The home buying process is often an overwhelming and confusing endeavor, especially for first time homebuyers. The best advice? Prepare 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 allow time to make necessary changes to improve your scores and fix mistakes on your report. Having a low credit score will increase your interest rate, or even prevent you from qualifying for a mortgage. You are entitled to a free yearly report from all three major credit bureaus—Equifax, Experian and TransUnion.
- Not shopping around. Don’t make the mistake of going with your local bank because you feel loyal to them. Not all lenders will offer the same rates or programs. You’ll want to get at least three quotes and find out what programs are offered by different lenders. By doing this, you can 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 would 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, plan for additional fees 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.
- Making large purchases or opening new credit card accounts before closing. Though you’ve already been approved, underwriting will take a close look at your finances and assets just prior to closing. 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.