Common Mortgage Mistakes Borrowers Make
- Not getting pre-approved for a mortgage
- Not shopping around for a lower interest rate
- Failing to check your credit scores in advance
- Opening new credit cards before applying
- Making late mortgage payments or worse, foreclosure/BK
- Not saving enough for a down payment
- Not seasoning your assets beforehand in a bank account
- Applying with limited employment history
- Changing jobs prior to loan application
- Forgetting to lock your mortgage rate
- Attempting to refinance after listing your home
I’ve put together a list of what I feel are the top 10 “mortgage mistakes” individuals should avoid if they’re planning to finance a new home purchase or refinancing a 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. Filing Bankruptcy or Being Foreclosed Upon
While this may be a no-brainer, it still reigns supreme. Avoid bankruptcy and foreclosure, plain and simple. Either could keep you out of the mortgage game for several years (up to seven years in fact!) for obvious reasons.
Also avoid mortgage lates. Even if your credit score is sufficient to meet minimum underwriting guidelines, 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 when you apply for a mortgage, 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 Before a Refinance
Listing your property on the MLS and then attempting to refinance your mortgage on that same property within six months (or longer) is usually a big no-no. Lenders don’t love the idea of giving you a loan on something you don’t actually want, or tried to get rid of unsuccessfully just months before.
[See more common refinance mistakes if you already own a home.]
4. Having Major Derogatory Accounts on Your Credit Report
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 (several months) 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 Knowing What You Can Afford
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 Big Spending
Opening new credit cards or making excessive charges on existing credit lines before and during the loan application process (it happened to me!).
This can hurt your credit score tremendously 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. Applying for a Mortgage with Limited Employment History
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 like a doctor) isn’t the best idea.
You must prove to mortgage lenders that you will actually continue to make the money you’re currently making to obtain a home loan. To this same end, avoid switching jobs prior to application unless it’s in the same field.
8. Not Having Seasoned Assets and Rental History
Don’t attempt 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 (unless you live with your parents) and have enough in your bank account to cover future payments.
Oh, and the money needs to be in your bank account, not under your mattress. Don’t forget the down payment and closing cost funds either.
9. Applying Without Solid Credit History
You may not get approved for a mortgage if you fail to establish 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 to qualify for a mortgage.
Yes, credit is apparently the root of all evil, but also a necessary one in the mortgage world, that is, unless you plan to pay for your house with cash…
10. Failing to Shop 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. It’s even more of a fail when it comes to getting home loan financing.
In short, put in the hours necessary to ensure to find the right bank to work with and snag the best deal, including the lowest interest rate and the lowest closing costs.
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?