Common mortgage pitfalls all buyers need to avoid
Renting can be extremely frustrating, especially in an under regulated and increasingly exploitative private rental sector. In the current climate, it’s getting harder and harder for people, particularly younger people, to secure property of their very own making them beholden to a rental market that can make it extremely hard to get on the ladder. This can be rather stressful. As demand for private rental property rises, landlords understandably hike up the rent. As rent climbs higher and higher it gets more and more challenging for people to save the requisite down-payment for a property of their very own especially when they don’t have the support of parents or the additional income of a partner.
After years, of scrimping and saving, budgeting and abstaining from the little temptations in life consider this. Even when they have finally cobbled together a meaningful deposit for their own home, they can still fall victim to a number of common mortgage pitfalls. This is why it is always handy to have a financial advisor on your side. While they do not work for free, they can guide you through the house buying process, helping you to find a product that suits your specific needs. However, if you’re determined to go it alone, it behoves you to educate yourself as much as possible before pulling the trigger on a sale. The path to home ownership is fraught with pitfalls and perils which could see you seriously endanger your future finances. Here we’ll go over some of the most common as well as suggesting some potential remedies…
Neglecting your credit score before applying
Your credit score is a vital component in ensuring that you have access to the best mortgage products and that you will not fall victim to choosing a product that isn’t right for you and ultimately sowing the seeds of your own financial ruin.
While it’s possible to get a mortgage with less than stellar credit, be advised that these products are designed to insulate the bank from the risk that buyers with poor credit represent. Thus, they will likely have high interest rates, high fees or both. Thus, the better shape you can lick your credit score into before buying, the more buying power you have and the better access you have to the more desirable products.
Rectifying a poor credit score isn’t as hard as you may think. Consolidating your debts into a single monthly payment can not only make your finances much easier and less stressful to manage, it will also improve your credit score. This is because a consolidation loan essentially repays all of your existing debts and replaces them with a new one. So long as you can stay up to date with the payments, you should see a substantial improvement in your credit score. Getting a credit card with a low interest rate and using it for little things like groceries is also a great way to improve your credit score so long as you pay it off promptly.
Falling in love with a property
When we fall in love with a person, it can blind us to their flaws, their character defects and any ways in which they may be objectively wrong for us. When we’re in love, we can let our hearts do the driving while our brains, logical thought and objectivity take a snooze in the back seat. So it is with both people and properties alike. While it’s a wonderful feeling to look around a property and feel as though you’ve found “the one”, it can also blind us to unpalatable truths. It can make us overlook maintenance issues which could prove expensive in later years or make us take a chance on a bad mortgage product if it means we get to secure the home of our dreams.
In property, as in love, there are always plenty more fish in the sea… Even when it really doesn’t feel that way.
Failing to factor in your composite living costs when upsizing
So, you’ve found a property that you think may be right for you. You know that you have a big enough down payment and you’ve used the best home loan calculator you can find to ensure that you can just about scrape together the monthly mortgage payments. The trouble is that we can fail to take into account the substantial difference our composite living costs can factor in our monthly budgeting. Just because the mortgage payments are just about in your reach does not mean that living in the property is financially viable, especially if you’re up sizing to a bigger property.
Larger houses tend to be more heavily taxed, they tend to have higher heating costs and are generally more expensive to maintain. It can be hard to calculate exactly what your composite living costs will be, but generally it’s not a great idea to reach for a property that’s right at the upper end of your budget. Overreach and you may find yourself…
Making yourself asset rich, but cash poor
Living costs are a large component of our monthly outgoings, but we also have a plethora of other expenses if we want to plan for a financially stable future even on top of our composite living costs. We must consider our tax obligations, the cost of our pension or IRA and the cost of any in-work benefits. These must be added on to your composite living costs and still have a healthy margin to allow for savings and unexpected expenses. Fail to account for all of this and you could spend years asset rich but cash poor, and this could have a profoundly negative impact on your quality of life.
Assuming you can’t get a mortgage if you’re self employed
If you are a self-employed freelancer working from home or subcontractor or you own your own business, don’t make the mistake of assuming that you’re unable to get a mortgage. Indeed, one of the most common mortgage pitfalls is making the mistake of assuming that you’re unable to get one. Again, if you’re self-employed it makes a lot of sense to see a financial adviser as they will be able to scour the market for products that will suit your needs. In theory, however, so long as you have a good credit score and can provide at least 2 years’ worth of books, you stand an excellent chance of getting a great mortgage product.
Taking the first mortgage you’re offered
A lot of people, especially first time buyers are so delighted to be offered a mortgage in principle that they’ll jump at the first product they are offered. While this is certainly understandable, it may be wise to take a step back. A mortgage in principle is a tremendously encouraging sign, but it does not mean that it is the only product available to you.
Falling for low interest products with high fees
Beware of any products that look too good to be true… It usually is. Some lenders advertise with enticingly low seeming rates but make up for them with extortionate fees. Keep an eye out for origination fees and closing costs. These can inflate an enticingly low interest rate to make the product far less advantageous than it appeared at first glance. Always read the small print and ask the lender if there are any fees which need to be factored into the overall mortgage cost.
When you’re able to overcome the pitfalls common when searching for a mortgage and finally receive the keys to your dream home, everything else will seem worth it!
Deborah Hunter Kells
I have a wide range of interests and the top of my list is people and relationships. I appreciate our big wide world and nature which tries so hard to deal with what we do to it. I enjoy learning and am a “forever student”. I would love to hear about you and what you have experienced – that one or both of us may learn.