Top 10 Mortgage Mistakes to Avoid

I’ve put together a list of what I feel are the top 10 mortgage mistakes individuals should avoid if planning on financing a new home purchase or refinancing an existing mortgage.

Anything on this list should be avoided at all costs to ensure your credit score is as high as possible and that you don’t run into any qualification problems when it comes time to get that sparkling new mortgage. Otherwise you could end up with a higher-than-necessary mortgage rate, or simply get declined!

1. While this may be a no-brainer, it still reigns supreme. Avoid bankruptcy and foreclosure. Either could keep you out of the mortgage game for several years for obvious reasons.  Also avoid mortgage lates. Even if your credit score is up to snuff, late mortgage payments that show up on your credit report can disqualify you with many banks and lenders.  Makes sense doesn’t it?

2. Not locking your mortgage rate. If you fail to (or forget to) lock the interest rate on your mortgage, it could go up.  A lot.  Yes, you have the choice to lock or float, but make sure you understand both options and keep an eye on interest rates before and during the home loan process.

3. Listing your property on the MLS and then attempting to refinance that same property within six months (or longer). Lenders don’t love the idea of giving you a loan on something you don’t actually want, or tried to get rid of just months before.

[See more common refinance mistakes if you already own a home.]

4. Applying for a mortgage with charge offs and collections, especially medical collections, on your credit report (many consumers have these, often in error, and they can easily be removed via credit bureau disputes. They crush your FICO score!). Regularly review your credit report to ensure there are no surprises long before you begin the mortgage process.

Put simply, a low credit score will lead to a much higher mortgage rate, and even disqualification if it drives your monthly mortgage payment high enough. Also steer clear of credit counseling. (Even if it doesn’t lower your credit score, many banks won’t lend to borrowers who have used these services in the recent past.)

5. Not figuring out how much you can afford well before beginning your property search. You should get pre-qualified or pre-approved before you even start looking at homes. Once you know how much home you can afford based on your salary and assets, you can properly assess the situation. Otherwise you could just be wasting your time and setting yourself up for disappointment.

6. Opening new credit cards or making excessive charges on existing credit lines before and during the loan application process. This can hurt your credit score and increase your debt load, which could lead to disqualification.  See debt-to-income ratio for more on that. You can buy your new leather couch and big-screen TV once the loan is funded and closed.

7. Attempting to get a mortgage with less than two years consecutive employment in the same occupation or field (unless you’re a recent grad with proof of future income). You must prove to lenders that you will actually continue to make the money you’re currently making to obtain a mortgage.

8. Trying to get a mortgage without documented 12-month housing history or your own verifiable assets that cover at least two months of your proposed mortgage payment, including taxes and insurance. Yes, lenders want to know that you paid your rent on time previously and have enough in your bank account to cover future payments.

Oh, and the money needs to be in your account, not under your mattress.

9. Not establishing your credit history. You generally need at least three credit tradelines (that show up on your credit report) with a minimum two-year history on each. Yes, credit is the root of all evil, but also a necessary one in the mortgage world, that is, unless you plan to pay for your expensive house with cash…

10. Not shopping around. If you don’t take the time to comparison shop, as you would any other product you buy, like a big-screen TV or a car, you’re doing yourself a major disservice. Put in the hours to ensure to find the right bank to work with and snag the best deal.

Bonus tip: Don’t forget to compare different loan products, such as fixed-rate mortgages vs. ARMs, and conventional loans vs. FHA loans. Both have their pros and cons, and should be carefully considered before applying for a mortgage. There is no one-size-fits-all approach folks.

*Many mistakes on this list pertain especially to first-time homebuyers. Most banks and mortgage companies now offer no-doc loans that don’t require income, assets, or employment. But they’ll still ask for your credit report and score, along with your housing history to ensure you’re a sound borrower.

And first-time homebuyers usually always have to verify assets, employment, and credit history. Sure, you might find a lender willing to give you a mortgage without those requirements, but your mortgage rate will be less than desirable!

If you think you’ve got better mortgage no-nos, or feel I could add some to this list, please feel free to contact me and I will add them. The more tips we’ve got, the more money we save people.

Read more: Do I qualify for a mortgage?


30 Comments

  1. Rochelle September 15, 2013 at 11:56 pm -

    I wish I had known these before I applied for a mortgage. Problem is once you apply, it’s too late if you don’t adhere to the rules mentioned above. It’s a shame the banks don’t make these rules more clear to the general public.

