The process of buying a home can be exciting but also stressful. Because of this, first-time or seasoned home buyers can make avoidable mistakes when mortgaging a new home. Here are some common mortgage mistakes that homebuyers often make and ways you can avoid making them yourself.
1. Failure to Get Pre-Approved
Many mortgage providers typically don't require people to get pre-approved, but a pre-approval letter can increase your chances of getting a mortgage. The pre-approval letter provides critical information about your creditworthiness and ability to repay a loan. A pre-approval letter also helps you understand the value of homes that you can afford.
2. Not Keeping Tabs on Your Credit
Lenders can deny or provide unfavorable lending terms if you have significant debt or a history of late payments. To avoid any surprises:
- Keep a close eye on your credit history.
- Regularly check your credit report to know your credit score.
- Notify your creditor or reporting agency for rectification if you notice any disputes or errors.
If your credit score is low, adopt better financial practices to improve it. For instance, pay your bills on time and avoid maxing out the available credit. Also, try to make more than the minimum monthly debt repayments. You'll then have to be patient and wait for the credit score to improve.
3. Not Shopping Around
Various lenders have different closing costs, interest rates, lender fees, and loan products. If you don't shop around, you might choose a mortgage that doesn't have the best terms in the market. Some lenders are offering discounts to attract more borrowers. If you don't have time to shop around, hire a mortgage broker to review all mortgage rates and find the best deal.
4. Having a High-debt to Income Ratio
The debt-to-income ratio is your total monthly debts divided by your gross monthly income. Having ongoing loans doesn't disqualify you from getting pre-approved for a mortgage as long as you have sufficient income. The problem arises when your total monthly debt is a high percentage of your income. Mortgage providers will be reluctant to offer you a loan because your risk of default is higher.
5. Including Unpredictable Bonuses or Overtime
Some homebuyers often include bonuses and overtime payments as part of their salary. While this can show that you have a higher income, such a strategy also has disadvantages. Your lender will evaluate your overtime and bonus rates over the last several months. If the bonuses and overtime fluctuate, the lender will not accept your claims of higher income.
6. Forgetting the Rate Lock
Whenever you apply for a mortgage, you have the option of choosing a rate lock. This means that you agree with the lender to have a specific loan rate for a specified amount of days. For instance, you can agree to pay your loan at an interest rate of 4% for the next three months. When that period expires, the lender can agree to extend the agreement at a small cost or for free.
You are vulnerable to industry changes if you forget to choose the rate lock. The interest rates can rise anytime, and you will have to make higher monthly repayments.
7. Opening or Closing Lines of Credit
Most people think the lender won't look at their credit after getting pre-approved for a mortgage. As a result, these aspiring homeowners will open a new line of credit to cater to mortgage application expenses. However, whenever you open or close a line of credit, the lender will automatically have to investigate the impact of this action on your creditworthiness.
The process of buying and selling a home involves many things. It would be best to have a qualified real estate attorney guiding you through the process. The Law Office of Steven Kurlander provides assistance and legal advice to close real estate transactions on time.
Contact us for more information.
