7 big mortgage loan mistakes (and how to avoid them)

Buying a home can be an exciting experience — but it can also be a stressful one. Not only do you need to find the perfect home, but you may need to find the right neighborhood, real estate agent, title company, and, perhaps most importantly, the best mortgage lender and home loan.

After all, most people can't afford to pay for their home with cash and will instead need to borrow money to complete their purchase. And, securing a mortgage is a significant financial decision that can shape your future for years to come. That's because the lender you choose — and the mortgage loan you decide on — play a significant role in the cost of your home. 

As such, it's incredibly important to find options that are a good fit for your unique circumstances. And, as you narrow down your mortgage loan choices, be sure to avoid the major mistakes that other people have made. Below, we'll detail what to look for — and how to steer clear of them.

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7 big mortgage loan mistakes (and how to avoid them)

Buying a home can be complicated enough — and making mistakes during the mortgage loan process will only add to the issues. So, as you navigate the mortgage loan landscape, be sure to avoid these big mistakes:

Neglecting to shop around

Many homebuyers let the excitement of buying a home cloud their judgment, and in turn, will make the mistake of accepting the first mortgage offer they receive. But different lenders offer different terms and interest rates, which can work to your advantage if you're smart about your approach. Remember, even a slightly lower interest rate can translate to significant savings over the life of your mortgage loan.

So, rather than simply accepting the loan offer, take the time to shop around, obtain multiple quotes and compare the details instead. Online mortgage comparison tools can be valuable in helping you make informed decisions — and you can try to also negotiate with lenders to get better rates after you've shopped around. 

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Ignoring your credit score

One of the gravest mistakes you can make when borrowing money to buy a home — or for nearly anything else — is neglecting your credit score. After all, your credit score plays a pivotal role in determining the interest rate you qualify for — and improving your credit by even a few points can have a big impact on the overall cost of your mortgage loan. 

So before you start shopping for a mortgage, be sure to obtain a copy of your credit report and check your score. If your score is less than stellar, take steps to improve it by paying down debt, correcting errors on your report and making timely payments. A higher credit score can save you thousands of dollars over the life of your mortgage, so it's typically worth it to take the time to make these, and other, improvements.

Overlooking your budget

Falling in love with a home that stretches your budget is a common pitfall of shopping for a home — and with home prices as elevated as they are, it can be even easier to find yourself in this situation. To avoid the issue, determine what your budget is before starting the home-buying process. 

And, as you do this, be sure to consider not only the monthly mortgage payment but also property taxes, insurance and maintenance costs as part of the holistic borrowing picture. And, remember that lenders may approve you for a larger loan than you can comfortably afford — which is why it's important to go into the process with an idea of what your budget is. If you stick to your budget, you can typically avoid financial strain in the long run.

Skipping the pre-approval process

You may think the best approach to take is to start shopping now to avoid missing out on an opportunity to buy a home, but you need to get pre-approved first. Skipping the pre-approval process is a misstep that can seriously hinder your journey. 

After all, getting pre-approved for a mortgage not only provides you with a clear understanding of your budget but also makes you a more attractive buyer to sellers. That's because a pre-approval shows that you are a serious and qualified buyer, which, in turn, gives you an edge in a competitive real estate market.

Ignoring loan terms and conditions

Reading the fine print is crucial when it comes to mortgage loans, but some borrowers make the mistake of overlooking important terms and conditions buried in the paperwork. That can be detrimental to your ability to buy a home. 

Instead, pay attention to details such as prepayment penalties, adjustable-rate terms and potential fees when you're shopping around for mortgage loans. Understanding these aspects can prevent surprises and ensure that you choose a mortgage that aligns with your financial goals.

Opting for the wrong loan type

There are a lot of different mortgage loan options to choose from — and choosing the wrong type of mortgage can lead to financial challenges down the road. Don't make that mistake or it could be costly.

To avoid that issue, be sure to assess your financial situation and future plans before deciding between fixed-rate and adjustable-rate mortgages. Fixed-rate mortgages offer stability, while adjustable-rate mortgages may have lower initial rates but carry the risk of future increases. Also consider your risk tolerance and financial goals when selecting the type of mortgage that best suits your needs.

Forgetting about the closing costs

Many homebuyers focus on the down payment they're making on the home and, in turn, neglect to budget for closing costs. That can cause issues late into the mortgage loan process if you aren't careful. When budgeting for your home purchase, ensure that you set aside funds for closing costs to avoid any financial surprises.

Closing costs typically include a wide range of fees for appraisal, title insurance, attorney services and other miscellaneous expenses. Be sure you understand and get a full accounting of what your closing costs entail, as failing to account for these costs can strain your finances at the last minute.

The bottom line

Avoiding these big mortgage loan mistakes requires careful consideration, thorough research and good financial planning — but it's important to do so. After all, your mortgage is a long-term commitment that significantly impacts your financial stability. And, by being proactive, understanding the terms and staying within your means, you can navigate the mortgage process with confidence and secure a loan that aligns with your financial goals. After all, a well-informed decision today can pave the way for a more secure and prosperous future.