Before you rush out and get a mortgage, there are some things that you need to be aware of; some mortgage mistakes that most people make. These mistakes can cost you a lot of money and are definitely best avoided. Here are the four most common mortgage mistakes people make.
Not Shopping Around
Everyone loves to shop around and use comparison sites for things like cars and insurance, but less than half of consumers do the same thing when it comes to finding a home loan. They tend to get fixated on the purchase price of their home and the initial interest rate on the mortgage.
There are other factors to consider though, such as the total price of the loan, closing costs, the nature of the loan (fixed/variable), and whether you need private mortgage insurance. Be sure to shop around with different lenders and get a few options before making a final decision. It’s the easiest way to avoid overpaying with a loan and getting more than you bargained for.
Waiting Too Long to Solve Credit Problems
It’s important to solve credit problems as soon as possible when buying a home. Don’t leave it until the last minute. Even if you aren’t planning on making a purchase for several months, or maybe even a year, get your hands on your credit report and score now to see where you are.
Borrowers that have better credit scores tend to receive better interest rates. This directly affects how much you’ll be paying each month and how much you can afford. It might take some time to repair your bad credit score too. At least to the point you see a noticeable improvement.
Check for errors on the report that could prevent you from being approved. It’s important your report is up to date and correct. Ways to improve your credit score are to pay off balances to less than 30% of your total credit allowance, avoid using credit for making large purchases, avoid opening new bank accounts and getting new loans, and paying bills on time.
Changing Jobs Before the Loan Closes
Changing jobs can be a good thing at times, especially if you’re going to get a pay raise from it. Lenders are going to want to talk to the human resources department at your new job or receive a copy of the offer letter to confirm your new status and salary.
If a borrower was to go from a salaried position to being self-employed though, then they are subject to a new set of underwriting guidelines. Lenders will closely assess your employment and income history in order to determine your debt-to-income ratio; the key metric used to evaluate whether you can pay back a mortgage or not.
Self-employed borrowers, and borrowers that rely on commissions and bonuses for income, must be able to provide two years’ of federal tax returns in order to calculate their average income. Starting a company or moving on to a commission-based salary is going to affect your ability to get approved for a loan. Wait until after you have a new home to get a new job.
Omitting Important Information from the Mortgage Application
The mortgage application is the first step being preapproved. Omitting information from the application – especially if done intentionally – is going to sabotage your chances to get approved for a mortgage and purchase a home.
The most common liabilities that people leave off of their applications – whether deliberate or not – are alimony and child support payments. These payments don’t appear in credit reports so it’s up to you to make a lender aware of them.
Also be sure to tell your lender about deferred student loans or if you are on income-driven repayment plans. While you might not be paying much money on your student loan debt right now, lenders are going to want to know that you can still afford mortgage repayments once student loan payments become a factor.
Doing your due diligence and learning about the mortgage process helps you to avoid these common mistakes. Communicating with your lender and doing some preparation allows you to be ready to make an offer when the time comes.