Buying a home involves a lot of moving parts: dealing with brokers, lawyers, inspectors, homeowners, paperwork, deeds, and more. Top it all off with the most important piece of the whole process: closing on a mortgage.
Mortgages are one of the most complex and significant documents you’ll ever sign. They likely involve the biggest purchase of your life, and you may spend half of your adult life paying it off.
Before you sign on the line, here are mortgage mistakes you’ll want to avoid.
1. Applying for new credit at the wrong time
Applying for new credit is never a good idea right before looking to take out a mortgage. New credit cards or additional debt can lower your credit score. At the very least, you’re risking higher interest rates on your mortgage. At worst, you might be turned down for a mortgage altogether.
Hold off on opening any new accounts in the months before applying for a mortgage. Having the best credit score possible is crucial to keep interest rates low on your mortgage.
2. Untimely j0b change
Both assets and income are important components of the mortgage qualification process. A recent job change before buying a home can be a red flag for lenders who want to see stability and a consistent income. Experts caution even further against a career change, which may appear even more risky.
If you’re looking to change careers, wait until after you’ve bought your home.
3. Applying for a mortgage without planning
A sudden decision to buy and apply for a mortgage is often the wrong approach. If your credit isn’t in top shape, you’ll need time to make things right.
Instead of starting with the mortgage application right away, start with checking your credit score and credit report. Doing this months before you start searching for a mortgage will give some key advantages.
Most importantly, you’ll have time to increase your score. While boosting your credit score can take some time, there are ways to increase your score quickly. Look over your credit report and dispute any errors that may be hurting your score. Without sacrificing savings for your down payment, pay off credit card debt that might be bringing your score down.
Before you apply, make sure to check your credit score yourself so you know where you stand. Don’t rely on your lender’s word. If you don’t know your score, you’re asking to be ripped off.
4. Not getting pre-approved
The mortgage pre-approval process makes homebuying easier. You’ll know how much house you can afford, which narrows down the options when shopping for a home. You’ll also benefit from speedier closing when you’re ready to buy rather than rushing to obtain a mortgage once you find your dream home.
Sellers want to know you’re a serious buyer before accepting your offer. Pre-approval is often their best sign you’re ready to close.
Make sure you don’t confuse “pre-qualified” with “pre-approved.” The former often doesn’t mean you’ve been approved for a mortgage yet, while the latter means your financials have been checked and you’re closer to being able to close.
5. Money moving last minute
Lenders want to see you have assets readily available. But they don’t just look at your current balance. Don’t try to play tricks by transferring a big chunk of money into your account right before you apply. Lenders know to look for this. You won’t be fooling anyone.
Instead, make sure your accounts show a steady presence of cash months before applying for a mortgage. Be ready to explain any deposits that aren’t related to your salary.
6. Comparing interest rates but not closing costs
In most cases, closing costs are unavoidable with mortgages. Don’t just look at the interest rate to compare mortgage offers. Zillow has a list of more than 30 different closing costs that could be tacked on. These fees often add up to 3% to 5% of the mortgage amount.
This is a big chunk of change, so make sure to compare lenders based on these costs, too. Don’t be afraid to negotiate fees, especially when one lender charges a higher fee than another for the same item.
7. Borrowing too much
Banks are still eager to lend you money. Because of this, you need to figure out for yourself how much you can really afford.
One common mistake: not taking into account the expenses of homeownership beyond the mortgage payment. Be sure to include property taxes and insurance premiums due annually. You’ll also need to consider maintenance, utilities, and other recurring expenses.
If you’re unsure how to estimate all this, check out Zillow’s affordability calculator, which factors in many of these extras.
8. Making a small down payment
Certain mortgages allow for smaller down payments, such as little as 3.5% percent for an FHA mortgage. Just because this is allowed doesn’t mean it’s a good idea.
Many money experts, like Dave Ramsey, recommend paying at least 10% down. Make a 20% down payment, and you’ll be able to avoid paying private mortgage insurance.
Just be careful: using all your savings on a down payment can be dangerous. Make sure you have money saved for emergencies so you’re not at risk of falling behind on your new mortgage.
Have you made any of these or other mortgage mistakes?
(image: How I See Life)