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?