Congrats! You’ve made the wise decision of buying a home. Before you can go house hunting, you’ll need to obtain a mortgage. For most buyers, a mortgage represents the largest debt of your lifetime. Making mistakes on your mortgage can cost you dearly. Here are five of the most common mistakes buyers make when getting a mortgage and how to avoid them.
- Not Getting a Mortgage Pre-Approval
A home is most likely the single largest purchase of your lifetime, so it makes sense to know how much you can afford to spend. That’s hard to do if you don’t get a mortgage pre-approval. A mortgage pre-approval helps determine how much you can afford to spend on a house. Besides developing a house hunting budget, a pre-approval protects you from rising mortgage rates. Most lenders guarantee your mortgage rate for up to 120 days when you’re approved for a mortgage. If mortgage rates rise you’re protected; if mortgage rates fall you get the lower rate. Homebuyers win either way.
- Not Shopping the Market for Your Mortgage
While a lot of homebuyers are smartening up to shopping the market for the best mortgage with mortgage rate comparison websites like CompareMyRates.ca, for far too many homebuyers their only stop is their local bank branch. If you bank with one of the big banks, chances are you aren’t getting the best mortgage product. Your mortgage is most likely the largest debt of your lifetime, so it makes sense to shop around. If you’re able to find a lower mortgage rate elsewhere, your bank may be willing to match the rate. Shopping the market is a win-win situation for homebuyers. A low mortgage rate can help save homebuyers thousands in interest over the life of their mortgage.
- Forgetting About Closing Costs
A common mistake homebuyers make when getting a mortgage is forgetting about closing costs. Closing costs amount to between 1.5 percent and 4 percent of the purchase price of your home. For example, if you’re buying a home worth $500,000, you should budget $20,000 for closing costs. Common closing costs include your down payment, land transfer tax, home inspection and real estate lawyer fees. Your bank will not cover your closing costs; it’s up to you to pay them out of pocket. When making a down payment on a house, make sure you put some money aside.
- Buying a Home at your Maximum Purchase Price
With home prices heading into the stratosphere in red hot real estate markets like Toronto and Vancouver, buyers often end up spending more than they had envisioned on a home. This is especially common when the dreaded bidding war occurs. The problem is spending too much on a home can leave you “house rich, cash poor.” Your mortgage payments may be so onerous that you have little money left at the end of the day for your other bills and to have fun. If mortgage rates head higher upon renewal, you could be in real trouble. That’s why it’s important to give yourself some wiggle room and buy a home below your maximum purchase price.
- Not Checking Your Credit Report
A mortgage represents a large sum of money. Although your character matters when it comes time to approving your mortgage, another factor that matters is your credit score. Your credit score gives banks an idea about your credit risk. If you have a credit score of 700 or higher, you shouldn’t have any problem obtaining the best mortgage rates. Before you apply for a mortgage, request a free copy of your credit report from TransUnion or Equifax and clear up any outstanding credit issues.