Buying a home is a big decision that involves a lot of planning and research. You want to make sure you get the best deal possible and avoid any costly mistakes. Here are seven common home financing mistakes that you should avoid when applying for a mortgage.
1. Not checking your credit score. Your credit score is one of the most important factors that lenders use to determine your interest rate and loan terms. A low credit score can mean higher interest rates, lower loan amounts, or even rejection. You should check your credit score at least six months before you plan to buy a home and work on improving it if needed.
2. Not shopping around for lenders. Different lenders have different criteria, fees, and rates for mortgages. You should compare at least three lenders and get pre-approved by each one before you start looking for homes. This will help you find the best deal and avoid any surprises later on.
3. Not saving enough for a down payment. A down payment is the amount of money you pay upfront for a home. The more you pay, the less you have to borrow and the lower your monthly payments will be. Ideally, you should aim for a 20% down payment, which will also help you avoid paying private mortgage insurance (PMI), an extra fee that protects the lender in case you default on the loan.
4. Not budgeting for closing costs and other expenses. Closing costs are the fees and charges that you have to pay when you finalize the purchase of a home. They can include appraisal fees, title insurance, origination fees, taxes, and more. Closing costs typically range from 2% to 5% of the loan amount, so you should have enough money saved to cover them. You should also budget for other expenses such as moving costs, home repairs, furniture, and utilities.
5. Not getting a home inspection. A home inspection is a professional evaluation of the condition and quality of a home. It can reveal any hidden problems or defects that could affect the value or safety of the home. You should always get a home inspection before you buy a home and negotiate with the seller to fix any issues or lower the price accordingly.
6. Not locking in your interest rate. Interest rates can fluctuate daily depending on market conditions and demand. If you find a good rate, you should lock it in as soon as possible to secure it for your loan. Otherwise, you might end up paying more if the rates go up before you close on the loan.
7. Not reading the fine print. A mortgage is a legal contract that binds you to certain terms and conditions for the duration of the loan. You should read and understand every detail of your mortgage agreement before you sign it. Pay attention to things like the interest rate, loan term, monthly payments, fees, penalties, prepayment options, and escrow account requirements.
