10 Home Finance Mistakes You Can't Afford
Most advice columns tell you what you should do, but just as importantly,
there some things you shouldn't do. Here are 10 frequent home finance mistakes
that consumers make - and that you should avoid.
- Don’t choose the wrong mortgage: With the advent of instant
refinancing, home loans are no longer the lifetime obligations they used to be.
Still, you don't want to be saddled for even a short period of time with the
Investigate all your options, then lay your choices
side-by-side and do the math, making sure to compare worst-case scenarios. Be
sure to look at initial interest rates, future interest rates and payments (if
different), and the possibility of prepayment penalties.
- Don’t confuse "preapproved" and prequalified" with a loan
commitment: These are debatable terms in real estate because not all
lenders define them the same way. In fact, one leading real estate dictionary
contains neither expression because their definitions are uncertain.
According to one school of thought, when you are prequalified, the lender is
making an educated guess about how much you can borrow based on information
you've provided. When you are preapproved, the lender has verified everything
you have told him or her and is offering to lend you up to a given amount at
current interest rates - under certain conditions.
Whether prequalified or
preapproved, final clearance and a check at closing - a loan commitment - are
subject to an appraisal satisfactory to the lender, good title, a last-minute
credit check and other verifications. When meeting with lenders, always ask how
they define each term and what additional steps will be required to actually
obtain a loan.
- Don’t have too much credit: Excessive credit is almost as
bad as no credit or even bad credit. Even if you pay your bills on time, lenders
tend to focus just as much on how much credit you have available to you as they
do on timeliness. So being up to your ears in car loans and credit cards is a
sure way to be turned down for a mortgage. Postpone any major purchases until
after you buy your house.
- Don’t lie on your loan application: Exaggerating your
income on a mortgage application or putting down other untruths can be a federal
offense. Lenders rarely prosecute liars, but if they find out later, they can
call your loan due and payable.
And don't ever sign your name to a loan
application that is not completely filled out, either. Loan officers have been
known to stretch the truth to get a client approved, but it's the borrower who
ends up paying the price, often in the form of unaffordable monthly loan
- Don’t hide if you can't make your payments: The worst thing
you can do is ignore phone calls and letters from your lender when you are
behind on your payments. Lenders have many options at their disposal to help
keep borrowers from losing their homes to foreclosure. But they can't do
anything for you unless they can talk to you about your difficulties. Lenders
are the enemy only if you give them no other choice.
- Don’t skip a home inspection: Failing to make your purchase
contingent on a satisfactory home inspection could be a costly mistake.
Independent home inspectors examine houses from stem to stern. They'll be able
to tell you whether the roof and/or basement leaks, whether the mechanical
systems are in good shape and how long the appliances should last. They can't
report on things they can't see, but at least their trained eyes are better than
yours. So don't pass just to save a few hundred dollars - it’s money very well
- Don’t hire just any agent to sell your house: All real
estate agents are not the same. You want to work with an agent who specializes
in your neighborhood and who is a top producer. Ask your candidates how they
plan to market your house, what you can do to make the place more attractive to
prospects and what you should set as a selling price. If you don't like any of
the answers, look elsewhere. And above all, stay away from relatives; unless
Aunt Amy or Nephew Nick fit the description above, keep looking.
- Don’t fail to check out a contractor’s credentials: Never,
ever hire a contractor who knocks on your door or says his prices are good for
only a few days. Reputable contractors don't solicit door-to-door, and they
don't cut prices just because they happen to be in your neighborhood. Check out
potential contractors thoroughly by calling several of their past clients, their
bankers and suppliers, your local better business bureau and your local consumer
- Don’t pay a contractor too much upfront: If a contractor
asks for more than a third of the contract price as a down payment, chances are
something's wrong. At worst, he's a scam artist who has no intention of
returning after he cashes your check. At best, he's undercapitalized and can't
afford to purchase materials on his own. Or, in between, he could be using your
money to pay workers on another job. Also, never give a contractor cash.
- Don’t burn your mortgage: It's a wonderful feeling when you
make your last house payment. After all, the place is now yours, all yours. Many
people celebrate by holding a mortgage burning party. But they torch the
original document. Don't. Make a copy and burn that instead. Keep all your loan
documents in a safe place.