7 Mortgage Mistakes Home Buyers Should Know

Many home buyers make a few mistakes while looking for the right mortgage for their needs. From finding the best lender to selecting their ideal terms, every step has its challenges. Although it's impossible to avoid every mistake, home buyers can navigate the process much easier by knowing what lies ahead. The following information can help buyers prepare ahead of time.

For informational purposes only. Always consult with a licensed mortgage or home loan professional before proceeding with any real estate transaction.

1. Not Understanding All the Home's Costs

When it comes to buying a home, everyone talks about down payment requirements, but do not mention all the other costs required. While the money a buyer puts down is a large amount, they will also need to provide even more to put in an offer and go through closing.

Upon finding their perfect home, for example, buyers put in an offer that's usually contingent on lender approval, inspection results, and other factors. To encourage the seller to wait, interested buyers put earnest money in an escrow account until the property closes. This payment is usually equal to up to 2 percent of the home's purchase price. If the buyer backs out of the purchase, they may forfeit the earnest money in full. Otherwise, it will go toward their closing costs.

Beyond that, home buyers may also pay for:

• Inspection
• Appraisal
• Homeowners insurance
• Property taxes
• State recording fees

2. Leaving Errors on Credit Reports

Home buyers need to thoroughly review their credit reports for errors and unpaid debts to ensure they have the highest score possible before applying for a home loan. Mortgage lenders look at credit scores to determine the applicant's ability and willingness to repay their debts. If the score is outside the lender's target range, they may deny the application. Otherwise, scores lower than ideal can result in high interest rates and other undesirable terms. Thankfully, home buyers can dispute the errors and pay off their outstanding debts before applying to raise their score.

3. Racing Through All Savings

Although home buying is expensive, homeownership is even more costly. Therefore, home buyers shouldn't completely empty their savings to pay for closing costs and other expenses. It is wise for buyers to keep extra money available, if possible, in case the home they buy needs repairs in the first few months, for example.

4. Filling Out Just One Loan Application

Every lender has their own requirements they use to offset the risk of issuing home loans. Because of that, they also have different rates and fee schedules, giving home buyers their choice of terms. For that reason, it's important for buyers to shop around for the best terms available. Even a difference of a half percentage point in interest may result in thousands of dollars saved over the years.

Home buyers can fill out an application with three lenders to see what offers await and choose the best terms possible. If a buyer doesn't like their terms, they can work on their credit scores or debt-to-income ratio to try to secure a lower interest rate or eliminate private mortgage insurance.

5. Shopping Around Before Preapproval

Although it's tempting for buyers to go shopping for a home before getting preapproved for a mortgage, without preapproval paperwork in hand, they cannot put in an offer.

6. Using the Full Approval Amount

Mortgages are approved at a certain amount based on the applicant's financial information. However, this doesn't mean it's wise for the borrower to use the full amount approved. By using the minimum amount possible, home buyers can pay less each month for their home and save more money.

7. Skipping the Home Buyer Rebate

Buyer's agents are an excellent asset for home buyers to have on their side. Not only do they help provide key insights about the real estate market, but they may also offer a buyer's rebate. This rebate is often equal to one percent of the purchase price of the home. Homebuyers must request the rebate directly when hiring the buyer's agent, and it is not available in all states. If they are eligible, the agent will let them know prior to putting in an offer and issue the rebate after closing.

With an understanding of these potential missteps, home buyers can navigate the process much easier. Then, they can select a lender, fill out the application, and pick the right terms without worrying about making a wrong decision along the way.

For informational purposes only. Always consult with a licensed mortgage or home loan professional before proceeding with any real estate transaction.