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Deadly Mortgage Borrowing Mistakes - Revealed...

Avoid these mistakes like the plague, because the consequences range from very expensive to financially crippling...

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Let’s face it - when it comes to applying for a mortgage, most of us are simply overwhelmed by the process. You’re excited by the prospect of owning a new home yet at the same time somewhat terrified of the debt load you’ve just chosen to take on, a debt load, which for most of us, will be the biggest one of our lives.

Of course if the stress of this wasn’t enough, you’re also faced with a mountain of paperwork, spelling out a myriad of fees and terms, most of which you’re not all that familiar with. It doesn’t matter which walk of life you’re from, a cab driver or a Harvard graduate or one who’s both, the whole mortgage process is equally confusing for everyone. So much so that borrowers are prone to making the occasional mistake.

The purpose of writing this article is to share with you the insight and knowledge to help you avoid making these deadly mortgage borrowing mistakes.

So according to most lenders and mortgage brokers, here are the mistakes they see most often:

Mistake #1: Unrepaired Credit

One of the things that astound a ton of mortgage brokers is the sheer number of buyers who apply for a mortgage, knowing full well that they have crappy credit. These buyers hope against all hope that somehow the lender will either not see this or choose not ignore thereby qualifying them for the mortgage.

How can you avoid making this mistake, simple, before you even think about applying for a mortgage, obtain copies of your credit report and your Equifax or Trans-Union credit score if you’re in Canada or FICO credit score if you’re in the U.S. This report along with your credit score is a major component to the lending approval process. It’s relatively inexpensive to get and can be done online.

A good rule of thumb is to do this at least six months prior to the time you’re thinking of actually applying for the mortgage loan. This way you’re going to have plenty of time both dispute and resolve any inaccuracies on your report will before the time you're ready to apply. Plus when you order your report it will also be accompanied by material that explains the various factors that go into forming your overall score.

Take the time to understand them, as some of them may be things you had no clue would impact your credit, such as paying off past bills or paying down credit card debt below a certain threshold. Tweaking things a little here and there are only going to help your credit score overall.

Mistake #2: Thinking All Mortgage Lenders Are the Same

Just like people are different, so are mortgages. Certain types of mortgage lenders are better suited to certain type of individuals and situations. There are some who gear their mortgages towards folks with damaged credit, while there are others who focus more on the self-employed. While there are others who prefer to target more affluent and upscale clients. Just because your uncle Fred tells you to go to his bank because he got a great deal there, it doesn’t necessarily mean it will be the same for you.

It’s best to do your homework and shop around. Give a few different financial institutions and or banks a call and explain your situation to them and see what types of mortgage products and services they may be able to offer in your particular circumstances. When explaining your situation to them be as candid and honest as possible so they get a clear picture only then will they be able to provide you with some relevant information.

Mistake #3: They Get Pre-Qualified, Not Pre-Approved for a Mortgage

Most first-time and even quite a few repeat borrowers confuse being "pre-qualified" with being "pre-approved." First thing you need to understand folks is that pre-qualification is a pretty casual process, and that along with $1.00 won’t buy you a coffee. When a lender pre-qualifies you, they basically tell you how much money you can probably borrow based on how much money you make, how much debt you already have and how much cash you have for the down payment. They don’t validate your income, they don’t pull your credit basically it’s just a chat, it may be a nice chat but at the end of the day just a chat!

Getting pre-approved however is a much more rigorous process and involves actually applying for a loan. During this process, you will submit tax returns, pay stubs and other information. Then it’s up to the lender to do their due diligence and verify that everything checks out. At the end of the day if the lender is satisfied with everything they will give you a commitment in writing for the mortgage.

Before you get out there and start real estate shopping, you need to ensure that you’re pre-approved especially in an active real estate market. This allows you three distinct advantages over the pre-qualified individual, first being, more weight given to your offer over the pre-qualified individual second greater bargaining power on the price and terms as the seller knows that you’re both serious and can get the financing. Last but not least you’re realtor knows you’re serious about purchasing a home and not wasting his or her time therefore they are going to be more committed to helping your find the right one.

Mistake #4: Buy Too Much Home and Borrow Too Much Money

Now I’m sure there isn’t one of you out there who wouldn’t like to live in a beautiful home, but doing so by taking out the biggest loan possible is crazy! If your plan for repaying this debt is praying that your income will eventually increase enough to make the payments comfortable you need to step back and think again! Any first time homeowner will tell you after a few months of owning a home about the additional expenses that come along with homeownership.

