Top ten Mortgage Company, lender
Top 10 mistakes to avoid
Home buying, refinancing, home equity loan

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Buying a home

Some common home-buying principles and caveats are presented here for your consideration.  By keeping them in mind, you'll help create a successful and more enjoyable experience. These Top Ten lists are by no means exhaustive.  Since your home could cost you 25 to 40 percent of your gross income, it's important to conduct research, ask questions and study the process carefully.

  1. Looking for a home without being pre-approved. As a potential buyer competing for a property, you'll have a better chance of getting your offer accepted by being as prepared as possible. Consider this hierarchy of preparedness:

    • Neither pre-qualified nor pre-approved
    • Pre-qualified (waste of everyone's time)
    • Pre-approved
    • Full approval, Commitment Letter from Choice Finance®

    The benefits available at each level can be easily understood when viewed from the seller's perspective. Imagine you're a seller in receipt of multiple offers to purchase your property. A complete stranger (buyer) is asking you to take your property off the market for at least the next two to three weeks while they apply for a loan. As the seller, lets consider the type of buyer you'd prefer to deal with.

    Neither pre-qualified or pre-approved
    This buyer provides no evidence that they can afford to purchase your property. You may wonder how serious they are since they're not at least pre-qualified.
    Pre-qualified
    This buyer has met with a mortgage broker (or lender) and discussed their situation. The buyer has informed the broker regarding their income, expenses, assets and liabilities. The broker may also have seen their credit report. The buyer provided you with a letter from the broker stating an opinion of what the buyer can afford.
    Pre-approved
    This buyer has provided a broker written evidence of income, expenses, assets, liabilities and credit. All information has been verified by a lender. As a result, much of the paperwork for this buyer's loan has been completed. This buyer will probably be able to close quickly. They provide you with a letter (pre-approval certificate) from the lender. You're as certain as possible that this buyer can close.

    As a potential buyer, you can see that being pre-approved will give you the best chance of getting your offer accepted. This is critical in a competitive situation.
  2. Making verbal agreements. If you're asked to sign a document containing instructions contrary to your verbal agreements--don't! For example, the seller verbally agrees to include the washing machine in the sale, but the written purchase contract excludes it. The written contract will override the verbal contract. More importantly, your state may require that contracts for the sale of real property be in writing. Do not expect oral agreements to be enforceable.
  3. Choosing a lender just because they have the lowest rate. While the rate is important, consider the total cost of your loan including the APR , loan fees, discount and origination points. When receiving a quote from a lender or broker, insist that the discount points (charged by the lender to reduce the interest rate) be distinguished from origination points (charged for services rendered in originating the loan).

    The cost of the mortgage, however, shouldn't be your only criterion. Have confidence that the company you select is reputable and will deliver the loan with the terms and costs they promised. If in the final hours of the transaction you determine that the lender has suddenly increased their profit margin at your expense, you won't have time to start again with a different lender. Ask family and friends for referrals. Interview prospective mortgage companies.

  4. Not receiving a Good Faith Estimate. Within three business days after the broker or lender receives your loan application, you must receive a written statement of fees associated with the transaction. This is both the law and the best way to determine what you'll pay for your loan. Bring the Good Faith Estimate (GFE) with you when you sign loan documents. You should not be expected to pay fees which are substantially different from those contained in your GFE.

  5. Not getting a rate lock in writing. When a mortgage company tells you they have locked your rate, get a written statement detailing the interest rate, the length of the rate lock, and program details. Get it signed!

  6. Using a dual agent--i.e., an agent who represents the buyer and the seller in the same transaction. Buyers and sellers have opposing interests. Sellers want to receive the highest price, buyers want to pay the lowest price. In the standard real estate transaction, the seller pays the real estate commission. When an agent represents both buyer and seller, the agent can tend to negotiate more vigorously on behalf of the seller. As a buyer, you're better off having an agent representing you exclusively. The only time you should consider a dual agent is when you get a price break. In that case, proceed cautiously and do your homework!

