Buying a house
Looking for a house without getting pre-approved. Do
not confuse a pre-approval with a pre-qualification. During the
pre-qualification process, a loan officer asks you a few questions and
hands you a pre-qual letter. The pre-approval process is much more
complete.
During a pre-approval, the mortgage company does all the work of a
full-approval, except for the appraisal and title search. When you are
pre-approved, you become like a CASH BUYER and have more negotiating
clout with the seller. In some cases (especially in multiple-offer
situations), having a pre-approval can make the difference between
buying a home and not buying a home. In other instances, home buyers
have been able to save thousands of dollars as a result of being in a
better negotiating situation.
Most good Realtors will not show you homes before being pre-approved
because they do not want to waste your time, their time, and the
seller's time. Many mortgage companies will pre-approve you at little or
no cost. They typically will need to check your credit and verify your
income and assets.
Making verbal agreements! If
an agent makes you sign a written document that is contrary to their verbal
commitments, don't do it!
Example:
the agent says that the washer will
come with the house, but the contract says that it will not. In this case, the
written contract will override the verbal contract. In fact, written contracts
almost always override verbal contracts. Buying a house is a very complex
process末but it's a lot easier when everything is in writing.
Choosing a lender just because they have the lowest
rate. Not getting a written good-faith estimate. While
rate is important, you have to look at the overall cost of your loan.
This includes looking at the APR, the loan fees, as well as the discount
and origination points. Some lenders add origination points into their
quoted points while other lenders add an origination point in addition
to their quoted points. So when one lenders says 2 points they mean 2
points, whereas another lender means 2 points plus 1 origination point.
The cost of the mortgage, however, cannot be your only criterion. There
is no substitute for asking family and friends for referrals and
interviewing prospective mortgage companies. You must also feel
comfortable that the loan officer you are dealing with is committed to
your best interests and will deliver what they promise. Often, the
company that has the absolute lowest quoted rate may not be the best
company for your mortgage business.
Choosing a lender just because they are recommended by
your Realtor. Your Realtor is not
a financial expert. They may not know what's the best loan for you. The
Realtor only gets a commission when your house closes. As a result, the
Realtor may refer you to a lender that is sure to close the loan, but not
necessarily the lender that has favorable rates or fees. Also, many Realtors
refer you to their friends in the loan business末who again may not be able
to get the best loan for you. Even if the Realtor is very professional and
looking out for your best interest, you should still do homework on your own.
We recommend shopping for a loan with at least 3 mortgage companies before you
make a decision. There are countless stories of consumers who wound up paying
higher rates or getting a loan program that was not right for them because
they blindly followed their Realtor's advice.
Not getting a rate lock in writing. When
a mortgage company tells you they have locked your rate, get a written
statement which details the interest rate, the length of the rate lock,
and details about the program.
Using a dual agent末i.e. an agent who represents the
buyer and the seller on the same transaction. Buyers
and sellers have opposing interests. A dual agent in most normal
situations cannot be fair to both the buyer and seller. Most dual agents
represent the sellers more strongly than they do the buyer. If you are a
buyer, it is much better to have your own agent who will be on your
side. The only time you should even consider a dual agent is when you
get a price break from using a dual agent. If that is the case, then
tread carefully and do your homework!
Buying a house without a professional inspection. Taking the sellers
word that they have made repairs. Unless
you are buying a new house where you have warranties on most equipment,
it is highly recommended that you get a property inspection, a roof
inspection and a termite inspection. This way you will know what you are
buying. Inspection reports are great negotiating tools when it comes to
asking the seller to make repairs. If a professional home inspector
states that certain repairs be done, the seller is more likely to agree
to do them.
If the seller agrees to do the repairs, have your inspector verify that
they are done prior to close of escrow. Do not assume that everything
has been done the way it was 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. Do
not sign documents in a hurry. Whenever possible try to get documents
that you will be signing ahead of time so you can review them. It is
advisable to ask for a copy of all loan papers you are signing a few
days ahead of the close of escrow. This way you can review them and get
your questions answered. Do not expect to read all the documents during
the closing. There is rarely enough time to do that.
Making your moving plans too tight.
Example: you expect to move out of your prior residence on a Friday and into
your new residence over the weekend. So you give notice to your landlord
to end your lease on a Friday and arrange for movers to come to your
house on Friday. Then, your loan closing gets delayed until the next
Tuesday. You now may be homeless! New tenants could be moving into your
apartment, and the movers are going to charge you for wasting their
time. You could be forced to live in a motel for a couple of days!
A Better Plan: allow for a 5-7 day overlap between closing and
moving. In the long run it is not nearly as expensive, and it will
certainly give you peace of mind.
[Back to the top of this
page]
Refinancing your house
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
mortgage company. In most cases, your current mortgage company 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. So even if you have been very good at making payments
to your existing lender, they will still have to do their
verifications all over again.