  2. Mike Cannon January 14, 2014 at 6:10 am -

    #4 is not specifically correct. Medical collections are not usually considered in the underwriting process. In addition adding a dispute to a credit report will prevent any loan from closing, the dispute will have be removed. When the dispute is removed it will be counted as an active debt and credit scores will go down.

  3. Colin Robertson January 23, 2014 at 3:37 pm -

    Mike,

    I should specify that disputing these items long before you apply for a mortgage will help. Perhaps a few months. That way you can get them removed and restore any related credit score damage before beginning the mortgage process.

    Thanks for your input.

  4. Patrick October 25, 2014 at 12:06 pm -

    In the article it says medical debts crush your fico. I spoke to a lender about my situation and he said medical doesn’t really have any bearing on how they figure score. Told me not to worry about my medical judgment. Can anyone elaborate on that?

  5. Colin Robertson October 26, 2014 at 8:39 pm -

    The new FICO score (FICO® Score 9) greatly reduces the impact of medical collections because the brains at FICO realized they aren’t representative of increased credit risk, and therefore their impact on credit scores should be low. But that assumes the lender is using FICO 9 and not an earlier model. Either way, it makes sense to remove/dispute medical collections before applying for a mortgage to ensure your score is as high as possible.

  6. Erin November 23, 2014 at 9:05 pm -

    What type of rent documentation is required for mortgage loan approval? While looking through 12 months of electronic documentation, I saw that there were a few months that were paid a few days late, but less than 30. Will we not qualify for a mortgage as a result? I do not have cancelled check to provide, just electronic records that show the late fees. My credit score is good otherwise. Thanks.

  7. Colin Robertson November 24, 2014 at 11:50 am -

    Generally, a verification of rent form will ask for 30-day late payments, not payments made a few days late.

  8. kyle April 15, 2015 at 12:53 pm -

    I have 4000 in medical collections is there any way that I can get home loan. I make good money but having hard time

  9. Colin Robertson April 15, 2015 at 5:32 pm -

    Hey Kyle,

    It depends on your credit score, assets, income, etc., but the collection itself may not be an issue depending on loan type and your other borrower attributes. Might be a low credit score that’s the problem?

  10. Dan May 4, 2015 at 5:56 pm -

    Wonderful how the 2-year credit requirement discriminates against new US residents…

  11. Colin Robertson May 5, 2015 at 3:35 pm -

    Dan,

    There are lenders that specialize in foreign nationals and non-resident aliens.

  12. Ray May 14, 2015 at 11:46 am -

    Thanks for all the great advice.

    I have purchased many homes and hung out with my parents during their real estate business wheeling and dealing days and still browse the net for updated advice / reinforcement on what I already know. I learn something new or see a new perspective all the time.

    These are such good points, but for most first time buyers they mere abstractions. They just want that first house so very badly. It takes a couple of times through the buy-pay-sell cycle to appreciate.

    Thanks again!

  13. lex January 20, 2016 at 8:31 pm -

    can i get approved if i have no rental history?

  14. Colin Robertson January 21, 2016 at 10:01 am -

    Lex,

    If you don’t have rental history you’ll likely just need to explain what you’ve been doing (for housing) and prove that you can handle mortgage payments going forward.

  15. Kat January 31, 2016 at 8:40 am -

    Can you please give me advice? I have to give you some background so I apologize for the length. I have always relied on my husband but a couple yrs ago he suffered a severe blood clot and developed a pain disorder. He has not been able to work since. Our landlord, who is very compassionate, allowed me to work for rent often reducing or eliminating rent. Some months we would pay in full but it would be middle end of the month. At the time I was making between $150-$200 a week supporting a family of 4 and making excessive trips for doctors tests therapists etc. Often 1 hr travel 1 way. My credit took a bit of a hit too. Anyway, I’ve been working hard to get things stable. I now work a job where I bring home $360 a week plus a 2nd job that’s an on call gig but made 5k in 2015. My credit is improving, no lates in 12 months on credit cards. Middle Fico is a 620. We want to buy a house for $50k 5% down. If we can get it, it will save us $100 a month over renting…I just don’t know how this rent thing will affect us…Will the low price of the house make a difference? Lender calculations are telling me U can afford $120k but I’m only trying to get $50 any advice… I’m so sad because I though I was doing so well.

  16. Colin Robertson February 1, 2016 at 10:33 am -

    Kat,

    Instead of speculating you’ll probably want to get pre-approved to see exactly what you qualify for based on all the numbers. And if you’re concerned the rent thing could hurt you, it may make sense to explain it upfront with a broker or loan officer that knows how to navigate the situation. Good luck!

