When it comes time to search for a mortgage, many homebuyers feel stressed and overwhelmed. Even if this is not their first time, finding a mortgage and getting approved can be a confusing and daunting challenge that you need to overcome. Without it, you will not be able to afford your new home.
Whether it is your first time or your fourth time buying a home, there are always some mistakes you did not know you could make. By researching ahead of time and being aware of some of the most common mistakes, you can move forward more confidently in your search for a mortgage.
Without further ado, here are some of the top X common mistakes that homebuyers make during the mortgage process:
#1. Not Knowing Your Credit Score Or Your DTI
When you apply for a mortgage, lenders will look closely at both your credit score and your debt to income ratio (DTI). You can check your credit score for free before applying for a mortgage, but it is highly recommended that you check this score even if you are not hoping to apply for a loan soon.
Although it is not as easy to check, your DTI is equally important to lenders. They want to see how much debt you currently hold and will use this information to calculate how risky you are as a borrower and if you can afford the mortgage that you’re applying for. Your DTI will include any credit card debt and existing loans.
To help improve your credit score, carefully search for any errors and dispute any that you find in writing. You will also want to focus on paying bills on time, paying more than just the monthly minimum, and not maxing out any of your cards.
Unfortunately, there are some things that you will not be able to fix such as late payments or delinquent accounts.
#2. Not Looking For Low Or No Down Payment Mortgages
Do not assume that there is only one type of mortgage that you can apply for. While the conventional mortgage typically asks for a down payment of 20%, there are low and no down payment mortgages that you may be eligible for.
Most low down payment mortgages will require you to pay an additional PMI or MIP insurance, but for some government-backed mortgages, this is not a requirement. Even if you do end up having to pay an extra mortgage insurance premium, you can usually request it be removed once you have reached 20% home equity.
Some common low down payment mortgages include FHA loans, Conventional 97 loans, HomeReady mortgages, and the Affordable Loan Solution mortgage by Bank of America and Freddie Mac. If you are a first time buyer, Wells Fargo offers a yourFirst Mortgage.
If you qualify for certain government backed loans, you may be able to get a mortgage with no down payment requirements. Both USDA loans and VA loans allow borrowers to buy a house with no money down, but you must meet eligibility requirements first.
#3. Deciding Not To Get Pre-Approved
Many new homebuyers think that getting pre-approved means that you must commit to a lender, so they decide to skip this step. Most of the time, though, pre-approval letters will come with an expiration date of 90 days or less.
Some homebuyers may think of this step as unnecessary, but it can have a huge impact on whether sellers take you seriously or not. In competitive buying markets, sellers may decide to only consider buyers who have a pre-approval letter even if the buyer has not committed to a lender yet. Without a pre-approval letter in hand, you may miss out on a home you love.
Pre-approval is not just good for sellers; it is also good for buyers. When you get pre-approved, a lender will let you know how large of a loan they think you’ll qualify for as well as the estimated down payment requirement, interest rate, and loan term. It gives you a better idea of what kind of home you can afford and can help you budget accordingly.
#4. Forgetting To Get Approved
Conversely, if you only get pre-approved and do not actually get approved, you will encounter some very challenging, very stressful complications when you go to sign the finishing documents on your home sale.
As mentioned above, pre-approval is when a lender gives you an estimate. They have not seen all your documents yet, so they have not officially approved you for anything. Pre-approval is just meant to give you an idea of what you can afford and the loan amount you may be approved for.
If you did get pre-approved, do not forget to return to your lender for an official approval! Even if you told them at the time that you will go with their offer, you still need to start the official approval process before you can buy your new home. You will know you are in the clear when you receive a document that says “clear to close” from your lender.
#5. Making Other Major Changes
Whether you decide to open or close a line of credit, switch jobs, or even quit working, make sure to wait until after you have been fully approved for a mortgage before doing so. Even with pre-approval lenders, may decide to deny you based on major changes you have made recently.
When you open or close a line of credit, it impacts your credit score and your DTI. If you have been pre-approved, it is important to keep your credit the same or as similar as you can between the pre-approval and the official approval.
If you switch or quit jobs, lenders may not feel like you have a stable income source to pay for a new mortgage. They may also feel like you are too risky if you are unable to keep a job for longer than a couple of years at a time. If you know you want to quit or change jobs, make sure to wait until after you have been approved.
Final Word Of Caution
When it comes to finding a mortgage, do not feel like there is only one mortgage out there that you can choose from. Take your time searching and do not feel rushed or pressured to choose something that you do not feel is right for you. At the end of the day, it is important that you feel confident in your decision and are comfortable moving forward in the mortgage process.