Tips for Avoiding Common Mistakes When Applying for a Mortgage
There are a lot of steps to go through when buying a home, and even the slightest misstep could delay your loan approval or put you off the market entirely.
To help you navigate this sometimes-confusing process, weve highlighted some of the most common mistakes when applying for a mortgage. Avoiding these pitfalls will make your mortgage application smoother and help you secure your dream home.
1. Not Shopping Around
The mortgage loan is one of the most important financial transactions you will ever make. And the best way to get a good deal on a home mortgage is to shop around. Not only can you save thousands of dollars by comparing lenders, but its also a great way to see what kind of service you can expect from your lender and how long it might take to close the loan.
However, a survey from Fannie Mae found that fewer than half of first-time homebuyers received more than one quote when applying for their mortgage. This may be a sign that consumers havent yet grasped the concept that competition is key to a smooth and successful mortgage application process.
The most important thing to remember is that a well-crafted mortgage application will help you get a much better deal on a home loan than you might otherwise be able to obtain on your own. The most important step is to understand the loan requirements of each lender, and then take your time in evaluating each option before making any final decisions. This will ensure that you dont end up with a home loan that is more than you need, and it will help to reduce your stress levels along the way.
2. Not Making a Down Payment
The mortgage process can be a complex and time-consuming one. It requires a lot of documentation, and it can take from 30 days to several months to get approved.
While there are many ways to avoid making common mistakes when applying for a mortgage, some of the most common ones include:
Not Making A Down Payment
The amount of money you should put down on your home depends on a number of factors, including your personal financial goals and financial situation. Generally speaking, a higher down payment means lower monthly payments and less debt. Moreover, a larger down payment can build equity faster.
Putting a high down payment can also reduce your risk of paying out your mortgage early or being saddled with extra costs, such as private mortgage insurance (PMI). Youll need to pay PMI until you have at least 20% equity in your home.
You may be able to qualify for a loan with less money down than the minimum requirement if you have significant savings or other assets. However, its important to understand that a low down payment can leave you without sufficient funds for emergencies or other expenses related to homeownership.
If you dont have the cash available to make a down payment, try out a few different scenarios to figure out whats best for your situation.
If your situation calls for a larger down payment, be sure to put the extra cash toward paying off other debts and building up your savings accounts. Its also a good idea to pause other savings goals, such as 401(k) contributions, until you have enough money for a down payment. This will help you avoid making a mistake later on when your finances are less stable and you could end up with a big mortgage bill that you cant afford.
3. Not Having a Good Credit Score
Having a good credit score is one of the best things you can do for your finances. It helps you get approved for a mortgage, save on interest costs and avoid late fees.
A credit score is a number that ranges from 300 to 850 and is used by lenders to determine your creditworthiness. Higher credit scores are more favorable for lenders, but it’s not impossible to get a mortgage with less-than-perfect credit.
Your credit score is based on several factors, including your payment history and the types of accounts you have. According to Experian, your credit mix, or how many installment loans (such as car loans and mortgages) you have compared to revolving lines of credit, can have a positive impact on your score.
You can also ask for a Rapid Rescore if you’ve made a big change to your financial situation, such as paying off a judgment or an account in collections, and your score doesn’t reflect it right away. This is a quick way to update your score, which could help you get approved for a mortgage faster than you would without it.
In addition to your credit score, your lender will likely check your debt-to-income ratio and other income-related factors before making a decision on your mortgage application. You can calculate your debt-to-income ratio by multiplying your total recurring monthly debt by your gross monthly income.
If you have a low credit score, or don’t have a sizable down payment, it might be best to wait for your financial situation to improve before buying a home. In the meantime, you might want to make sure your budget is on track and you have a strong emergency fund to cover unexpected expenses.
4. Not Having a Good Credit History
Buying a home is an exciting time, but the process can also be stressful. Fortunately, there are several tips that you can use to avoid common mistakes when applying for a mortgage.
One of the most important factors that will impact your ability to get a mortgage is your credit history. A bad credit history could make it hard for you to get approved for a loan, and it can even put you at risk of foreclosure.
You can improve your credit score by making your payments on time and limiting your use of your credit cards. It can also help to keep your debt-to-income ratio (DTI) at a reasonable level.
A good credit score is the foundation of all your other credit, including a mortgage. It helps you to qualify for a home loan, receive a low interest rate and get a better deal on your mortgage in the long run.
Its normal to be excited about your new home, especially when its your first. But its not a good idea to make large purchases with your credit right before you apply for a mortgage, because it can raise red flags with lenders.
Another mistake to avoid is not having enough cash in your bank account. Lenders will want to see that you have enough money saved up for the down payment and closing costs.
If you have a lot of debt, you may want to consider paying it down before applying for a mortgage. Doing so will lower your debt-to-income ratio and reduce the amount of pressure youll put on your finances, according to the Consumer Financial Protection Bureau.
You can also take steps to increase your credit score before you start house hunting. For example, you can work with a credit repair company to spruce up your score.
5. Not Having a Good Job
When it comes to buying a home, there are a lot of things that can go wrong. In fact, the mortgage application process is a stressful time for many people, so its important to avoid making any mistakes that could end up costing you money and jeopardizing your loan approval. Here are a few common mistakes that borrowers make when applying for a mortgage that you should avoid if possible.
Not having a good job can be a big mistake when youre applying for a mortgage, especially if you dont have any savings set aside to cover the closing costs and other expenses. Its also important to be honest about your salary and income, and dont omit any information that might raise red flags for lenders.
For example, lenders will want to know if youve had any recent changes to your salary or employment history. Theyll be looking for evidence that you can make the payments on your new mortgage, so if youve recently gotten a promotion or taken on a higher pay grade, youll need to document this clearly when you apply.
A good job is an essential part of a healthy economy, successful businesses, strong communities, and well-functioning democracy. However, most Americans do not feel that they have a good job, and only 44 percent of working people in the United States say they are satisfied with their jobs. This is why we created the Workplace Quality Initiative to empower workers to define and communicate what makes them feel valued and happy in their jobs.