  17. Keep February 18, 2016 at 4:59 am -

    Question: if you have old unpaid debts (from 9yr ago) and it not on credit report (and not sure who to pay the debt to) when applying for a home loan will lenders see that past unpaid debt?

  18. Colin Robertson February 18, 2016 at 8:28 am -

    Keep,

    I suppose it depends who can see those unpaid debts and where they actually show up. Chances are a lender may not see them if they’ve already fallen off your credit report.

  19. Cortney March 30, 2016 at 1:59 pm -

    A few questions…1) what documents are required for rent history…a letter from the rental company? 2) i have been self employed for two years with a small income but recently started employment with a good salary…it’s only been a couple months…is there any chance I could still qualify with just a handful of paychecks…if I could show and employment contract would that help? Any tips? And 3) how do you even start…is there a certain bank/lender that specializes in FHA loans or first time home buyers? I’m a little lost on where to even begin. Thanks!

  20. Colin Robertson April 4, 2016 at 6:54 pm -

    Cortney,

    Either VOR (verification of rent form) or cancelled checks for some period, typically 12 months. It might be tough to use income that is brand new unless it’s something you can prove will definitely continue for the foreseeable future. A broker might be helpful for you because they can advise you and send your loan application to a specific lender whereas a single bank will just kind of tell you if you’re approved or not with them.

  21. Richard, April 14, 2016 at 6:09 am -

    I might be short for closing. Can I make a large deposit (30k) from my SCorp (100% owned) to my personal during underwriter processed? Thank you !

  22. Colin Robertson April 14, 2016 at 8:22 am -

    Richard,

    Best to ask your loan officer or broker to be sure.

  23. Colin Robertson April 18, 2016 at 10:26 am -

    Richard,

    Best to ask your lender directly to know 100%.

  24. Glen Taskinen April 25, 2016 at 10:20 am -

    Me and my wife Prequalified for a 150k mortgage for a house house and later decided to purchase a cheaper house (the one we have been renting for three years) we just acquired a purchase agreement contract and have an appointment with the bank in a few days. The thing that has me nervous is my wife (co-borrower) has a few medical bills in collection but her credit score is in the high 600’s..I myself (borrower) don’t have any delinquent debts and have good credit..I am nervous about being denied because of those.. but i keep reading mixed responses about medical debt. most say eliminate them for a higher credit score (no brainer) but if your credit isn’t that bad anyways are they grounds for a denial?

  25. Colin Robertson April 28, 2016 at 3:17 pm -

    Glen,

    As you said, removing them would likely make her credit score jump considerably, but if you can get approved regardless it might not matter. However, a lower credit score could result in a higher mortgage rate, so you could see about removing them (might be to late now) or possibly see if you can qualify without her if her credit hurts your overall application.

  26. monica April 29, 2016 at 1:48 pm -

    Hi Colin.

    I bought a house 10 years ago. rigth now my mortgage is 20 years. I know the first 10 years you pay interes only. I want to refi. my house but I can’t proof my income because, I’m self employee. my self is in the mortgage and my husband is in the title. inconme for 2015, he report : 40,000 and I report 72,000 inconme from the house. We report the 40,000 from him, because we want to refi. next years and we plan to take me from the mortgage and put my husband in the mortgage and title. Can we do that and how is work.

    Thank you for your help.

    monica.

  27. Ray May 24, 2016 at 5:43 am -

    Great post.

    I am about to close a house, and the bank is requiring proof of rent payment. I have money overseas outside the united states (That I have proof of), and brought in some cash with a relative from my overseas bank account. I used that money to pay few months of rent in cash to my current landlord.
    I have cash receipts from the LL as well as a copy of the lease.

    Is this an automatic denial on my loan? I am very nervous as my closing date is supposed to be in 2 weeks.

    Kindly advise

  28. Colin Robertson May 24, 2016 at 8:08 am -

    Ray,

    The lender may want a letter of explanation to determine why you used a relative’s money to pay your rent and ensure you have the necessary funds to make your own rental payments and subsequent mortgage payments. If it can be reasonably explained it may not be grounds for denial.

  29. Britney Robinson June 17, 2016 at 12:50 pm -

    Is there anyway around the two year employment thing? High down payment? Co-signer? Etc?

  30. Colin Robertson June 24, 2016 at 4:09 pm -

    Britney,

    It’s possible depending on the loan and situation…the two-year thing is a general rule to avoid further scrutinization. Certainly no reason to give up until explicitly denied on this basis.

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