In some cases not only are they forking out more for mortgage payments than they might have for rent, but now they also need to cover things like property taxes and home insurance, as well as higher bills for utilities, maintenance and repairs that they never faced as a renter. If they are in a strata or condominium they now have strata or condo association fees as well.

Just keep in mind that if you choose to overextend yourself some other thing will need to give. Things like retirement savings, college or tuition funds for your children, clothes for you or the kids. Vacations are certainly going to be out of reach as well as that new car you wanted. Live and borrow within your means, remember it’s not the lender who will be making these mortgage payments till the end of time, it’s you!

Mistake #5: Don’t Shop Around for the Best Rates and Terms

This mistake can really cost you. A percent or so here and there can add up to tens of thousands of dollars over time. As you’ve probably already guessed by now credit plays a major part in the rate you get, better credit better rates or so you would think so. Unfortunately however a lot of borrowers out there with decent credit wind up paying for mortgage rates and terms meant for those with poor credit. These so-called "subprime" loans are often more profitable to both the broker and lender, so less ethical mortgage brokers may push them on unsuspecting borrowers. Even people with a few blemishes on their credit can often qualify for better loans than they're typically offered. But there are ways to ensure this doesn’t happen to you.

The first way to ensure this doesn’t happen to you has already been mentioned; know your credit score and report! The second way is to do a little work online and check the rates posted on various websites. These days you can go to sites like MSN Money’s mortgage loan center and find out not only prevailing rates but in some case typical fees as well. Doing this little bit of legwork can potentially save you tens of thousands. Knowing what the prevailing rates are will allow you to not only better understand the lenders offer but more importantly ensure it’s the best one out there.

Mistake #6: Paying “Bogus” Fees

Some lenders can boost their profits by adding on a variety of fees. In some cases these fees may be perfectly legitimate, while in others they may be greatly inflated and sometimes nothing but fluff and purely bogus. Some lenders may charge you for "document preparation," which in some cases be nothing more than having their computer spit out a form. Or they may charge $150 for a credit check that cost them a fraction of that.

The time to question and challenge bogus fees is not when you're about to sign the mortgage loan documents it’s during your investigative process. Have a mortgage broker do this work or call a number of lenders to compare their loans. Ensure that you clearly understand the interest rate, any "points" charged to get that rate (each point is 1% of the total loan amount) and any/all other fees the lender or broker charges. Once you've selected a lender, you'll be given a good-faith estimate of closing costs, which should include any fees being charged. Ask about each fee, and try to negotiate down the ones that seem excessive. This is the time to do so; you won’t get a chance to do so later!

Now does this mean that you’ll not be hit with any last minute bogus fees when it comes time to sign the mortgage, no, but it does mean that you’ve greatly reduced the chances of it happening by doing this work up front! You can try challenging bogus fees at this point, but more than likely you'll have to bite down and swallow these extra charges if you want your mortgage.

Mistake #7: Didn’t Set Aside Enough Money for Closing Costs

Finally when the day you're scheduled to get your mortgage loan, otherwise known as closing, you'll going to be expected to write a check for a number of expenses, which typically include attorney's fees, taxes, property transfer taxes, title insurance, prepaid homeowners insurance, points and other lenders' fees. Not all of these may be applicable to you but a few will be. Collectively these are known as closing costs, and the final number that these can sometimes add up to can be between 2% to 7% of the selling price of the house or in the case of a refinance anywhere between 1% - 5% of the mortgage.

When it comes to closing costs as a general rule they are always more than folks ever think they are going to be. But you can avoid this “nasty” surprise if you plan ahead. You can do this in a few ways, one is by getting a good-faith estimate from your lender or broker as early in the loan process as possible. Another way is to check with your lawyer in advance how much is going to be needed for closing and for what. This allows you to clear up any discrepancies that you may not have been aware of. Make sure you have the cash in advance and that it doesn't "disappear" before closing.

Not having enough cash on hand after closing can bring with it, its own share of problems. Far too many borrowers scrounge up every last dime they have for closing costs, something that leaves them with virtually nothing in the event of an unforeseen emergency. That’s why it’s a wise idea to make sure you’ve got at least three months expenses in reserve that way if the air conditioning decides to stop working the day after you move in, you won’t be sweating!

About the Author:

Kam Brar is a licensed mortgage broker and has been directly involved in the lending industry over the past 10 years, bringing with him a wealth of knowledge and experience. His particular specialty throughout his career has been working with "challenge" customers, where it takes creative financing (and sometimes private loans) to accomplish their goals.

His role with ShangriLoan is that of a consultant and mortgage industry liaison.



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