7 Mortgage Hopes and Dreams That Are Completely Delusional Today
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Right now, mortgages are having a moment. With interest rates low yet rising fast, home loans are the hot topic du jour, and one that I, as a real estate agent, help homebuyers navigate daily.
Still, just as both buyers and sellers experience wake-up calls when it comes to the real estate market, the mortgage process can be complicated, with my clients’ beliefs often riddled with magical thinking.
For instance, they might catch wind of how their cousin snagged an ultralow interest rate last month (or last year) and presume they can get the same deal today. Or they get excited when a bank pre-qualifies their loan and think that’s enough to make an offer on a house. Sadly, none of this is true and can trip up homebuyers right when it counts.
To help you understand what misconceptions might be lurking in your own mind, I’ve laid out seven of the most common delusions homebuyers might have about mortgages. Take a look, and know that these beliefs can create major obstacles once reality comes into play.
1. A pre-qualification is the same as a pre-approval
It is very easy to get a pre-qualification, known in the industry as a “pre-qual.” In fact, most real estate agents and their sellers require potential buyers to obtain one before they even tour homes. (This is a way to weed out the looky-loos from the serious candidates.)
Obtaining a pre-qual is a relatively simple process: You can speak with a loan officer over the phone or even online, then answer basic questions about your finances. Then viola, you’re pre-qualified!
However, I encourage clients to go ahead and secure a pre-approval, which is a significantly more in-depth undertaking, because you need to produce tangible documents backing up your bank accounts, assets, and income. It’s the equivalent of putting in the hours to study and prepare for a test as opposed to showing up after skipping all of your classes.
A pre-qual can be a bit vague with no promises made. On the other hand, a pre-approval is grounded in reality because it more accurately reflects the terms of your potential loan. It also forces you to take all of the necessary steps to secure your loan.
2. Applying for a mortgage is quick and painless
It’s important to know that obtaining your mortgage can significantly affect the time it takes to close your real estate purchase. It could add weeks and sometimes months to the closing process.
For one, it is up to the loan officer to scrutinize your financial viability with the proverbial fine-toothed comb, and it is up to you, the borrower, to supply official documents to support your claim.
Some people are more organized than others. If you have a folder on hand that details your tax returns for the past two years, bank statements, and pay stubs, then we salute you. But for most folks, it’s a scramble to collect these items.
And don’t expect your loan officer to necessarily prioritize your file. While the mortgage process has always been long and involved, the insanely hot market means there are many applicants in the queue. You will need to exercise patience.
3. You’ll get one of those insanely low rates everyone is talking about
Even though they’re ticking upward, low-interest-rate mortgages still seem to abound, with banks advertising some fantastical digits. But be forewarned: These rates apply to those with stellar credit and are dependent on a number of factors, including down payment and more. All in all, think of these advertised rates as the bait that gets you in the door—odds are, you will end up paying more.
4. It’s basically free to get a mortgage
Banks are federally mandated to disclose the myriad closing costs and fees that will be associated with your loan. However, most people don’t pay attention to the significance of these dollar signs.
When you look at the fine print, it literally costs thousands of dollars to borrow money, and I’m not referring to interest. Be prepared to pay fees you never anticipated, such as the cost of the bank’s attorney, the appraiser, and plenty of “servicing fees.”
5. Using your big bank will be easier
Once they ascertain how much information gathering will be involved, buyers believe a common myth that they can skip steps by using the big bank where they might have their checking and savings accounts. If you have a financial history with this institution, then you are a valued customer and applying for a mortgage should be simple, right?
Having experienced the mortgage process through banks big and small, I encourage clients to go small when they can.
For one, the steps involved are no different—even when the bank in question has direct access to your financial information, you will still need to provide tangible documentation. But more importantly, a smaller institution means you will be working with a local lender in a local market, not a random loan officer who is out of state who’s been assigned to you by your big bank.
Michelle Rizzi, a certified mortgage planning specialist at Ulster Savings Bank based in Kingston, NY, says it’s as simple as this: “We live and work in the local area and have good insight into the market.”
“We are flexible in helping our borrowers when things go sideways” (and they do), Rizzo adds, and “we service 95% of our loans, which means they are not sold off several times, and the borrower will always be able to speak to the servicing department locally. Many borrowers don’t realize that their loans will be sold, which makes it hard to ensure the payments are up to date, especially if there is tax escrow.”
6. You can easily borrow money for land or a fixer-upper
Finally, inventory is really tight. Many buyers are thinking, “I don’t want to compete in a bidding war,” and decide that they will borrow money to purchase land and build their homes. This is theoretically doable.
However, getting clearance for this type of loan is a totally different process, and you need to find specific banks that will even agree to this arrangement in 2022. The same goes for “construction loans,” which are sought for properties that require renovation. Right now, many banks are being especially selective about this undertaking, thanks to rising building costs and a nationwide labor shortage.
7. Once you have the commitment, it’s a done deal
In this hot market, some homes are being offered at prices that exceed their worth. Or, in the case of a bidding war, you might have overplayed your hand (and wallet) in order to score the goods.
One of the last hurdles of the mortgage process is that the bank will obtain (and charge you for) an appraisal, where an outside party uses comparative calculus to determine the value of the home. If that estimate falls short of what you’re borrowing, it can put an instant stop to your clearance. (The only workaround here is to pay the difference in cash.)
Another reason your loan might come to a standstill? If you have any change in employment or financial status over the course of the loan process, the bank might retract the loan.
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