Taking out a mortgage is the greatest financial commitment you will ever make if you are planning to buy your dream home. However, from filing out different forms and following various rules and regulations, applying for a mortgage can be complicated and challenging.
It’s also easy to make mistakes that can delay your mortgage approval or result in not getting approved for the loan. Here are seven costly mistakes to avoid when applying for a mortgage.
1. Adding new debt
Getting a new loan before applying for a mortgage isn’t necessarily bad, especially if it’s for something essential like a car. However, this can increase your debt burden and reduce your chances of getting approved for a mortgage.
Most lending institutions limit the amount you can borrow in relation to your income. However, your mortgage repayment as a percentage of your net disposable income (NDI) can also limit the amount you will get. No matter how much you earn, your lender will want to ensure that your monthly mortgage repayment is not more than between 30% and 35% of your NDI.
Generally, having any debt will lower the maximum amount you can borrow as it reduces your NDI. Don’t take on any debt before applying for a mortgage if you want to borrow as much as possible.
2. Not getting pre-approved
Getting a mortgage pre-approval isn’t a must, but it’s highly recommended when you are ready to put in an offer on a home. A pre-approval letter proves to the seller that you are a serious homebuyer and can secure a loan. Mortgage prequalification also allows you to learn more about mortgages and work with your lender to identify the right for your goals and requirements.
During pre-approval, the lender will assess your credit score and history, current assets and debts, recent pay stubs, tax returns, and other personal information. They will also conduct a credit check with a hard inquiry. If pre-approved, you will receive a letter which is an offer to lend you a specific amount good for 90 days.
3. Choosing the first mortgage lender that you find
Mortgage loans vary from one lender to another, and each offers different products, rates and terms. In most cases, they have varying qualification requirements, too. Therefore, it’s always important to compare loan products and options from multiple lenders.
Getting quotes from three lenders can save you up to $1,500 over the life of your loan, while five quotes can save you an average of $3,000. The savings can sometimes be bigger, especially on larger loan amounts.
When comparing loan options, consider the bank or credit union you typically bank with. Some lenders offer loyalty discounts to existing clients, which might mean a lower rate, waived fees, or both. Consider an online lender or mortgage company, as these typically have fewer overhead costs compared to traditional banks and might offer lower rates.
4. Failing to keep track of closing costs and fees
If you are not prepared to pay them when they are due, closing costs and fees can hinder the closing of your home. Closing costs range between 2% and 6% of a home’s purchase price and are usually paid upfront on the day of finalizing the purchase.
Some of the fees usually included in closing costs include appraisal and home inspection fees, loan application and origination fees, document preparation fees, and credit report fees, among others. You might also need to make a payment upfront on your mortgage insurance if you have an FHA loan.
Closing costs are negotiable in some cases, but in most cases, they are unavoidable. Consider buying discounts and mortgage points to help reduce the interest rate and your monthly payment by paying off a percentage of the total amount.
5. Not checking your credit report and score
One thing mortgage lenders consider when you apply for a loan is your credit score. The better your credit score, the more likely you will get a reasonable interest rate and terms on your loan. Mortgage lenders usually reserve affordable interest rates for borrowers with a credit score of 740 or higher.
Before applying review your credit score to ensure it’s in a good place. If your score is poor, improve it before filing your loan application. You can easily know your credit score and receive regular credit reports through the three major credit reporting agencies; Experian, Equifax, and TransUnion.
Once you receive your credit report, review it for errors and fraudulent activity. Inaccurate information can lower your credit score, so dispute any errors you encounter by writing a letter to the appropriate credit reporting agency.
6. Changing a job right before applying for a mortgage
While moving to a new company can make sense for your career, changing a job right before applying for your mortgage can keep you away from getting the best deal. Your lender will consider your employment history and income; both should be strong when applying for the loan.
Usually, your mortgage won’t be approved unless you have been in your current role for at least six months. It’s advisable not to change a job right before applying for a mortgage.
7. Leaving mortgage protection insurance until the last day
Mortgage protection insurance (MPI) is a life insurance policy that helps your family make monthly payments if you die before it is fully repaid. Some mortgage protection will also offer coverage for a limited time if you become disabled following an accident or have lost your job.
You can apply for mortgage protection after receiving approval while waiting to close everything off and get the keys to your new house. However, the mortgage application process can sometimes be time-consuming and more tedious than the loan process. Apply for mortgage protection insurance four to six weeks before the disbursement of your mortgage to give your insurance company enough time to process your application and get your cover in place.
Endnote
Buying a home is an exciting experience, but navigating the application process can be complicated and time-consuming, especially for first-time homebuyers.
Fortunately, understanding these common mistakes and taking necessary steps to avoid them can help make the process much easier and boost your chances of getting the best deal on your mortgage. You can also take the help of an experienced mortgage professional who can guide you through the process.