Avoiding Mortgage Red Flags
Sponsored By Move
Sponsored By Move
Six steps to help keep your financial foundation from crumbling
By Diane Benson Harrington
By Diane Benson Harrington
While buying a new home can be exciting, don’t let the enthusiasm for new digs lead down the path to financial ruin. Here are six things to avoid when securing your home financing:
1. Don’t put the house before the mortgage
“Don’t go out and look for a home, fall in love with one, and then go to lender and say, ‘How am I going to finance this purchase?’ Figure out what you can afford, shop for a mortgage and get prequalified, and then choose a home. That way, you’re less likely to commit to something you really can’t afford,” says Mike Fratantoni, senior economist with the Mortgage Bankers Association of America.
“Don’t go out and look for a home, fall in love with one, and then go to lender and say, ‘How am I going to finance this purchase?’ Figure out what you can afford, shop for a mortgage and get prequalified, and then choose a home. That way, you’re less likely to commit to something you really can’t afford,” says Mike Fratantoni, senior economist with the Mortgage Bankers Association of America.
2. Don’t rely on the lender’s assessment of your finances
Don’t be deluded by the “financial expert” across the desk into believing you can afford more house than you think you can. A lender will know a lot about you before the process is over, but they have no way of knowing all those family finance idiosyncrasies.
“Sit down and draw up your family budget first: Here’s what we think we’d be comfortable with now, and with how that payment can vary over time,” Fratantoni says. “Then the lender can say yes or no as to whether you can qualify for that payment.”
If you discover after the fact that the monthly payments are more than you can handle, you could face a huge loss when you have to sell that home quickly. “Worse, you could be forced into foreclosure or bankruptcy,” notes Robert Skrob, executive director of the National Association of Responsible Loan Officers. “It is much better to be patient, buy a home you can comfortably afford, make payments, build equity and then transition into a larger home later.”
Don’t be deluded by the “financial expert” across the desk into believing you can afford more house than you think you can. A lender will know a lot about you before the process is over, but they have no way of knowing all those family finance idiosyncrasies.
“Sit down and draw up your family budget first: Here’s what we think we’d be comfortable with now, and with how that payment can vary over time,” Fratantoni says. “Then the lender can say yes or no as to whether you can qualify for that payment.”
If you discover after the fact that the monthly payments are more than you can handle, you could face a huge loss when you have to sell that home quickly. “Worse, you could be forced into foreclosure or bankruptcy,” notes Robert Skrob, executive director of the National Association of Responsible Loan Officers. “It is much better to be patient, buy a home you can comfortably afford, make payments, build equity and then transition into a larger home later.”
3. Don’t choose a mortgage on interest rates alone
Skrob says some mortgage advertisements promise low rates that involve a 30-year mortgage coupled with an accelerated payment plan.
“You may decide you like that option, but you cannot directly compare the interest rate on that mortgage to other opportunities. This loan could cost more than other mortgages with seemingly higher interest rates,” he says.
Skrob points out that literally hundreds of loan options are available. A variety of hybrid options on the market mean 30-year fixed and traditional adjustable rate mortgages (ARMs) are no longer the only ways to go. “Every borrower has a different financial situation and financial goal. Consult with a loan officer who can tailor a program to meet your individual needs instead of focusing exclusively on rates and points. You may likely find a better product than the one you were shopping for,” he says.
Skrob says some mortgage advertisements promise low rates that involve a 30-year mortgage coupled with an accelerated payment plan.
“You may decide you like that option, but you cannot directly compare the interest rate on that mortgage to other opportunities. This loan could cost more than other mortgages with seemingly higher interest rates,” he says.
Skrob points out that literally hundreds of loan options are available. A variety of hybrid options on the market mean 30-year fixed and traditional adjustable rate mortgages (ARMs) are no longer the only ways to go. “Every borrower has a different financial situation and financial goal. Consult with a loan officer who can tailor a program to meet your individual needs instead of focusing exclusively on rates and points. You may likely find a better product than the one you were shopping for,” he says.
4. Don’t shop less for your mortgage than you do for your house
You’ll have both for the same amount of time, so it’s wise to give them equal weight.