Not doing a break-even analysis. Find
out what the total cost of the refinance is, then figure out how much
you will save every month. Divide the total cost by the monthly
savings to get the number of months you will have to stay in the
property to break even on your refinancing costs.
Example:
if
your refinance costs $2000 and you save $50/month, your break-even is
2000/50 = 40 months. You should refinance if you plan to stay in the
house for at least 40 months.
Note:
The break-even analysis only works if you are refinancing
to save money. If you are refinancing to switch from an adjustable to
a fixed loan, or from a 30-year loan to a 15-year loan, it is much
more difficult to perform a break-even analysis.
Not getting a written good-faith estimate of closing costs. Your
mortgage company is required to provide you with a written good-faith
estimate of closing costs within 3 working days of receiving the
application.
Paying for an appraisal when you think that the house may appraise
too low. Have the appraisal
company do a desk review appraisal (typically at no charge) to provide
you with a range of possible values. Your mortgage company can ask their
appraiser to do this for you. Do not waste your money on a full
appraisal if you are doubtful about the value of your house.
Using the county tax-assessors' value as the market value of your
house. Mortgage companies do not
use the county tax-assessors' value to determine whether they will make
the loan. Instead they use a market-value appraisal which may be very
different from the assessed value.
Signing your loan documents without reviewing them. Do
not sign documents in a hurry. Whenever possible try to get documents
that you will be signing ahead of time so you can review them. It is
advisable to ask for a copy of all loan papers you are signing a few
days ahead of the close of escrow. This way you can review them and get
your questions answered. Do not expect to read all the documents during
the closing. There is rarely enough time to do that.
Not providing documents to your mortgage company in a timely manner. When
your mortgage company asks you for additional paperwork, jump on it! Do
not complain. They are trying to get you approved, not trying to hassle
you unnecessarily! Jump through the hoops as quickly as possible.
Borrowers who do not respond to requests for documentation quickly
enough run the risk of paying higher rates if the rate lock expires.
Not getting a rate lock in writing. When
a mortgage company tells you they have locked your rate, get a written
statement which details 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" refinance.
This leads to much 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) even when they are 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 get turned
down.
[Back to the top of this
page]
Getting a home-equity loan
Not checking to see if your loan has a pre-payment penalty clause. If
you are getting a "NO FEE" home-equity loan, chances are
that it has a hefty pre-payment penalty clause. This can be very
important if you are planning to sell your house or refinance in the
next 3-5 years.
Getting too large a credit line. When
you get too large a credit line, you can get turned down for other
loans, because some lenders calculate your payments based on the
available credit and not just the used credit. Having a large equity
line indicates a large potential payment, which makes it difficult to
qualify for loans. Note : this argument holds even if your equity line
has a zero balance.
Not understanding the difference between an equity loan
and an equity line. An equity loan
is closed末i.e. you get all your money up front and then make fixed
payments on that loan, until you pay it off. An equity line is open末i.e.
you can get an initial advance against the line and then reuse the line as
often as you want during the period that the line is open. Most equity lines
are accessed through a checkbook or a credit card. On equity lines, you only
pay interest on the outstanding balance.
Use an equity loan when you need all the money up front末e.g. home
improvement, debt consolidation.
Use an equity line if you have an ongoing need for money or need the money for
a future event末e.g. you need to pay for your child's college tuition in 3
years.
Not checking the lifecap on your equity line. Many
credit lines have lifecaps of 18%. Be prepared to pay payments at higher
interest levels if rates move upwards.
Getting a home-equity loan from your local bank without shopping
around. Many consumers get their
equity line from the bank that they have a checking account with. Use
your bank, but shop around first.
Not getting a good-faith estimate of closing costs. Your
mortgage company is required to provide you with a written good-faith
estimate of closing costs within 3 working days of receiving the
application.
Assuming that your home-equity loan is tax deductible. In
some instances, your home-equity loan is NOT tax deductible. Perhaps you make
too much and fall into the AMT trap, or perhaps you have pulled out more than
$100,000 cash from your home. Do not depend on your mortgage company for
information regarding this matter末check with an accountant or CPA.
Assuming that a home-equity loan is always cheaper than a car loan or
a credit card. A credit card at
6.9% is cheaper than a credit line at 12% even after the tax deduction.
To compare rates, compute the effective rate of your home-equity loan,
with the rate on a credit card or auto loan.
Effective rate = rate * (1 - tax_bracket)
Example : If the rate of the home-equity loan is 12% and your tax
bracket is 30%, your effective rate is : 12% * (1-0.3) = 12%*0.7 = 8.4%
If your credit card is higher than 8.4%, then the equity loan is
cheaper, otherwise it is not.
Besides the interest rate, you may also want to compare monthly payments
and other terms of the loan.
Getting a home-equity line of credit if 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) even when they are 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 get turned
down.
Getting a home-equity line to pay off your credit cards if your
spending is out of control! When
you pay off your credit cards with your equity line, don't go out and
charge up those credit cards again and put your house on the line! If
you can't manage the plastic, tear it up!
