When you are applying for a home loan, it's important to have everything just right. Errors made before or during the process can result in a higher interest rate or not getting approved for a loan that you otherwise would have gotten.
Make sure to speak with your lender and/or a financial advisor to see what options make sense for your specific financial situation.
To make sure that everything goes well when it's time to talk to the bank, keep these mortgage mistakes and the way to avoid them in mind:
1. Paying off Debt Right Before Applying
It's human nature: you are running your credit and discover an old balance you forgot about. While you may have the funds handy to make good on your debt, you won't usually want do this right before shopping for a mortgage. Any changes in the history of a debt will typically show up as new activity and can hurt your credit score.
Instead of looking at everything right before applying for your loan, check your credit reports from all three major reporting bureaus six months to a year before you apply for a loan. This way, the negative mark is not there to harm you and the recent payment won't cause an unexpected dip in your score.
2. Making Another Major Credit Decision
The period when you are shopping for a mortgage is not usually the time to open a new zero-interest credit card account or to buy a new car on credit. While deals on new credit cards can be enticing, the new inquiry can be a red flag to lenders and can also cause a small dip in your credit score.
If you find yourself suddenly without a car, see if you can replace it without taking out an auto loan. Like a new credit card, this will add a new inquiry to your credit reports. It will also affect your debt to income ratio in a negative way. It might be better to try carpooling or using public transit, if possible, while you nail down your loan to buy your home.
3. Not Keeping Steady Employment
If you have an opportunity at a new company, you may want to see if it will wait until after you have your loan in place. Lenders like to see at least two years at a job to show that you are stable enough to qualify for a mortgage. While a new job can provide more income, an easier commute and other benefits, changing too soon before buying a house can keep you from getting the best deal on your mortgage.
4. Not Learning About the Process
Applying for a mortgage can be complicated and intimidating. However, it can be harmful to your finances to hide your head in the sand. Find a mortgage specialist who will lay out the details so that you understand what is going on throughout the process of getting your loan. You'll be able to produce needed documents more quickly and will better understand all of the details of your loan agreement.
5. Not Shopping Around
Many people are afraid of shopping with too many lenders. On a certain level, it makes sense. The mortgage application process can be grueling. And, if you know a little about how credit scores are calculated, you know that each inquiry has the potential to slightly lower your score.
However, the minor drawbacks do not cancel out the massive benefits of shopping with multiple lenders when seeking a mortgage. While the process can be intimidating, this is something you'll have to do once that will benefit you for years. Even a fraction of a percent lower on the interest rate on one loan can lead to thousands in savings over the life of your loan.
Creditors understand that people often like to shop around. A cluster of inquiries for the same product all at once (in this case, a mortgage) will not hurt your score the same way that a hard pull for a credit card every month or so will.
6. Not Knowing What to Look For
The lender who is recommended by your neighbor should not be the only one you look at. You should also not choose a lender based on how close their offices are to your home and whether you do business with them for other banking products. This is one area where being brand-loyal can hurt your wallet. While you should definitely consider the lenders who are already familiar and recommended, you should also check the rates at ones who are new to you.
7. Waiting too Long After Seeing a Good Rate
The purchase of a home is not a decision you should rush into. However, if you find a rate that you like, it is important to be ready to act quickly and decisively. Mortgage rates go up and down over months and years, and they are expected to climb throughout 2017. If you are able to find a rate that you like now, you should work to embrace it before circumstances change again and the opportunity goes away.
8. Not Saving Cash for Closing
Your down payment isn't the only thing you'll need to pay out of pocket when you find your home. You may also have an origination fee, title insurance, homeowners' association dues, taxes and other costs at closing. You may also have to make a payment upfront on your mortgage insurance if you have an FHA loan.
In some cases, you can work with the seller to get them to cover some or all of these costs. However, in many cases, there will still be some fees that you will have to pay before you are able to close on your house.
Buying a home is a decision that should be pondered and planned for for some time before jumping in. By taking decisive action while you are preparing to buy and while you are going through the mortgage process, you can improve your chances of qualifying for the mortgage you want and finding a home that you will love.
The Ashton Real Estate Group of RE/MAX Advantage
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