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 life cap on your equity line.
Many
credit lines have life caps 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!