“We think buyers – particularly first-time buyers – are not shopping enough for mortgages, that they are relying too much on a Realtor or a broker,” Fratantoni says. “Shop on your own and compare offers across different lenders.” Even though a mortgage broker, much like an independent insurance agent, can offer your mortgage options from a variety of lenders, the Mortgage Bankers Association believes it’s wise to check in with more than one broker, just as you would more than one lender.
Skrob cautions buyers to do as much homework on their own as possible – comparing rates, points, styles of loan – before actually applying for a mortgage and handing over personal details like your social security number. In a perfect world, you want to avoid having several lenders pulling your credit report, he says. “Over the years, the credit reporting agencies have determined that a borrower who seeks credit from many different lenders is riskier than others. Therefore, they may decrease your credit score each time a lender pulls your credit report,” he says. “A lower score decreases your likelihood of getting the best rate and terms.”
Fratantoni doesn’t believe those credit checks look overly negative to a potential borrower, but it doesn’t hurt to do as much groundwork as you can and narrow your choices before letting lenders check your credit.
You’ll have both for the same amount of time, so it’s wise to give them equal weight.
“We think buyers – particularly first-time buyers – are not shopping enough for mortgages, that they are relying too much on a Realtor or a broker,” Fratantoni says. “Shop on your own and compare offers across different lenders.” Even though a mortgage broker, much like an independent insurance agent, can offer your mortgage options from a variety of lenders, the Mortgage Bankers Association believes it’s wise to check in with more than one broker, just as you would more than one lender.
Skrob cautions buyers to do as much homework on their own as possible – comparing rates, points, styles of loan – before actually applying for a mortgage and handing over personal details like your social security number. In a perfect world, you want to avoid having several lenders pulling your credit report, he says. “Over the years, the credit reporting agencies have determined that a borrower who seeks credit from many different lenders is riskier than others. Therefore, they may decrease your credit score each time a lender pulls your credit report,” he says. “A lower score decreases your likelihood of getting the best rate and terms.”
Fratantoni doesn’t believe those credit checks look overly negative to a potential borrower, but it doesn’t hurt to do as much groundwork as you can and narrow your choices before letting lenders check your credit.
5. Don’t be lured by low initial payments
Some ARMs and hybrid loans can bring even the most expensive of homes within your immediate reach. But once the initial term is over – usually in anywhere from one to seven years – the interest rate adjusts and your monthly payment may skyrocket.
Sure, you can refinance at that time, or just before the initial term expires, but there’s no guarantee the mortgage rates then will be as good as the one you have now, or that the same loan programs will be available.
“You absolutely need to understand how the loan is going to change over time and what you’re comfortable with. Ask specifically, ‘If interest rates go up, what’s my payment going to be?’” Fratantoni suggests.
Some ARMs and hybrid loans can bring even the most expensive of homes within your immediate reach. But once the initial term is over – usually in anywhere from one to seven years – the interest rate adjusts and your monthly payment may skyrocket.
Sure, you can refinance at that time, or just before the initial term expires, but there’s no guarantee the mortgage rates then will be as good as the one you have now, or that the same loan programs will be available.
“You absolutely need to understand how the loan is going to change over time and what you’re comfortable with. Ask specifically, ‘If interest rates go up, what’s my payment going to be?’” Fratantoni suggests.
6. Don’t even dream of fudging financials .
Some appealing loan programs promise better rates if you have a certain income or if you’re looking at a particular type of home (historic, one in a neighborhood that’s being turned from bad to good, etc.). But don’t be tempted to tweak your numbers or circumstances to help you qualify. “Misleading a lender goes beyond just making a mortgage mistake. It’s being fraudulent. You never want to do that,” Fratantoni says.
Skrob says you should run, not walk, from any lender who encourages you to cover up past financial difficulties or stray from the truth.
Some appealing loan programs promise better rates if you have a certain income or if you’re looking at a particular type of home (historic, one in a neighborhood that’s being turned from bad to good, etc.). But don’t be tempted to tweak your numbers or circumstances to help you qualify. “Misleading a lender goes beyond just making a mortgage mistake. It’s being fraudulent. You never want to do that,” Fratantoni says.
Skrob says you should run, not walk, from any lender who encourages you to cover up past financial difficulties or stray from the truth.
No comments:
Post a Comment