The mortgage process is a potentially complicated one. During the underwriting process, a number of obstacles can get in the way of your approval. And considering the huge commitment, it’s crucial that you make sure the mortgage you get into is one you can live comfortably with.
There are plenty of potential mistakes throughout the mortgage process that can prove costly, which is why you want to avoid them.
1. Not Checking Your Credit First
If your credit score is seriously lacking, you’d be better off taking a few months to improve it before applying for a mortgage. If it’s anywhere under 560, odds of getting approved are slim. Even if approval is granted, you’ll likely be stuck with a super high interest rate that will only make the mortgage more expensive over the long haul.
2. Making Major Purchases on Credit
If you’re applying for a mortgage, the last thing you want to do is add more debt to the books. Your debt-to-income ratio will play a key role in your lender’s decision about whether or not to approve your application – the higher you make that number through expensive purchases on credit, the lower the odds of a rejected application.
3. Not Looking at All the Costs Associated With Homeownership
Obviously, you’ll need to be able to afford your mortgage payments. But on top of that, you’ll need to make sure you adequately budget for a variety of other costs that come with paying down your principal, including property taxes, property insurance, and mortgage insurance.
4. Making a Major Career Change
Your employment and income are important factors that your lender will look at. They’ll want to be certain that you are able to comfortably afford your monthly mortgage payments into the foreseeable future. But if you suddenly decide to change jobs or quit your current job in favor of self-employment, it could throw a wrench into the mortgage underwriting process. If you’re thinking of making a change in your field of employment, wait until you’ve sealed the mortgage deal first.
5. Not Paying Attention to APR
Many buyers will be attracted to low posted interest rates, but may fail to recognize that many of these deals often come with high fees attached. It’s important to look at the yearly percentage rates from Truth-in-Lending disclosure forms to figure out which mortgage package actually costs less. A mortgage with a slightly higher rate and lower fees may actually be the more affordable option, so it’s wise to compare mortgages side-by-side to identify which one will cost you the least amount.
6. Putting Forth a Minimal Down Payment
There are mortgage options out there that allow borrowers to put a small down payment towards their purchase. But the less money you put towards the purchase price, the larger your loan amount will be, obviously. Along with a larger loan amount comes a lot more money paid towards interest, which can translate into tens of thousands of dollars by the end of life of the mortgage. And any down payments less than 20% means you’ll be stuck paying Private Mortgage Insurance (PMI), which will cost you an extra 0.2% to 1.5% of your loan balance every year.
7. Not Scrutinizing Your Loan Documents
You’ve got the right and the responsibility to look over your mortgage documents with a fine-tooth comb before you sign on the dotted line. It might be a nuisance to have to look through the documents in detail, but it can save you a lot of headaches in the long run. At the very least, thanks to the Truth in Lending Act (TILA), you’ve even got three days to rescind the contract if there is something you don’t like without losing a dime.
8. Not Taking Advantage of Specialized Loans
Depending on your specific situation, you may be eligible to apply for specialized loan programs. For instance, first-time homebuyers with a less-than-stellar credit score may be able to obtain an FHA home loan that’s backed by the Federal Housing Administration. With the FHA guaranteeing a portion of the loan by the FHA, borrowers may be able to more easily qualify for mortgages. And if you’re a service member of the military, you might also be eligible for a VA loan that’s backed by the Department of Veterans Affairs, which often requires no down payment or mortgage insurance.
9. Not Locking in at a Super Low Rate
While there are adjustable-rate mortgages available, you might be better off with a fixed-rate mortgage if the current rate is very low. And with today’s mortgage rates as low as they are, it might be a good idea to lock a good rate before they start to rise. All those rates that you might be quoted really don’t mean anything until you’ve got it in writing, so if you like the rate, lock it in.