Avoiding Mistakes

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Applying for a mortgage can be a daunting experience. You can borrow too much or prepare too little. You can misjudge terms or overestimate your credit. With so much at stake, it’s no wonder so much can go wrong.

It’s not enough that you’re agreeing to take on the biggest debt of your life, one that represents two to three times your annual income. You’re also confronted with piles of paperwork, flurries of fees and a tidal wave of terms, from amortization to title insurance, whose meaning is fuzzy at best.

In this confusing and pressure-filled atmosphere, it’s easy to make some mistakes. Here are some common ones that lenders and mortgage brokers see, and what you can do to prevent them.

1) Not fixing your credit
Mortgage brokers say they’re confounded at the number of buyers who apply for a mortgage with their fingers crossed, hoping their credit will allow them to qualify for a loan.

Before you even think about applying for a mortgage, obtain copies of your credit report. Doing this at least six months in advance should give you plenty of time to challenge any errors on your report and ensure that they’re removed by the time you’re ready to apply for a loan. You can also see the legitimate factors that are hurting your score and do something about them, such as paying off an overdue bill or paying down credit card debt.

2) Not Using The (RRSP) Home Buyers Plan

The Homebuyers Plan offers first time home buyers an opportunity to use a portion of their RRSP savings to purchase a home. Check this article for pros and cons of using the homebuyers plan.

3) Not getting pre-approved for a loan

Many first-time borrowers confuse being "pre-qualified" with being "pre-approved." Pre-qualification is a pretty casual process, where a lender tells you how much money you probably can borrow based on how much money you make, how much debt you already have and how much cash you have for the down payment. Getting pre-approval, by contrast, is a much more rigorous process and involves actually applying for a loan. You typically submit tax returns, pay stubs and other information. The lender verifies the information and checks your credit. If all goes well, the lender agrees in writing to make the loan. In a hot or even warm real estate market, the house hunter who is only pre-qualified is a cooked goose. Home sellers and their agents give much more weight to offers being made by buyers who already have a loan lined up.

4) Borrowing too much money

Many people take out the biggest loan they possibly can, figuring that their incomes will eventually increase enough to make the payments comfortable. But few first-time buyers have any clear idea of how expensive homeownership can be. Not only will you shell out more for mortgage payments than you probably did for rent, but you’ll also need to cover property taxes and homeowners insurance, as well as higher bills for utilities, maintenance and repairs than you faced as a renter.

Lenders are perfectly willing to let you overextend, knowing that you’ll probably forgo vacations, retirement savings and new clothes for the kids rather than default on your mortgage.

"Mortgage money … is way too easy to get," People tend to overbuy … and that can really stress family life. It’s also a formula for foreclosure."

Instead of going to the edge of affordability, consider limiting your housing costs -- mortgage payments, property taxes and homeowners insurance -- to 25% or so of your gross income. That’s a much more sustainable level for most people, financial planners say, than the 33% lenders are typically willing to give you.

4) Not shopping around for rates and terms

Mortgage broker Roy Cocciollo sees too many borrowers with decent credit getting stuck with loans meant for people with poor credit. So-called "subprime" loans are often more profitable, so less ethical mortgage brokers may push them.

If the borrower doesn’t know what the prevailing interest rates are for someone with their credit standing, Cocciollo said, they can easily pay thousands of dollars more than they need to. Even people with a few dings on their credit can often qualify for better loans than they’re typically offered.

5) Fees

Some lenders and brokers do charge fees. Just make sure that they are legitimate by asking what they are for and why are they being charged. If in doubt or if you are being bullied into signing, just ask for a second opinoin from another broker.

Typical fees to lenders on 1st mortgages are charged for non-qualified mortgages is around 1% of mortgage amount. Some lenders pay the broker half that amount and some don't pay, so the broker may have to charge you an addtional fee. A reasonable rate will be somewhere between .5% to 1%. If it is more than that, make sure you ask why.

Private lenders and second mortgages tend to charge more interest and fees. The average 2nd mortgage carries an interest rate of about 11% and lenders charge as much as 5% of the mortage amount in fees, so be careful. Home Mortgage Info fees are extremely reasonable. Call us for more information!

6) Not planning for closing costs

The day you’re scheduled to get your loan, known as closing, you’ll also be expected to write a cheque for a number of expenses, which typically include legal fees, taxes, title insurance, prepaid homeowners insurance, points and other lenders’ fees. Together, these are known as closing costs, and the total can be eye-popping: somewhere between 2% to 7% of the selling price of the house.

Usually, when people see the closing costs, they’re like a deer in the headlights. It’s much more than they ever think it’s going to be.

Plan for closing costs by getting a good-faith estimate from your lender as early in the loan process as possible. Make sure you have the cash on hand (or rather, in your checking account) and that it doesn’t "disappear" before closing because of sloppy bookkeeping or a last-minute emergency.

7) Not having enough cash on hand after closing

After borrowing too much, and scraping together every last dime for closing costs, many home buyers have nothing left in the bank to pay for anything unforeseen happening --and something unforeseen always happens.

It costs so much just to move in, then the water heater breaks. Some people are so tapped out by the process, that they’re not able to make their first mortgage payment on time. That’s why "more and more lenders are requiring [borrowers have] three months’ reserves after closing."

That’s a smart idea for borrowers, anyway. Having three months’ reserves, which means a fund equal to three months’ worth of expenses, will help you handle the added costs of homeownership with much less stress.

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