The home buying process is often an overwhelming and confusing endeavor, especially for first time homebuyers. The best advice you can adhere to is be prepared and do your homework. There are many steps to take in order to get the process under way. Here we are taking a look at the biggest mistakes to avoid when applying for a mortgage.
- Neglecting to review your credit report. Plan to check your report at least six months prior to applying for a mortgage. This will give you time to make any necessary changes to improve your scores if needed, and also fix any mistakes that might be on your report. Having a low credit score will drastically increase your interest rate, or even prevent you from qualifying for a mortgage at all. You are entitled to a free yearly report from all three major credit bureaus—Equifax, Experian and TransUnion.
- Not shopping around. Do not make the mistake of going with your local bank because you feel loyal to them or because you assume you will get the best rate from them. Not all lenders will offer the same rates or programs. When setting out to apply for a mortgage, get at least three quotes and find out what kind of programs they offer to determine which lender works best for you.
- Picking out your dream home prior to getting pre-approved. Speak to a mortgage lender first, find out what you qualify for, and then find a home within your means to pursue. You might find that you do not qualify for as much as you planned, which will lead to disappointment if you already had your heart set on a home outside your qualifying range.
- Not saving enough for a down payment. Depending on what type of loan you choose to go with, you will need a minimum of 3.5% to 20% of the cost of the home to put down at closing.
If you do not have enough for the down payment, chances are you will end up paying PMI (private mortgage insurance) which will increase you mortgage payment monthly.
- Not planning for additional fees. On top of the above-mentioned down payment, you will also need to plan for additional fees that are required along the way or at the time of closing. The appraisal, title, lender fees and up-front real estate taxes are just a few of the “extras” you will need to plan for.
- Ignoring the actual cost of owning a home. On top of your monthly mortgage payment, you will need to plan for utilities, real-estate taxes, and home maintenance. By not considering these additional fees, you run the risk of becoming home poor and putting you and your family in an uncomfortable financial situation.
- Making large purchases or opening new credit card accounts before closing. Though you already went through the approval process, underwriting will take a close look at your finances and assets just prior to closing to make sure nothing has changed since the time of approval. Even the slightest change to your report or financial status will cause the lender to question you and possibly even cancel/postpone your closing.
- Neglecting to lock in your interest rate. Rates are constantly fluctuating, so it is important to keep a close eye on the rates and lock in to prevent it from going up. This could significantly increase your monthly payment if you fail (or forget) to do so.