6 Things You Must Know Before Getting a Home Loan
In just last ten years, the mortgage industry has changed greatly due to the mortgage crisis in 2008. While the internet has made it easier than ever to obtain a home loan, the system regulating the industry is now tighter than ever as well.
This is important for home buyers to know because even just subtle changes in the way you approach home loan shopping, and even small changes in the way you structure your mortgage, can have a significant impact on the total expense of your loan over its lifetime. Put simply, these choices can either cost you thousands, or save you thousands.
Getting the Right Information
Whether you’re getting prepared to buy your first home, or simply planning to make a move and buy your next house, it’s critical to inform yourself a little about the current mortgage market and the gather some tips for obtaining the best loan available to you.
After talking with some other professionals in the industry, I’ve come up with a list of 6 common mistakes that most homebuyers make when shopping for a mortgage. These mistakes will have an enormous impact on your bottom line and the amount of interest you pay over the life of your loan, so pay attention! Don’t make the same mistakes!
Mistake #1) They Don't Get Pre-Approve for a Home Loan First
Pre-approval is a simple, quick and easy step to take before you run out and start shopping for homes. While I know you’re excited to get to “the fun part” of buying a home, getting a loan pre-approval first will be well worth the short amount of time involved.
Your lender can provide you with a pre-approval letter that acts as proof of funding to be accompanied with any purchase offers you submit to sellers. To them, it’s essentially as good as money in the bank, and lets them know that should they decide to accept your offer, you will be able to follow through on funding and see the transaction all the way through to closing.
It can be done over the phone, or even online, and done at no cost or obligation to you, so feel free to shop around and see who can offer you the best financing.
Mistake #2) They Don't Set a Budget for Their Monthly Mortgage
Just because you qualify for loan of a certain dollar amount, doesn’t mean you have to take a loan out for that full dollar amount. While the qualification process will assess your current income and expenses, it’s impossible to plan for things like vacations, car troubles, and other unexpected expenses that may come up along the way.
So look closely at your finances and determine what is the maximum monthly payment you’d be comfortable with. While opinions will vary widely depending on who you listen to, I prefer the more conservative approach of not let your monthly payment, including insurance and taxes, to be no more than 25% of your take-home income. This goes especially for first time home buyers.
Mistake #3) They Don't Consider Their Long-Term Goals
Most of the time mortgage terms are set for 30 years… THIRTY YEARS! Think about that… that’s three whole decades, and a roughly a third of your lifetime. Most home buyers don’t take the time to ask themselves some simple questions up front before committing to those large mortgages.
Questions like: How long do you think you’ll own this home? What direction are the interest rates going in? And how quickly? Is your income expected to go up or down significantly in the near future? Will it impact the amount of monthly mortgage payment you’re comfortable making?
The answers to these questions are important to consider before making such a huge financial commitment, and will help guide you in the process of selecting a home loan that’s right for you.
Mistake #4) They Don't Take Advantage of Pre-Payment Privileges
Most home loan shoppers don’t realize that there are pre-payment options available to them when structuring their loan that can shave years, and thousands of dollars, off their loan. By simply structuring your payments so that they come out more frequently, such as weekly or biweekly, will significantly lower the amount of interest you’ll pay over the life of your loan.
For the exact same reason, you should be allowed the option to make a substantial pre-payment if you choose to, at least up to a certain amount. Selling a car or other personal property can put some extra money in your pocket, and by putting that money down on the principal of your home loan you’ll save yourself thousands of dollars in interest over the life of the loan.
It would be wise for you to consider loan options that offer these two advantages, as they’ll shave years off your mortgage, and save you thousands of dollars in interest. However, not every mortgage is going to have these options automatically available to you, so make sure to ask when shopping around for a loan.
Mistake #5) They Don't Get a Mortgage That's Portable or Assumable
Portable mortgages, where available, can allow you to carry them with you when purchasing your next home and avoid having to pay any discharge penalties. This will save you from going through the entire loan approval process again, unless you’re making the move up to a much more expensive home.
Assumable mortgages are ones that can be taken over by the purchaser of you home when you sell and move to your next home. This can be used as a powerful negotiation tool as it makes it much easier for someone to buy your home and gives you more options to consider, and once again also saves you from having to pay any discharge penalties.
Mistake #6) They Don't Consult with a Mortgage Expert
Mortgages are really big commitments that we typically don’t spend any time learning about until it’s time to get one. Since it’s such a big financial transaction, generally the biggest one in our lifetimes, we really ought to consider consulting with a mortgage expert who can lead us through the process and ensure we get the best loan option available to us.
Working with a mortgage expert can make the process go much faster and help you avoid any costly delays, and more importantly make a significant difference in the ultimate cost and effectiveness of your loan. Also, there’s no cost or obligation, so you really have nothing to lose.