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Romance & Money

Buying Your First Home

The 7 big mortgage mistakes and how to avoid them

Truly Terrified Mary in Wisconsin:
"My husband and I are saving money for our first home. We are overwhelmed by the amount of information we see everyday regarding this process. So much so, that we feel terrified of making a mistake with our hard earned savings. Can you offer us any advice?
Thank you!"


Oh Well Truly Terrified Mary, it’s good that you ask sooner rather than later. Most people learn from their mistakes, you are wise to want to learn from the mistakes of others.
I’ve had very intelligent people, like the CEO who called me from his jet while in Copenhagen on business; all ask me the exact same questions. The language of the mortgage business, like the language of the software business, is hard to understand if you don’t deal with it everyday. Even then it can often times be vague at best.

It never ceases to amaze me how many people go into the house buying process completely unarmed and unaware. It’s not enough that the windstorm of paperwork is filled with terms like amortization, discount points, title insurance, escrow, and more, but many are also assuming the largest debt of their lifetime, and they don’t prepare beyond saving money and looking at houses.

That man from the jet didn’t usually finance homes, he’d always paid cash. But his accountant told him to get a mortgage on his primary residence. He called that day to ask why he needed title insurance when he had millions of dollars in life insurance. He was not happy. I explained to him that title insurance and life insurance are very different things. (There are two types of title insurance: Lenders (loan) title insurance, and Owner's title insurance. Most lenders require a Policy when they issue you a loan. It is usually based on the dollar amount of your loan. It protects the lender's interests in the property should a problem with the title arise (fraud, mechanics lien, wills, etc). The amount decreases each year and disappears as the loan is paid off.).

"Experience is the name everyone gives to their mistakes."
Oscar Wilde (1854 - 1900), Lady Windermere's Fan, 1892, Act III

There are seven big mistakes people make all the time that you can learn from:

The first big mistake people make in this process is to not understand the language to the best of their ability. You don’t need to know them all, but try to understand words as they come along, such as; escrow, title insurance, adjustable rate mortgage, finance charge, etc.

The second thing is in not repairing their credit BEFORE they look at houses. Many don’t even know what their credit reports say about them. 75-90% of mortgage decisions are based on your credit score alone, and many people not only don’t know what their FICO score is, but also don’t know they have one. ORDER your credit report and your three digit FICO score. Order your report from www.experian.com or any of the three credit bureaus where you can get your FICO as well. Or order from any of the legitimate companies who offer credit reports and then go to www.MyFico.com to order your score. Do this at least six or seven months before you plan to apply for a mortgage. That way if there is any erroneous information you can clear it up before it messes you up in the form of loan denial or an interest rate far above the norm.

The third thing you must do is to get pre-approved (not pre-qualified) for a mortgage. Pre-qualified is meaningless. This can take place in a phone conversation with a loan officer who knows nothing of your file. Pre-qualification can be revoked once you make actual application. So don’t go looking for a house based on a pre-qualification. Go through the actual process of loan application and APPROVAL before you go looking.

The fourth thing first time homebuyers don’t do enough of is to take a good look at the first time homebuyers programs. These often require lower down payment, and offer lower rates, fees, and more flexible underwriting for people with damaged credit. FHA is not the only program out there; there are many private banking programs for first timers as well. Shop around.

The fifth thing people do when they buy their first home is that they buy too much. First time homebuyers don’t understand how expensive it is to own a home. They haven’t experienced yet the cost of insurance, maintenance, yard care, leaking roof, taxes, rising utility bills, etc. A lender will push your income to debt ratios as high as 33-40% depending on your credit. I suggest you keep your PITI (principle, interest, taxes, insurance) payment at about 25% of your gross income. That way you can ease into home ownership without the stress of being financially overstretched.

The sixth thing people do is that they don’t shop around for a better deal. Unfortunately there are less ethical lenders out there that will play off your lack of understanding. They can ‘stick’ you with a higher rate and fee than you deserve (called subprime loans) so they can make more money off your loan. Shop around for a good deal. Call at least three different lenders (your bank, competitive bank, and a mortgage broker) and ask them to send you a good faith estimate of closing cost based on the price range for which you are qualified. Look on the internet (MyFico.com is a good source) for the prevailing rates and fee’s so you can glean a base of knowledge before you go shopping.

The seventh thing is that people don’t plan for the full cost of buying a home. They don’t understand that in addition to that hard saved down payment, they will also have escrow items (tax & insurance reserves) and closing cost that can run into the thousands of dollars. Get those three good faith estimates months in advance and understand how much you will need to close. Then, make certain you have money left over to live on. I advise 3-6 months of cash reserves after you close. Think about it; you move after spending all your money on closing the house, then the refrigerator and the dryer break the very first week. What do you do if you have no cash reserves? It happens all the time. Be prepared.

Additional information on this topic:

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Important Financial Help Websites and Phone Numbers
mindy@overcoffeenotary.com

 

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