+ What
are the most commonly made mistakes in buying or refinancing
a house?
Top Ten Mistakes
Buying
a home | Refinancing your home | Getting a home-equity
loan
If you're like most people, purchasing a home
is the biggest investment you'll ever make. If you're
considering buying a home, you're likely aware
of the complexity of the endeavor. Because of the numerous factors
to consider when purchasing a home, it's important to prepare as best you can.
Some common home-buying principals 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.
Buying a home
- 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
- Pre-approved
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 nor 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.
- 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.
- 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.
- 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.
- 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.
- 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!
- 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 close of escrow. Do not assume that everything was done as promised.
- 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.
- 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.
- 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.
[Back to the top of
this page] [Close
Window]
Refinancing your home
- 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 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.
- 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.
Note: This
is a simplified break-even analysis. If you are refinancing
considering switching from
an adjustable to a fixed loan, or from a 30-year loan
to a 15-year loan, the analysis becomes much more
complex.
- Not getting
a written good-faith estimate of closing costs. See item number four above.
- Paying
for an appraisal when you think your home value may
be too low. Have
the appraisal company prepare a desk review appraisal
(typically at no charge) to provide you with a range
of possible values. Your mortgage company's appraiser
may do this for you. Do not waste your money on a full
appraisal if you are doubtful about the value of your
home.
- 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.
- Signing
your loan documents without reviewing them. See item number nine
above.
- 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 a costly delays.
- 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.
- 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!
- 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 mortgage company to find out
if getting a second will cause your refinance transaction
to be turned down.
[Back to the top of this page] [Close
Window]
Getting a home-equity loan/line
- Not knowing
if your loan has a pre-payment penalty clause. If you are getting
a "NO FEE" home-equity loan, chances are
there's a hefty pre-payment penalty included. You'll
want to avoid such a loan if you are planning to sell
or refinance in the next three to five years.
- 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--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.
- 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. For both equity loans and lines, you can only
be charged interest on the outstanding principal balance.
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.
- Not checking
the lifecap on your equity line. Many credit lines have lifecaps
of 18 percent. Be prepared to make payments at
the highest potential rate.
- 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.
- Not getting
a good-faith estimate of closing costs. See item number four above.
- 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.
- 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 percent,your tax bracket is 30
percent, your effectiverateis: .12 * (1 - .3) = .12 * .7 = .084 = 8.4
percent.
If your credit card is higher than 8.4 percent, the equity loan is cheaper.
- 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.
- 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!
[Back to the top of this page] [Close
Window]
Have other questions? Please email
us at info@freedommortgageteam.com or call us at 630.928.3272 |
