10 major mortgage mistakes to avoid
Here are 10 potential pitfalls to avoid.
1. Not checking your credit
Before you look for a mortgage, you should know where your credit score stands. After all, a bad credit score can bump up your mortgage interest rate several percentage points or leave you with no approval.
Be sure you check your credit early — several months before seeking a loan — in case any changes are needed to get it back up to snuff.
2. Applying for new credit alongside the mortgage
Avoid applying for any other type of credit before and during the mortgage-application process.Whenever you apply for new credit, you're considered a greater credit risk, at least initially. If you apply for a credit card or auto loan around the same time you apply for a mortgage, your credit score might get dinged enough to kill your eligibility or bump up your interest rate.
3. Failing to look at the total housing payment
A mortgage payment includes principal, interest, taxes and insurance, or PITI. Prospective homebuyers often mistakenly do not factor their property taxes and insurance premium into their overall mortgage budget.The debt-to-income ratio, used to determine if a borrower can make a certain mortgage payment, is the proposed cost of PITI divided by gross monthly income. A $1,200 homeowners-insurance policy would add $100 per month to an escrowed mortgage payment
4. Not seasoning your assets
The bank or lender will want to see that you can actually pay your mortgage each month. But without seasoned assets, or money that has been in your account for at least a few months, you could be out of luck.Some borrowers think they can transfer funds from a relative's account days before applying, but this won't fly once the underwriter uncovers the paper trail.
5. Job-hopping
Another key to mortgage approval is steady employment and income. An underwriter will want to know that your monthly income is consistent and is expected to continue into the foreseeable future. So don't jump from job to job too much before applying for a mortgage. If a new job is in the same field, it shouldn't be a deal-killer, but a career change will lead to problems.If you're thinking about jumping ship, wait until you've closed your mortgage.
6. Not getting pre-approved
Good preparation is the key to a good mortgage. Before shopping for a home, make sure you can actually qualify for financing by getting a pre-approval.A mortgage pre-approval is stronger than a pre-qualification because the bank pulls your credit and looks at your income, assets and employment. Your debt-to-income ratio will also come into play to ensure you know how much you can afford.
With this pre-approval, you will also get a written commitment from the lender that will show home sellers that you're serious about the purchase.
7. Not shopping around
Just because you're pre-approved with one bank doesn't mean you must obtain financing from it. Shop around with multiple banks and lenders and consider a mortgage broker. A broker can shop your rate with a number of banks concurrently and find you the lowest rate with the best terms.Don't be one of the many consumers who obtain a single mortgage rate before applying. Comparison shop as you would for anything else you buy. And don't forget to factor in closing costs.
8. Chasing exotic loan programs
Shop around for the lowest rate and closing costs, but not at the expense of your mortgage. Anything that sounds too good to be true most likely is. If the payment seems too low, you might be paying interest-only or even negatively amortizing, which means your mortgage balance is growing each month.It's best to keep it simple and go with a loan program that you can get your head around, such as a fixed-rate mortgage.
9. Forgetting to lock your rate
A mortgage rate means little if it's not locked in. If you're happy with your rate, lock it. Mortgage rates change daily — and sometimes, several times daily. All of those mortgage quotes you obtain are just quotes until you actually tell the bank, lender or broker to "lock it in."Once locked, your rate is guaranteed for a certain period, be it seven days, 15 days or a month. Never assume your rate is locked until you get it in writing.
10. Not reading your loan documents
It's your responsibility to read and accept the terms of your new mortgage. Sure, it might be a pain to go through all the loan documents before signing, but it's a bigger pain to sign up for something that you don't want or that you disagree with.Take the time at closing to ensure that you understand everything you're signing and thereby agreeing to. Don't be afraid to ask questions. Otherwise, you could wind up with a mortgage with predatory terms and no place to turn.
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