All you have to do to get unsolicited mortgage advice is tell someone that you’re about to begin looking for a new home. Some of it, such as a recommendation of an exceptional lender, is good. Much of it is not.
5 pieces of advice you should absolutely ignore are:
1. Find the house you want before you talk with a lender.
Those who give this advice will tell you that pre-qualifications don’t mean a darn thing, so you’re just wasting your time.
They’re right – pre-qualifications are useless. You need a pre-approval. In a pre-qualification the borrower simply gives information about their current situation and the lender writes a letter that says something along the lines of “If all this is true, then Joe qualifies for a loan up to X dollars.”
In a pre-approval, the borrower supplies relevant documentation, the lender verifies that information and runs a credit report, and an underwriter makes a decision.
The truth: Smart home buyers always get a pre-approval before going shopping. Not only will this prevent them from lusting after homes they can’t possibly purchase, it helps strengthen their offer when they find the right home.
Home sellers naturally are more eager to accept an offer from a borrower who has a pre-approval than from a borrower who has yet to speak with a lender.
2. Use the bank where you have your checking and savings accounts.
The adviser’s theory is that since you already have an ongoing relationship with your bank they’ll naturally give you more favorable rates. Some even advertise how they make the loan process easy for their current clients. But it’s not necessarily true.
The truth: You should shop for a lender just as you shopped for a home. Each bank has their own guidelines, regulations, and fees – and they wouldn’t change even if you were the loan officer’s sister.
In most instances, you should choose a mortgage broker over a single bank. A mortgage broker has access to a wide variety of loan programs at different banks and can help you find the best one for your particular situation.
3. Always choose the lender and loan program with the lowest interest rate.
This sounds like common sense, until you realize that the interest rate isn’t the only variable. It’s true that your monthly payment will be lower, but that low rate might come in the form of an Adjustable Rate Mortgage, which could come back to bite you.
Thousands fell victim to this in the recent downturn. Home prices fell and they were unable to refinance into a fixed rate mortgage when their interest rates re-set. As a consequence, far too many of those borrowers were forced into short sales or foreclosures.
In addition, low rates might come with high fees, which are added to the loan balance.
Before making any decision, compare ALL of the variables and consider your long-term plans.
4. Reading the fine print is a waste of time. Just sign here.
Yes, it is true that mortgage documents contain a lot of words and it takes a considerable amount of time to read them all. That’s why real estate agents and loan closers want you to trust that it’s all “standard” information and nothing to worry about. No one wants to sit at the table for 2 or 3 hours while you go over each page.
The truth: It may all be standard and nothing to worry about – but it may not.
The fine print could contain clauses that can cost you thousands of dollars. For instance, there could be a sneaky little “due on sale” clause hiding between more benign sentences.
If possible, get your documents a day or two ahead of time and take the time to read and understand them. Otherwise, let the closer know that you’ll be arriving a few hours early for the signing so that you can read the contract in private before being expected to sign.
You may find something you need to dispute. If so, stop right there and don’t sign until the issue is resolved.
5. Borrow as much as your lender says you can afford.
If the bank says you can afford it, why not go for the biggest, best house you can get? After all, they’ve looked at your finances and wouldn’t approve you for more than you can afford.
Several reasons, the first being that your lender doesn’t know what else might be important in your life.
• You might enjoy the comfort of having money left over at the end of the month.
• You might enjoy dining at 5-star restaurants, vacationing abroad, spending week-ends at the beach or on a skill hill, or sending your children to expensive summer camps.
• You might have dreams of early retirement, or of starting your own business.
Add to that the fact that none of us can ever predict when a job layoff or an illness could curtail our incomes. And, don’t forget that the bigger the home, the more expensive the upkeep.
You want to enjoy your new home, not become its slave. So purchase the house the fits your lifestyle, your actual needs, and a monthly payment that fits comfortably within your budget. Don’t spend money on square footage or amenities that will add to your stress rather than your pleasure.
When you’re ready, we at Homewood Mortgage, the Mike Clover Group, will be happy to talk with you and show you the loan programs available to you. We’ll also be happy to get you pre-approved, so you can shop for your new home with confidence.
You can reach us at 469.621.8484 or you can apply on line at www.mikeclover.com.
18170 Dallas Parkway
Dallas, TX 75287