is best for you. Know the ins and outs of conventional, FHA, VA and USDA loans so that you are not at the mercy of your broker.

7) Failing To Pay Extra Escrow Payments

Your lender will do the best job they can with your escrow payment, but more often than not, it will come up short.

The reason for this is that they are basing the escrow payment on the information that they have. Among other things, they will use prior year tax records to estimate property taxes. Once the home is sold though, property taxes will go up.

With a pre-existing home, the prior home owner was likely paying taxes on a home value under market value. This is because a homes taxable value can only be raised so much each year. The tax assessor will use the home sale as a way to start taxing the home at market price. On a new home, your initial taxes may be based on the unimproved value of the land. This will also go up, in a big way.

Protect yourself from a potential escrow shortage by paying extra money into your escrow account for the first year. Even just a few hundred extra dollars can help.

8) Not Shopping Home Owners Insurance Rates

You must shop your home owners insurance. Just like with auto insurance, the prices can vary considerably from lender to lender.

Rates for home owners insurance are not consistent across carriers and may reflect an individual companies losses in a particular area. One company may have had many more claims in a region and may be charging accordingly. It is not unusual to find identical polices with one premium being half of what another is.

Shop your home owners insurance with at least four different insurance companies before you make a decision. If two policies have similar rates, check insurance carrier reputation as well. Some will provide better service than others, which is important in an emergency.

9) Paying Points

Points are a way to buy down the interest rate on your home. It sounds like a great thing, but it is not always a smart move.

One point is 1 percent of the loan value and it will earn you a .25 percent decrease in your home interest rate. If your home loan is for 300,000 dollars and your interest rate is 4 percent, a point would cost you 3000 dollars and it would drop your rate down to 3.75 percent.

Points can be a great thing, but only if you plan to stay in your home for a long time. In this example, buying a point would save the home owner 43 dollars a month in interest charges. It would take almost 70 months to recoup the 3000 dollar cost of the point. If a homeowner planned in being in a house for over 6 years, they would benefit from buying the point. If not, it is wasted money.

Points can be a good thing, but you need to do the math and consider your particular situation to avoid wasting money.

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