Applying for a mortgage is one of the biggest financial steps most people ever take in their lifetimes. When your hopes and dreams of homeownership are relying on a single application, it can be really hard not to focus on what all might go wrong.
Avoiding real problems is a lot easier, however, when you have an idea of the ways that mortgage applications frequently derail. Here are some of the most common:
1. Not Checking Your Credit Score Before You Apply
Your credit score may be the single most critical factor in your mortgage approval process. Rightly or wrongly, lenders use your credit score to determine if you’re a good risk for a loan and what interest rate you deserve. If your score is too low, you won’t even get an application past the Loan Officer, let alone through underwriting.
- Pro Tip: Sign up for a credit score monitoring service at least six months to a year before you apply for a mortgage so you can keep an eye on your score at all three major reporting companies (Transunion, Equifax and Experian). Make sure to correct any errors you find. Pay down your debt, avoid new credit inquiries and make all your payments on time.
2. Not Shopping Around for the Best Mortgage Rates
A lot of people stick with the very first lender they approach, so long as they’re offered a loan – and that can be a big mistake. Interest rates and loan terms can vary significantly between different lenders. Failing to compare the rates and terms can end up costing you thousands of dollars over the life of your loan.
- Pro Tip: Shop around. Get quotes from multiple lenders. The damage to your credit score from the inquiries will be minimal since scoring companies recognize this kind of behavior from savvy shoppers.
3. Failing to Get a Mortgage Pre-Approval
We’ve said this before and we’ll say it again: Pre-qualification is not the same as pre-approval. Prequalification is an “educated guess” about how much house you can afford, based on basic information that you provide to the lender, like your income and credit score. There’s no lengthy verification process, underwriting doesn’t get involved and you don’t have any kind of commitment from the lender. In the earliest stages of your house-hunting, you might want to seek pre-qualification so that you know what price range you want to look for while you get a feel for various neighborhoods and styles of homes. That can help you avoid falling in love with a home that you can’t afford.
A pre-approval, by comparison, is a much more involved process and represents a tentative offer from the lender for a mortgage – the only “blank” in your application is the actual home you want to buy. You know the maximum dollar amount that the lender will give you, which means that your bids on homes are made with confidence. That’s hugely attractive to sellers.
- Pro Tip: It can take a few days to get through the preapproval process, depending on how complicated the documentation needs are – but this is time well spent. Preapproval can shorten the process between an accepted offer on a home and the closing date, taking a lot of stress out of the post-offer/acceptance process.
4. Making Large Purchases Before Closing
Once you’ve gotten a pre-approval, found a home you really love and your offer has been accepted, it is really tempting to start buying the furniture you envision in your new space or putting money down on the vacation you want to take before you get started on your move – but you need to leave your credit cards alone. Large purchases on credit will affect your credit score and debt-to-income ratio, and your mortgage offer could be rescinded.
- Pro Tip: Don’t let your excitement over your accepted bid lead you astray. More people make this mistake than any other, usually not realizing that the bank may pull their credit score again, before the final approval. For the next 30 days, or however long it takes to reach closing, keep your financial situation stable.
5. Changing Jobs Before the Application Process Is Over
Job stability is as big a factor to many lenders as your actual income. An unstable employment history where you’ve “job hopped” several times in a year or even switched careers can make lenders nervous. You want to maintain your employment without interruption during the gap between your pre-approval and closing.
- Pro Tip: Okay, this one probably isn’t entirely under your control. If your employer suddenly announces they are eliminating your department and everybody in it loses their positions, there is little you can do but scramble to find a new job with a comparable pay structure and try to make it work with your lender. Similarly, if you’re offered the job of your dreams and you can’t pass it up, let your lender know as soon as possible so you can provide updated documentation. In all other cases, stay put until after closing.
6. Forgetting About All the Hidden Costs of Home Buying
When you’re thinking about your budget, it’s easy to focus solely on the price of the home and the mortgage payments. However, there are numerous other costs involved, including closing costs, inspection fees, property taxes, homeowners insurance and maintenance expenses that must be factored into your future plans. You can get frustrated and pinched for cash before you even get into your new home, and wind up unhappy with your financial constraints afterwards.
- Pro Tip: You’re less likely to experience financial strain and “buyer’s remorse” if you stick to the lower end of your price range when you’re looking at houses. You should also anticipate moving costs and other expenses by stockpiling a little cash that you can use for movers, utility deposits and other move-related expenses.
Ultimately, it’s important to think ahead and stay calm as you approach this significant milestone in your life. With the right moves, you’ll be “signing on the dotted line” at closing and have those all-important keys in your hand. Just remember that it’s important not to relax your financial guard until you do.
