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Mortgage Process – 3 Common Misconceptions Before Applying for a Mortgage Loan
Georgia’s Own mortgage experts, Todd and Earica, discuss three common misconceptions you should know about before applying for a mortgage loan.
How to Buy a House in Georgia | 7 mistakes to avoid when purchasing your first home
You’ve been looking at online home listings for months, driving through neighborhoods on the weekends, and saving every spare dime for a down payment. You’re ready to make the home-buying plunge.
Buying a house is one of the most exciting—and stressful—times in your life. You’re eager to find your dream home and start the next chapter of your life, but let’s be serious. A home is a big investment, and you can’t afford to make a hasty, uninformed, or emotional decision.
Here are a few of the most common blunders homebuyers make and how you can avoid them, or at least learn from their mistakes.
1. Failing to check your credit report
Amazingly, the Federal Trade Commission’s last large-scale study of credit reports found that 26 percent of consumers had at least one inaccuracy in their credit report. Not all of those errors would have impacted their credit rating to the point that it resulted in a higher mortgage interest rate, but it certainly would have for some.
It’s critical to review your credit report at least three months before you plan to apply for a home loan. If you find an error, you’ll have time to dispute it and have it corrected before lenders check your credit report for preapproval. If your credit report is clean, it will improve your credit score and likely impact the interest rate on your mortgage. All consumers can access a free copy of their credit report annually from annualcreditreport.com.
2. Skipping the mortgage pre-approval
There’s pre-qualified and pre-approval. Both show the seller that you’re a serious buyer, but pre-approval requires a credit check and the submission of supporting documentation for income and assets. It will also help you save time by allowing you only to view homes that you already know you can afford instead of falling in love with one that’s outside of your price range. Put in an offer, and a buyer who already has pre-approval has a leg up on a buyer who doesn’t.
3. Missing the Hidden Costs
Once you find your dream home, most buyers simply calculate their mortgage payment and say, “Sure, I can afford that.” When reality sinks in, you soon figure out that you’ll need to pay taxes, insurance, utilities, HOA and maintenance fees. These are the hidden costs that may just push you over the top of your budget. If you’re a first-time homebuyer, it might be the closing costs, appraisal fees, escrow fees, and moving costs, among others. You can’t forget about the added costs that come with purchasing a home and the extra responsibility of being a homeowner.
Ask the sellers about their summer and winter utility costs, HOA fees, and property taxes. Talk with your insurance agent about the cost of a homeowner’s insurance policy and ask your broker for an estimation of your closing costs. Gather as many quotes and estimates as you can so that you can make a more informed decision about whether you can afford to purchase this home. It’s better to know the truth sooner than later.
4. Waiting for everything on your wish list
In the real world, when do we get everything we want? Even when you’re spending $100K, $300K or $500K, there will always be compromise. Here’s our advice: Keep an open mind. It’s unlikely that any one home will have everything on your wish list. You’ll need to separate those wishes into wants, like a fireplace or a fenced yard, and needs, like a garage or four bedrooms. You might even label some of them deal breakers, such as a specific town, school district, or its proximity to your office.
Flexibility is a critical component in the house-hunting processes. The goal is to find the home with the most wants and needs that still fits within your budget.
5. Assuming the neighborhood is just fine
You may have found love in a home, but if the neighborhood isn’t up to par, it could be a costly mistake. With a house comes the neighborhood, so take a good look around before you buy—and do your research. Not everything a homebuyer should consider is out in the open.
Think about the reasons you’re purchasing this home. Do you have children? The quality of schools in the area might be an important factor to consider. Visit the schools personally and take a tour. Review information, rankings, test scores and other analytics online. Drive through the neighborhood at different times of the day and chat with parents as they wait for their kids to come home on the school bus.
Does the neighborhood feel safe at night? Check the local crime reports and registered sex offender list. How’s the local shopping? Where’s the nearest grocery store or park? These are all questions you should investigate before purchasing a home.
6. Not considering the resale value of your home
You’re buying a home, not selling one, so why worry about resale value? It’s simple. Sooner or later you’re going to want to sell this home, and you’ll need someone to buy it. Don’t buy the home with the railroad tracks running through the backyard just because it has a gourmet kitchen that you’ve fallen in love with. There’s a reason it’s priced below market value and a bonus if you can close in 30 days.
The best approach is to look for a home that offers the general preferences of a typical homebuyer. You can paint, decorate and furnish to add your personal style, but when you’re ready to sell, whether in a year due to a job transfer, or in 40 years when you retire to the beach, your home will appeal to the highest number of prospective buyers.
7. Letting your emotions rule your decision
The decision to purchase a home should be made primarily with your head, not your heart. Yes, you should love your new home. After all, you’re investing a ton of money to own it, and you’ll be living in it every single day. But, you shouldn’t be so enamored that you’re blinded to what it can do to your budget. When you’re already spending such a large amount of money, another $10K or $15K doesn’t seem like very much, but it can put you in a tighter financial situation than you’re prepared to handle. One layoff, job change, illness, or any other situation that causes a reduction in salary can easily cause your dream home to become a burden.
One recommended guideline is to spend no more than one-third of your monthly income on housing costs, which includes your total mortgage payment, taxes, and insurance–no matter how tempting it is.
What is a Jumbo loan?
If you’ve ever purchased a home, you know that there are a variety of mortgage loans available to buyers. There are FHA, VA, construction, and subprime loans, fixed–rate, adjustable-rate, and interest only loans. There’s also one called a jumbo loan, which clearly implies it’s going to be huge. Wouldn’t you agree?
If you’re thinking about a jumbo loan, there are a few things you should know. After all, you’re investing in your dream home, and it’s important to be well educated on the type of debt you’re taking on to help fund it.
Conforming vs. non-conforming loans
A conforming loan is one whose loan amount falls within the servicing limits for Fannie Mae and Freddie Mac. In other words, it’s the maximum loan amount that can be purchased from lenders by Fannie Mae and Freddie Mac, two government-sponsored agencies, and sold to investors for the purpose of providing liquidity in the mortgage markets. This frees up the cash necessary for lenders to continue writing real estate loans for other borrowers.
Currently, the conforming loan amount is $453,100 for a single-family home in all States, except for Hawaii and Alaska and a few federally designated high-cost markets.
Regardless of its high credit quality, if the mortgage amount exceeds the conforming loan limit, it is considered a jumbo loan or a non-conforming loan. Jumbo loans are not eligible for purchase by Fannie Mae or Freddie Mac and the lender bears all the risk.
Jumbo loan requirements
Because jumbo loans have higher purchase limits, they’re typically used to purchase luxury homes, vacation homes, or even investment properties. While traditional mortgage loans have strict lending standards, jumbo loans have even more demanding requirements.
Jumbo loans pose an additional amount of risk for lenders, mainly due to the size of the loan. That’s one reason that the down payment requirement is typically 20%. Generally, if a jumbo mortgage loan defaults, a home of that caliber is unlikely to sell quickly and for full price. The lender mitigates some of the risk by requiring a certain amount of equity in the home. Interest rates for jumbo loans are typically a little higher than conforming loan rates as well. Most often, a 1/4 to 1/2 percent increase would be a fair expectation.
Borrowers will also be required to demonstrate financial strength, too. Their debt-to-income ratio should be roughly 45 percent, and they’ll need to plan on a required reserve amount that could potentially be as high as 20 percent of the value of the loan.
If you are able to meet the requirements, a jumbo loan might be the right fit for your financial situation. Of course, there are other options. Be sure to speak with your lender to help you decide which product meets your mortgage needs best.