Applying for a mortgage may seem like a tricky process, but it doesn’t have to be. With a little guidance, anyone can get started on the path to becoming a homeowner. With that in mind, we’ve laid out some of the most common mortgage application mistakes that would-be buyers make, as well as how to fix them. Read them over so that you can avoid falling into these all-too-familiar traps.
Not working on your credit first
Having good credit is one of the most important factors in applying for a mortgage. Not only is it vital to getting approved, at base, but it also determines what interest rates you’ll be offered on your loan. With that in mind, you want your credit to be in the best shape possible before you apply in order to put yourself ahead.
Luckily, there are many tools you can use check your credit. These days, a score of 730 and above is considered excellent while anything below 600 needs work. That said, FHA loan programs will accept scores as low as 540, as long as your other financial components are in good shape.
As for how to build up your score, it’s actually fairly simple. The most important thing is to make sure you’re making your payments on time, every month. Be sure to pay as far above the minimum payment as possible to focus on paying down debt. Additionally, going forward, use as little credit as you can in order to improve your utilization score.
Getting prequalified instead of pre-approved
You’ve probably heard those commercials on TV where mortgage companies boast about their ability to pre-qualify you in minutes. While these claims might be true, they don’t mean much anymore. There’s a difference between a pre-qualification and a pre-approval. In recent years, the latter has become the gold standard to use when making an offer.
The reason for this change is because a pre-qualification isn’t very reliable. To be pre-qualified, all you need to do is supply your own estimates of your income, debts, and assets. However, there is no confirmation that what you’re saying is true, so it gives the seller very little reassurance of your ability to actually purchase the home.
With a pre-approval, on the other hand, you’re required to submit financial documentation along with your request. The lender runs a credit check and looks at your pay stubs, debt records, and bank statements before making a final determination on whether or not to grant you a loan. In this case, there’s much more credibility.
Forgetting to shop around for a lender
Many people assume that if they go to more than one lender when trying to get pre-approved for a mortgage it will negatively impact their credit. While this used to be the case, it’s no longer true. These days, credit bureaus have agreed to treat all pre-approval inquires as one, as long as they occur within the same time period. (That time period varies between 15-30 days, so stick close to 15 days, just to be safe.)
This gives you more freedom to shop around. Different lenders may approve you for different amounts, give you different interest rates, or charge different fees. It’s in your best interest to do your homework. Research the best lenders in your area, get pre-approved by a handful of them, and compare the rates they give you.
That said, sometimes finding the best fit isn’t just about the rates they can offer. Before you make your final decision, be sure to interview each lender to get a feel for how well they can assist you. Think about how easy – or difficult – it was to get in contact with them. Ask them if you qualify for any special grants or programs to assist with your down payment or closing costs. Read reviews to get a sense of other people’s experiences of working with them.
Letting the pre-approval set your budget
Once they have their winning pre-approval in hand, many buyers make the mistake of having that number become their budget for house-hunting. However, doing so increases their risk of becoming “house poor”. In reality, the number on a pre-approval is the maximum amount that the bank is willing to give you in a loan. You don’t have to – and probably shouldn’t – spend that much.
Instead, the better thing to do is make a budget of your own. Use a mortgage calculator to play around with different sale prices until you come up with a payment amount that feels right to you. Then, plug that number into your monthly budget to see how it feels alongside your other expenses. When you have a number that works in both scenarios, make that your maximum – and stick to it.