Andrew J. Surma is a local Private Mortgage Banker who specializes in jumbo financing for affluent customers with complex income or asset management situations. He provided insight on these common mortgage mistakes and tips for avoiding them.
1. Choosing a lender based on interest rate alone.
A loan’s annual percentage rate, or APR, reflects the costs you’ll pay per year over the term of the loan, other costs like origination fees, and discount points purchased to reduce your interest rate. So, to compare apples to apples when looking at loan options, you should compare their APRs. One loan may have a low-interest rate but relatively high fees, and another may have a higher interest rate with low fees – the APR reflects the total package to help you determine the best value. You should also compare the estimated closing costs.
2. Not coming prepared for how the mortgage process works today.
If a person has financed a home purchase before but it was a while back, they may be in for a surprise at how much the process has changed. It is more rigorous than before the housing crisis started around 2008. Across the industry, lenders are requiring more documentation of income and assets, to fully verify a borrower’s ability to repay their loan. Be prepared to provide your full tax return, W2 and 1099 forms, for example. When applying for a jumbo mortgage (a loan above a certain limit – in Orange County, above $636,150), you may need to show that you have enough money in reserve to cover at least one year’s worth of mortgage payments. Ask your lender for a list of documentation you’ll need to provide so you can be prepared upfront.
3. Underestimating how long the process will take.
Borrowers aren’t the only ones asked to do more in today’s mortgage market. New regulations set specific timetables for certain steps of the process. For example, if the APR, loan product or certain terms of the loan are changed in the final stages, a required 3-business-day review period starts over, which may delay your closing date. Regardless of which lender you use, the mortgage process may take longer than it used to. One way borrowers can help make their mortgage process move as fast as possible is to respond quickly and completely when the lender asks for something, like additional documentation or a signature on a disclosure. At Wells Fargo, eligible customers can speed up the process by using yourLoanTrackerSM to track their loan’s status, exchange information and sign documents electronically on a computer or mobile device. It’s always a good idea to call your lender if you have questions about what’s expected, so you can satisfy the requirements and keep things moving.
4. Having no idea what’s in your credit history.
Before applying for a mortgage, check your credit report and know your credit profile. I’ve had customers who didn’t know what was in their credit report and are surprised at what we find. A small debt collection or one late payment in your past can impact your credit score, which can affect your interest rate or the amount you can borrow. It’s important to know your credit profile so you’re realistic while shopping for a home – a lender can help you understand the price range and payments you’re likely to qualify for. Getting prequalified with a lender is a good way to determine your price range. Checking your credit report regularly will also reveal any errors so you can get them corrected before they impact your ability to qualify for financing. Once a year, you can get a free copy of your credit report from each of the three credit bureaus at www.annualcreditreport.com. More and more financial institutions are also offering to provide credit scores to customers – for example, consumer credit customers at Wells Fargo (those with a Wells Fargo mortgage or home equity line of credit, credit card, private student loan, direct auto loan, or a personal line or loan) can see their FICO score for free in the Wells Fargo Mobile app.
5. Making a financial move that affects credit before the loan closes.
Some applicants mistakenly think their loan is a sure thing when they receive an “initial approval” or a “preapproval.” Then they do something that changes their credit profile – and they no longer qualify for that loan. Approval given at the beginning of the mortgage process is conditional (and credit reports expire after a certain amount of time), and the lender may pull your credit report again before closing (only if the first one expired). If in the meantime you’ve bought an expensive car, maxed out a credit card or opened a new one, changed jobs, or taken on another loan, it can impact your credit report or credit score, which can change the amount you can borrow, your interest rate, or even being approved for the loan at all. You should have roughly the same amount in your bank account at the end of the process as you did when you were evaluated to qualify initially. Avoid any other major financial transactions until your home purchase is finalized. If a changed circumstance is out of your control, like a job loss, discuss it with your lender to see what options you may have.
6. Pursuing a new mortgage before tying up loose ends on an existing one.
If you are selling your primary residence and buying a different one, make sure the current home is under contract to sell or is in escrow before applying to finance the new purchase. Carrying the costs of two properties at once – such as paying taxes, insurance, and homeowners association dues on both properties because the old one hasn’t sold yet – can hurt your ability to qualify for a loan, not to mention causing financial stress. There can also be delays in the process for the new mortgage if you haven’t completed the sale of the first home. Wait till your current property has advanced down the path to being sold before moving forward with a purchase.
7. Getting caught unaware by interest-rate adjustments and related fluctuations in monthly payments.
If you choose an adjustable-rate mortgage (ARM) instead of a fixed-rate mortgage, it’s important to know how much the interest rate can be adjusted (how much it could potentially increase or decrease throughout the life of the loan). Adjustable interest rates change according to an index driven by the market. A change in your interest rates means a change in your monthly payment. If your interest rate adjusts higher than you planned for, you’ll also be paying more per month than you planned – and a big market shift could mean you can no longer afford your home. To avoid this scenario, review your Loan Estimate carefully so that you know upfront the maximum level your interest rate and monthly payments could increase to – and determine whether you can afford that possibility. Consider the lender’s rate adjustment cap when comparing your options.
Another tip to consider: It can be helpful to work with a local loan officer who knows the market. A local mortgage professional will be knowledgeable about things like local tax rates, typical homeowners’ association dues, and appraisal factors. Also, for buyers seeking a jumbo mortgage (also called a nonconforming loan), working with someone who specializes in this type of financing can be beneficial. In Orange County, any mortgage above $636,150 is a jumbo loan. Wells Fargo has a dedicated Private Mortgage Banking team serving these clients, and a specialized underwriting team trained to understand the unique aspects of non-conforming lending.