  7. Buying a home without professional inspections. Unless you're buying a new home with warranties on most equipment, it's highly recommended that you get property, roof and termite inspections. This way you'll know what you are buying. Inspection reports are great negotiating tools when asking the seller to make needed repairs. When a professional inspector recommends that certain repairs be done, the seller is more likely to agree to do them.

    If the seller agrees to make repairs, have your inspector verify that they are done prior to settlement.  Do not assume that everything was done as promised.

  8. Not shopping for home insurance until you are ready to close.   Start shopping for insurance as soon as you have an accepted offer.  Many buyers wait until the last minute to get insurance and do not have time to shop around.

  9. Signing documents without reading them. Whenever possible, review in advance the documents you'll be signing. (Even though some specifics of your transaction may not be known early in the transaction, the documents you'll sign are standard forms and are available for review.) It's unlikely that you'll have sufficient time to read all the documents during the closing appointment.

  10. Not allowing for delays in the transaction. In a perfect world, all real estate transactions close on time.  In the world we live in, transactions are often delayed a week or more.  Suppose you asked your landlord to terminate your lease the day your purchase transaction was scheduled to close. A day or two before your scheduled closing date, you discover your transaction is delayed a week.  In a perfect world, no one is inconvenienced and your landlord is willing to work with you. More likely, however, your landlord is inconvenienced and angry.  Will you be thrown out?  Will you have to find interim housing for a week or more?  The eviction process takes a little time, so the Sheriff won't immediately remove you, but this type of stress-producing episode can be avoided.  How?  Terminate your lease one week after your real estate transaction is scheduled to close.  That way, if there is a delay in closing your transaction, you have some leeway.  This approach might cost a little more, then again, it might not.

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Refinancing your home

  1. Refinancing with your existing lender without shopping around. Your existing lender may not have the best rates and programs. There is a general misconception that it is easier to work with your current lender. In most cases, your current lender will require a new, updated application and the same documentation as other companies.   This is because most loans are sold on the secondary market and have to be approved independently.  Even if you have made all your mortgage payments on time, your existing lender will still have to verify assets, liabilities, employment, etc. all over again.

  2. Not doing a break-even analysis. Determine the total cost of the transaction, then calculate how much you will save every month. Divide the total cost by the monthly savings to find the number of months you will have to stay in the property to break even. Example: if your transaction costs $2000 and you save $50/month, you break even in 2000/50 = 40 months. In this case you'd refinance if you planned to stay in your home for at least 40 months.
    Refinance calculator

    Note: This is a simplified break-even analysis. If you are refinancing an adjustable to a fixed loan, or from a 30-year loan to a 15-year loan, the analysis becomes much more complex.

    #2 applies only if lowering your payment is your only objective.  It may very well be that by refinancing you can consolidate your other debts and greatly decrease your monthly payment on your total debt load.  What a relief for so many people... and a break-even analysis is the last thing on their minds. 

  3. Not getting a written good-faith estimate of closing costs. See item number four above.

  4. Paying for an appraisal when you think your home value may be too low.  An experienced Loan Officer won't let you pay for an appraisal without researching first that the odd's are strong your home value should come in where you need it to for your transaction.  Your Loan Officer will have access to appraisal companies that he/she deals with regularly, and therefore should be able to get you this information free and rather quickly.  The appraiser will pull recent comparable sales in your neighborhood.  Be sure you give your Loan Officer your home's square footage, # of bedrooms, # of bathrooms, finished basement?, additions, decks..etc.  Do not waste your money on a full appraisal if you are very doubtful about the appraised value of your home meeting the needs of your transaction.
  5. Using the county tax-assessor's value as the market value of your home. Mortgage companies do not use the county tax-assessor's value to determine whether they will make the loan. They use a market-value appraisal which may be very different from the assessed value.
  6. Signing your loan documents without reviewing them. See item number nine above.

