Many borrowers tend to make a number of mistakes in mortgage and home-buying process. Here are some of the most common mistakes to avoid:
1. Not Keeping Tabs on Your Credit
No one likes surprises, especially before buying a house. If you have obvious credit issues, lenders might offer you less-than-ideal interest rates and terms or deny your loan application right away. Either situation can be frustrating and can push back your ideal timeline. To tackle potential problems in advance, check your credit report for free each year at the website www.annualcreditreport.com from each of the three credit reporting agencies: TransUnion, Equifax, and Experian. Look for errors and dispute any mistakes in writing with the credit reporting agency and creditor, including documentation to help make your case.
2. Searching For Homes Before Getting Pre-Approved
When you find a perfect home, there is no time to waste. In many hot markets you will be up against multiple bids and stiff competition. Sellers are unlikely to consider offers from buyers who don’t have a pre-approval letter from a mortgage expert. A pre-approval letter shows sellers that the lender has done their due diligence to ensure you have means and motivation to repay your bills, based on your credit history and score, income and employment history, assets, and other key factors. In a competitive market, sellers won’t take you seriously without a pre-approval letter.
3. Not Shopping Around for a Mortgage
Homebuyers can leave a lot of money on the table when they don’t shop around for a mortgage. Searching for a mortgage with a few different lenders gives you a better sense of what you can afford and lets you make an apple-to-apple comparison of loan products, interest rates, closing costs, and lender fees. Shopping for a mortgage puts you in a better position to negotiate with lenders to get the best deal possible.
4. Buying a More Expensive House Than You Can Afford
When a mortgage expert tells you that you can borrow up to a typical loan amount, it doesn’t mean you should. If you max out your loan, your monthly payments might not actually be manageable. Typically, most prospective homebuyers can afford a loan amount between 2 and 2.5 times their gross annual income. Use UFM’s Mortgage Calculators to estimate how much house you can afford in a certain price range.
5. Opening or Closing Credit Lines of Credit
Keep in mind that mortgage lenders check your credit during pre-approval and again prior to giving you the final green light for funding and closing escrow. In the interim, maintain your credit and finances stable. That means not opening new lines of credit or closing existing lines of credit. Doing so can lower your credit score and increase your debt-to-income ratio – both key reasons for a lender to deny the final approval.
6. Making Big Purchases on Credit
Just as opening or closing lines of credit can ding credit scores, so can run up existing accounts. Again, keep your credit and finances stable until you close on your home loan. Use cash instead, or better yet, delay buying new furniture until after closing escrow.
7. Moving Money Around
Another big no-no in mortgage underwriting is making large deposits or withdrawals into or from your bank accounts or other assets. If lenders suddenly see unsourced money coming in or going out, it might look like you got a loan, which would impact your debt-to-income ratio. Lenders will request proof to verify that the deposit isn’t a disguised loan. Don’t forget to consult your mortgage professional before you make any large deposit into or withdrawal from your bank accounts.
8. Changing Your Job
Although changing jobs may benefit your career, it may complicate your mortgage approval. A lender wants to ensure you have a stable income and employment, and that you can afford to repay your mortgage. For approval, you generally must provide proof of consecutive 2 years of steady employment and income. When you change jobs, that continuous record of income and employment is disrupted, particularly if you take a lower paying job.