Buying a home is a complicated process, and many people find the number of factors involved in the process to be overwhelming. Because your mortgage terms will be based on your financial situation at the time you apply, what you do while applying for a mortgage can have a real effect on the mortgage and rate you will actually get. Taking a few precautions while you prepare for your mortgage application—and avoiding several mistakes—may help you get better terms on your loan. The PorchLight Real Estate Group of Denver, Colorado, offers these guidelines.
Neglecting to Check Your Own Credit
When you apply for a mortgage, lenders focus on your credit report as one of the major aspects of your financial history. Homebuyers who don’t check their own credit report are missing the chance to improve their score before the scrutiny starts. A person’s credit is based on an accumulation of factors over time, so major changes to your credit score take time. But if there are errors on your report, getting them fixed can make a difference. Pull a report from each of the three credit reporting bureaus and review them carefully for accuracy. If you find any errors, contact the bureau that issued the report and ask them to make the appropriate changes.
Applying for New Credit Simultaneously
Applying for a new credit card shows up on your report and can change your credit score. Usually, credit scores take a small dip from credit checks when a new credit account is applied for. Even if the change in the score is small, it’s better not to have any in your report when mortgage lenders are reviewing your credit. Put off applying for new credit cards or loans while you apply for a mortgage. Also, avoid closing old or unused accounts while you look for a mortgage because that also affects your credit score by lowering your “available credit.” Put old credit cards away and don’t use them but avoid canceling the accounts until after your mortgage is approved.
Neglecting to Shop Around for a Lender
Finding a mortgage lender early in the process of buying a home is helpful because you’ll already have a lender and financing lined up when you find your dream home. But choosing a lender too quickly, without doing any shopping around, is a mistake. Even if the basic terms of mortgages from two lenders is the same, the fees and final costs from one lender to another can be significantly different. Asking questions about such fees before you choose a lender can ultimately save you a lot of money when you buy your home.
It may seem crazy to go through the process of applying and getting approval for a loan before you even have a house in mind to buy, but, in fact, it can make the rest of the process go much more smoothly. You’re going to need to fill out the paperwork and have your income verified anyway in order to get a mortgage, and doing it for pre-approval will arm you with valuable information, such as what size of loan the lender thinks you can afford. With some hard numbers to work with, you can narrow your house search and zero in on real and reasonable prospects earlier. Plus, having pre-approval demonstrates to potential sellers you’re serious and ready to move forward.
Taking On a Loan That’s Too Big
This is a mistake that pre-approval can help you avoid, but you still have to make sure the numbers make sense for you. You can’t just look at the basic loan amount and interest rate because you have to take into account closing fees, taxes, mortgage insurance and other expenses, including maintenance on the home itself. Make sure you review the entire package carefully and understand the complete expenses of the home you want to buy, so you don’t end up “house poor.”
Signing Loan Documents You Don’t Understand
Many people find it difficult to read long contracts, but if you assume all the details are correct, and you don’t need to understand the fine print, you’re making a big mistake. The specific terms of your mortgage have a big influence on how much you will pay over the total length of the loan. You also need to be aware of any interest rate changes, so you can be prepared for larger mortgage payments. Take your time when reading mortgage documents and ask plenty of questions.
Trying to Time the Market
It might be tempting to look for the absolute lowest possible mortgage rate and wait if you think rates are going down. But it can be a big mistake to try to time the market, either by dragging out the process or jumping in before you’re ready. It’s impossible to know where the bottom for interest rates will be, or how long they will stay there before rising again. Instead, when you’re ready to buy, and you can afford the mortgage rates available, take the opportunity to invest in your new home.Don’t Make These Mistakes When Applying for a Mortgage by Karen Wachtel
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