The Most Expensive Mortgage Mistakes You Can Make

We all make financial missteps, whether it’s an impulse purchase in the checkout aisle or something less defensible, like an extended warranty or rental car insurance.

But bigger purchases – like, say a home – can really magnify mistakes. Missteps when it comes to securing a mortgage often prove especially damaging, given the size and staying power of the obligation.

Here’s a look at four mortgage mistakes to avoid at all costs.

1. Not Mastering Your Credit

Credit and credit scores play a critical role in homebuying. You’ll need to meet a lender’s credit score benchmark just to get pre-approved for a home loan. That benchmark number will vary based on factors like the lender and the loan type.

Failing to understand your credit and credit report can potentially cost you big time. Higher credit scores often open the door to lower interest rates. It costs money to borrow money, and a lower rate can save you thousands over the life of a home loan.

Here’s a quick example. On a 30-year fixed-rate $350,000 mortgage at 4.5%, the monthly principal and interest payment is $1,773. Hike the rate to 5.5% and that payment jumps more than $200.

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In addition, coming up short credit-wise can curb your access to more cost-friendly loan types.

Borrowers who can’t meet a lender’s benchmark for conventional financing – and who don’t qualify for a VA home loan – often turn to FHA loans. These government-backed loans feature an expensive form of mortgage insurance that borrowers now pay for the life of the loan.

Before you apply for a loan, it’s a good idea to get your credit in the best shape possible. Take some time to review your credit reports for any problems – including errors that need to be corrected – and check your credit scores to see where you stand, and where you need to be. You can get your credit reports for free once a year through AnnualCreditReport.com, and there are free resources, like Credit.com, where you can monitor your credit scores and put together a plan to build your credit.

2. Not Understanding Your Options

The FHA fallback also underscores why it’s critical to understand your home loan options.

Millions of veterans and service members have access to the historic VA loan program, which has helped generations of military homebuyers purchase with no down payment, no mortgage insurance and lower credit scores than conventional financing.

Buyers in more rural areas may be able to utilize the USDA’s Rural Development Home Loan, which also allows for $0 down. Consumers with great credit and enough cash to make a solid down payment may find the best rates and terms with a conventional mortgage.

There are also scores of state and local homebuying assistance programs out there. Buyers who don’t get a full picture of their mortgage options could be costing themselves a lot of money for a long time.

3. Skipping a Home Inspection

Home inspections aren’t mandatory. But you should consider them to be. Professional inspectors can uncover all manner of defects and potential problems lurking in, under and above the living space.

Buying a home without one is a significant risk. Most buyers can use the results of a home inspection as a pivot point to renegotiate with the seller or walk away from the deal if they discover a problem.

4. Buying Too Much House

What you can technically afford and what makes sense in everyday life can be two different things. It’s especially easy for first-time buyers to wind up “house poor,” meaning their monthly housing expenses eat up most of their discretionary income.

Lenders will look at the relationship between your monthly debts and income as part of their underwriting and approval process. That metric is known as debt-to-income ratio. But only the VA loan program currently requires borrowers to meet a standard for discretionary income, or what it calls “residual income” to ensure you have enough money to cover your needs after you’ve paid the major expenses each month.

Everyone else is basically on their own. No one expects to lose a job, go through a divorce or face a medical problem. Make sure you’re in a position to stay current on your mortgage and meet other obligations each month. Part of that includes taking all the necessary steps to ensure you’re not paying more than you have to.

Being house poor can leave you one emergency away from financial disaster.