The Worst Mortgage Advice Experts Have Ever Heard

published Nov 15, 2018
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Buying a home is a huge financial decision, and, if you’re about to do so, your life advisory panel (family, friends, that opinionated co-worker…) is probably eager to weigh in. While well-intentioned, not all mortgage advice is good. Here, financial and real estate experts share some of the worst mortgage advice they hear, as well as tips on what to do instead:

1. Don’t bother with a pre-approval letter

You may hear that because a pre-approval isn’t reviewed by an underwriter, it’s not official, says Jesse Shafer, a real estate agent with Compass in New York City. Still, the pre-approval process is a worthy one because it helps you gauge how much you can afford. It also demonstrates that you’re serious about getting to the closing table.

“It shows the seller you’ve at least had preliminary conversations with the bank, that your credit has been pulled, and so forth,” Shafer says.

But, don’t think once you’re pre-approved that you’re all set. Securing a home loan involves several steps: Even after you’ve done an initial document dump—handing over pay stubs, W-2s, brokerage statements and tax return—your loan officer may request a copy of your most recent bank statements and, if you’re receiving help from a family member for the down payment—an official gift-giver letter.

2. Open a new credit card to boost your score

Consistency is the name of the game when you’re going through the home-buying process. Right before you make an offer is not the time to open up a new credit card to prove your creditworthiness.

“While it’s true multiple lines of well-maintained credit can bolster a score over time, opening new lines of credit while your lender is reviewing your loan application can potentially crater a deal,” Shafer says.

Same goes for auto loans or student loans, he says. You want to keep your debt-to-income ratio stable throughout the process and don’t want unnecessary hard queries dinging your credit score.

3. Focus on how much you can qualify for

Instead of focusing on how much the bank will lend you, ask yourself “How much can I afford?” says Aaron Norris, vice president of The Norris Group, a California real estate investing firm.

Be careful: Some mortgage and real estate professionals might nudge you to purchase at the price you qualify for, he says. But this doesn’t factor in expenses that could escalate, like HOA dues and property taxes. If you’re maxing out, will you have enough money leftover for emergency fixes?

“Once you start looking at homes that you technically qualify for, but can’t afford, it’s such a letdown to go backwards,” Norris says.

If you’re having a hard time setting a budget, he recommends meeting with a certified accountant to help run the numbers.

“It’s really important to have someone on your team looking out for your financial health in the short-term and long-term,” he says.

4. Waive your financing contingency

In a competitive market, you may hear it’s attractive to waive some of your contingencies—namely your finance contingency—to make yourself stand out among multiple offers.

The financing contingency is a clause in the contract that says your purchase offer is dependent on you securing financing for the purchase price. Simply put, it protects you, the buyer, if you can’t secure financing.

This can be risky business, though, explains Boris Sharapan Fabrikant, a real estate agent with Compass in New York City. Say you waive the financing contingency and your lender doesn’t approve your loan for the selling price. Now, you need to pony up the remaining cash or lose your earnest money deposit (and hope the sellers don’t sue). Or what if you lose your job and can’t close on the loan?

“Make sure you know the risks before you waive a contingency,” Sharapan Fabrikant warns.

5. Opt for the lowest interest rate

When you’re taking out a mortgage loan, it’s tempting to set your sights on the lowest interest rates, says Daniela Andreevska, the marketing director at Mashvisor, an investment-focused real estate analytics company. That’s not always your best bet, though.

“For example, adjustable-rate mortgages usually have lower interest, but the interest rate is fixed only in the first three years, after which it is readjusted every year. In this way, you might end up with a much higher interest than with a fixed-rate mortgage,” she says.

Be sure to read the conditions of each mortgage carefully and to judge which is best for your unique situation, Andreevska says.

6. Quick! Pay down your mortgage

The bad advice doesn’t stop once you’ve secured a home loan. Anjali Pradhan, who runs Dahlia Wealth—a company aimed at helping women invest their money—says she’s seen far too many young people obsessively paying down their mortgages at the expense of investing for their retirements.

She points out that interest rates are at historic lows and have been for quite some time, so it doesn’t make sense to pay down your mortgage as quick as possible.

“Your mortgage is the cheapest way you will ever be able to borrow money as it is backed by collateral: your home,” Pradhan says. “By all means, honor your payment schedule but do put the rest into retirement savings or other investment vehicles.”