Dec 2013 19

10 Major Mortgage Mistakes to Avoid

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Applying for a mortgage might easily seem overwhelming, with so many choices and products to choose from — especially if you haven’t had much experience with the jungle of information connected to mortgage financing before. Since you’re not an expert, it’s vital to be able to avoid at least some of the most common mistakes. We've prepared a simple list of the top ten pitfalls when getting a mortgage. Check it out, and hopefully it will save you both time and money.

1. Aiming for more than you can afford

We all know the scenario. You see the house of your dreams that's priced just a tiny bit above your top budget (or simply above), but you feel it really is the one, whatever the cost. However, the vision of having a perfect garden and lovely kitchen can turn into a nightmare if you don’t get your numbers right. You need to realize that even though mortgage payments are usually lower than your previous rent, there are hidden costs connected to home ownership, such as insurance costs, energy bills, and maintenance expenses. Would you still be able to cope with unexpected situations like getting a new roof or fixing the heating system if something goes wrong? Think twice before rushing into a deal that might cost you much more than just a tightened belt for a year or two in the end.

House in Vancouver  Gord McKennaHouse in Vancouver by Gord McKenna

2. Not getting pre-approval

Before you start hunting for a home, it’s a good idea to visit a mortgage lender and check whether you can actually qualify for financing by getting pre-approved for a mortgage. As Chris MacNeil from MorcanDirect says,

"House hunting without a pre-approval is not dissimilar to going on a shopping spree without knowing your bank balance. The point being: it would be foolish to get to the check out, only to find out your card has been declined!"

Getting a pre-approval carries along several advantages. Firstly, you'll find out how much you can realistically afford. Secondly, in case there is any trouble with your credit score, your advisor will help you work it out and outline a credit development plan. Even though this process can take up to two years (so it’s advised to start dealing with it as soon as possible), thanks to learning about your weaknesses and fixing them, you will get a reward of qualifying for the best possible interest rate.

3. Not locking your rate

Mortgage rates are subject to swift changes. Sometimes they can even vary within a single day. If you’re satisfied with the rate, lock it immediately, simply by applying for a pre-approval. Once your rate is locked by your bank or broker, you get 120 days of fixed interest rate levels — and even if the rate increases later, you'll still enjoy the benefit of more favourable conditions. Always make sure to get written confirmation that your rate is locked. 

4. Job hopping

One of the main things that all lenders look for is stability in both your finances and your life. As much as you might find it awesome to try new things, move around, and chase the best possible job in the city, you can be sure that lenders aren't so enthusiastic about this. Not even to mention an option that you might be considering, starting a new business. Of course, being on the move doesn't necessarily disqualify you from getting a mortgage, but it certainly doesn't raise your chances. If you've just changed employers and find yourself in the probationary period, consider postponing your purchase for a few months. Lenders’ spirits will go up, together with the amount of money you'll save by qualifying for better conditions.


5. Forgetting about your down payment

Before obtaining approval, you'll have to prove you have enough money to make a down payment, which can be anywhere from 5 to 10 per cent of your future home’s price. Even though this seems like an obvious condition of getting a mortgage, you'd be surprised how many buyers experience trouble showing sufficient liquid assets on their account. Think about this before applying for a mortgage. Some of the possible sources are registered retirement service plans, bank accounts, and brokerage accounts or a gift from your family. However, make sure to avoid suspicious or rushed money transfers just a couple days before closing, since the Anti-Money Laundering and Terrorism Act states that lenders are required to request a 90-day record of all your accounts to check the source of the down payment. And just like we pointed out in the previous paragraph, lenders love consistency and stability when it comes to your finances.

6. Decisions based on rates only

"When you decide on the basis of pricing alone, it might not be the best product for you,"

Toronto mortgage broker Joe Walsh said for the Star. He adds that getting hooked on a mortgage that you chose just on the basis of the lowest interest rate could easily lead to later regrets. Of course, rates are a valid consideration, and they're one of the most important compasses on the search for the best available options. But you have to realize that different types of mortgages, their payment structures (such as pre-payment options), and possible penalties for paying off too early can all play a great role as well.

7. Hiding information from your advisors

Trying to hide negative financial information about you is probably the worst idea ever when it comes to mortgages. If you’re concerned that you might not seem well-paid or reliable enough to get credit, the best way to find out is to try to get a pre-approval and fix all the possible problems with your advisor. Don’t think that the drawbacks won’t come to light — any unpleasant surprises in the process of getting a mortgage might actually cost you a deal.


Sofa  mylocationscoutsSofa by mylocationscouts

8. Forgetting about the closing costs

Closing costs are probably the sneakiest costs that come up when purchasing a home, and many people forget about them. Avoid last-minute complications by leaving by at least 1.5 per cent to 3 per cent of the overall purchase price to cover additional expenses that pop up in the end. These include such things as the cost of a professional home inspection, lawyer or notary fees, land transfer tax, property tax, and property insurance as well as moving costs. Be prepared, so that you’re not left with no cash on hand unexpectedly.

9. Settling for the first offer

Even though the process of choosing the best mortgage offer can be strenuous, it’s certainly worth it. Don’t make the common mistake of settling for your friendly neighbourhood bank that offers "just okay" conditions because your friend said so. Decisions about financing your future home are too important to approach this way, and underestimating the impact of your choice might cost you loads of money. For example, Carole Ann Bryant, an accredited mortgage professional in Cobourg, pointed out for the Star that,

"On a $200,000 mortgage with a 20-year amortization, a rate that’s 0.25 per cent higher would cost $4,000 more in interest over five years." 

Plus, the pack of conditions that comes with a deal varies greatly, as lenders compete against each other with offering earlier down payments for small extra fees, holidays from payments, and many other perks that might or might not come with your deal.

10. Not reading the documents properly

Going through all the specifics of the mortgage agreement surely isn’t the most intriguing activity in the world, but it’s absolutely vital for you to check the provisions of the contract before signing up for anything you don’t know about. Don’t be afraid to ask questions if you don’t understand something — it’s better to be sure before nodding to unfavourable terms. If you have a lawyer, it might also be a good idea to get a consultation, as a legally trained person is able to spot even the slight nuances that most people don’t notice and warn you about them.


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