Getting a mortgage can be exciting. It’s so exciting that many people make some pretty common mortgage missteps. Because this is the largest investment you will likely make, you should proceed with caution.
Read our guide to see how to avoid the most common mistakes made today.
Major Mortgage Missteps
Following are some of the major mortgage missteps you can make. These issues can derail your mortgage approval altogether. Avoiding them can help make the mortgage application process easier for you.
Not Checking Your Credit
Your mortgage approval and interest rate are highly dependent on your credit history/score. You are eligible to receive a copy of your report from each credit bureau one time per year. This gives you access to what lenders see regarding your credit history.
If you don’t check your credit, you could leave:
- Erroneous information on the report
- Have a negative credit history and not know it
- Have a large utilization rate and not realize it
We recommend pulling your credit report from all 3 bureaus a few months before you apply for a loan. This way you know what you may need to fix. Credit reporting errors or issues don’t get cleared up overnight. It will take time to get everything fixed. Give yourself that time by being proactive.
If you have “bad credit”, fix it. You can do this by:
- Making your payments on time
- Paying down outstanding debt, especially credit card debt
- Paying off collections
Opening New Credit
You might think it’s no big deal to open a new credit right before or during the mortgage application. It’s a big issue, though. Lenders don’t want to see new debt. At the very least, they must include the debt in your debt ratio. At the worst, it makes lenders leery of lending you money.
Lenders see new inquiries on your credit report and they wonder what you are up to. Did you take out a new loan? Do you have debt that they don’t know about?
Avoiding taking out any new debt or even making inquiries at least a few months before applying can help reduce this risk.
Focusing on the Interest Rate
The advertised interest rate isn’t the true cost of your loan. The APR includes the lender’s fees. They can inflate the cost of the loan. A low introductory rate is a great way to lure customers in. They then feel like it’s okay if they pay higher fees. Comparing the APR from different quotes, though, will show you how much you can save.
Sometimes the lower interest rate isn’t all it’s cracked up to be. You want the perfect balance between a low interest rate and fair closing costs. Compare everything before settling on one loan.
Taking too Much Mortgage
It’s easy to get excited when your lender tells you how much mortgage you can get. This is just on paper, though. Stop and think about how much you can afford in reality.
Taking too large of a mortgage can make you house poor. Basically, you have no money left for other things. This can make you regret your decision. Don’t just focus on the numbers on paper. Put them into action. Get a total mortgage payment; this includes principal, interest, taxes, and insurance.
Once you know the total, you can work it into your budget. See how it looks – do you have money left at the end of the month?
If you make yourself house poor, putting money aside for savings could be impossible. Then when a rainy day comes, you could find yourself in hot water.
Other Avoidable Mortgage Missteps
Aside from the “major” mortgage missteps you can take, there are others you should avoid. These can help you save money and headaches down the road.
Not Shopping Around
Don’t let one mortgage approval make you settle. There are other fish in the sea. How do you know what they have to offer? You might be taking a mortgage payment that is higher than necessary.
We recommend that you shop around with at least 3 lenders. This way you have a good idea of what’s available. Compare not only the interest rates, but the fees too. Again, look at that APR. This is the true cost over the life of the loan.
You’ll likely find that lenders have very different fees. One may charge an origination fee. Another may charge discount points to get your rate down. Keep shopping until you find the rate and fees that fit your budget.
Your credit doesn’t get hurt for shopping with several lenders within a short period. Take advantage of this benefit.
Paying too Much for the Loan
This goes along with shopping around. But, don’t make the mistake of paying too much for a loan. If a lender tells you that you are “lucky” to get approved, you’re likely to pay more. Instead, only pay the going rate/fees in your area.
You can find out the average by asking around. Ask friends and family what they paid recently. Do some research online too. Getting a quote doesn’t commit you to the loan. Make sure you are comfortable with what you pay.
You aren’t obligated to pay origination or discount fees. There are other options. Make sure you see what they are and how they affect you.
Putting Only a Little Money Down
Each mortgage program has a minimum down payment requirement. This doesn’t mean you can’t put more money down. If you have it, put it down. This is especially important if you have a conventional loan.
Fannie Mae allows LTVs up to 95% in many cases. This also means you’ll pay Private Mortgage Insurance. This drives up the cost of your loan. If you can afford a down payment of 20%, do it. Then you can avoid PMI.
If you can’t afford 20% down, but can put more than the minimum 5%, do it. You’ll benefit with a lower monthly PMI. You’ll also pay PMI for a shorter period. You only have to pay the insurance until you owe less than 80% of the home’s value. The more money you put down, the quicker you’ll meet that milestone.
Making any of these mortgage missteps can make home ownership difficult. The last thing you want is a mortgage/home that you come to hate. Your mortgage payment is likely one of the largest payments you’ll make every month. Make sure it’s one you are comfortable with now and well into the future.