  7. Not providing documents to your mortgage company in a timely manner.  When your mortgage company asks you for additional documents, provide them immediately.  They are doing what's necessary to get your loan approved and closed.  Delays in providing documents can result in costly delays.
  8. Not getting a rate lock in writing.  When a mortgage company tells you they have locked your rate, get a written statement which includes the interest rate, the length of the rate lock and details about the program.  Get this signed, and on company letterhead.

  9. Pulling cash out of your credit line before you refinance your first mortgage.  Many lenders have cash-out seasoning requirements.  This means that if you pull cash out of your credit line for anything other than home improvements, they will consider the refinance to be a cash-out transaction. This usually results in stricter requirements and can, in some cases, break the deal.
  10. Getting a second mortgage before you refinance your first mortgage.  Many mortgage companies look at the combined loan amounts (i.e., the first loan plus the second) when refinancing the first mortgage.  If you plan on refinancing your first loan, check with your Loan Officer to find out if getting a second will cause your refinance transaction to be turned down.

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Home Equity Loan, or Line of Credit

  1. Not knowing if your loan has a pre-payment penalty clause.  If you are getting a "no fee" or "no closing cost" home-equity loan, chances are there's a pre-payment penalty or early termination fee included.  These fees typically read:  "prepay penalty $400 or 1% of line amount, whichever is less.   PLUS 100% of recordation tax within first 18 months, or 50%of recordation tax if within 19-36 months."
  2. Getting too large a credit line. When you get too large a credit line, you can be turned down for other loans because some lenders calculate your payments based upon the available credit, and not the used credit.  Even when your equity line has a zero balance, having a large equity line indicates a large potential payment, which can make it difficult to qualify for other loans.
  3. Not understanding the difference between an equity loan and an equity line. An equity loan is closed--i.e., you get all your money up front and make fixed payments until it is paid if full.  An equity line is open--i.e., you can get numerous advances for various amounts as you desire. Most equity lines are accessed through a checkbook or a credit card.   You are charged interest-only on the outstanding principal balance when you have an equity line, and your payment are thus based on your outstanding balance.  With the equity loan, your payments are always based off of the original loan amount regardless of how much you pay it down.  The rate on the equity line is adjustable and usually based on the prime rate... your rate can change monthly.  The rate on the equity loan is fixed.

    Use an equity loan when you need all the money up front--e.g., for home improvements, debt consolidation, etc. Use an equity line when you have a periodic need for money, or need the money for a future event--e.g., childrens' college tuition in the future.
  4. Not checking the life cap on your equity line. Many credit lines have lifecaps of 18 percent.  Be prepared to make payments at the highest potential rate.
  5. Getting a home-equity loan from your local bank without shopping around. Many consumers get their equity line from the bank with which they have their checking account. By all means, consider your bank, but shop around before making a commitment.
  6. Not getting a good-faith estimate of closing costs. See item number four above.
  7. Assuming that your home-equity loan is fully tax-deductible. In some instances, your home-equity loan is not tax deductible. Do not depend on your mortgage company for information regarding this matter--check with an accountant or CPA.
  8. Assuming that a home-equity loan is always cheaper than a car loan or a credit card. Even after deducting interest for income tax purposes, a credit card can be cheaper than a credit line. To find out, compare the effective rate of your home-equity line with the rate on your credit card or auto loan.

    Effective rate = rate * (1 - tax bracket)
    Example: The rate of the home-equity line is 12%, your tax bracket is 30%, your effective rate is: .12 * (1 - .3) = .12 * .7 = .084 = 8.4%
    If your credit card is higher than 8.4 percent, the equity loan is cheaper.
  9. Getting a home-equity line of credit when you plan to refinance your first mortgage in the near future.  Many mortgage companies look at the combined loan amounts (i.e., the first loan plus the second) when refinancing the first mortgage.  If you plan on refinancing your first, check with your mortgage company to find out if getting a second will cause your refinance to be turned down.
  10. Getting a home-equity line to pay off your credit cards when your spending is out of control.   When you pay off your credit cards with an equity line, don't continue to abuse your credit cards.  If you can't manage the plastic, tear it up! 
    HELOC calculator

 

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