When it comes to applying for a mortgage or refinancing a mortgage there are some common mistakes that can not only result in outright denial of an application but also can lead to increased costs for a loan that add up overtime.  Spending extra money where one does not have too, especially if they do a few simple things means keeping more of the money in one’s own pocket.  Learn about the common mistakes in this article here and how best to avoid them.

Not Getting Pre-Approved Prior to Seeing Homes

Some home buyers think the mortgage pre-approval process is easy and when the time comes, they can apply for the mortgage and get a pre-approval letter in very little time.  If the home buyer is missing proper paperwork, or their credit score is not up to par, their employment information verification is running into delays, or any other reasons the pre-approval may not be given until everything is resolved paperwork and information wise.

These days lenders by law are required to be very particular in what documentation they need to show that a home buyer is eligible for a pre-approval letter.  Without that documentation the mortgage application will not be able to move forward.  So a home buyer seeing homes prior to sitting down with a mortgage lender to get pre-approved or even just start the process is setting themselves up for disappointment when they do find a nice house, but their offer won’t be considered because they don’t have a mortgage pre-approval.

Not Paying Attention to Credit Score/Credit Report Until Too Late

The credit report and credit score of a borrower will play a big role in the amount someone is approved for and how much they will pay in interest.  Too low a credit score can result in outright denial of a mortgage application.  Low credit scores result from late and/or missed payments, bankruptcy filings, foreclosures, short sales and more.  If one can’t get approved for a mortgage based on their credit report it may be better to wait and take some measures to improve their score.  Depending on the issues the more time one has to fix their credit score the better.  Credit scores cannot be repaired overnight and need to be worked on at least months if not years in advance to get the best results.

If one’s credit report has errors in it then those errors need to be addressed as soon as possible as well.  Credit reporting agencies have systems in place to deal with reporting errors and creditors who incorrectly report the errors have a time frame within which to respond as to whether there is an actual error or the report is correct.  This is something that takes time to resolve and should be done and resolved well in advance of applying for a mortgage.  Any lender who sees comments in a credit report that there are errors currently being reviewed will have to investigate each of the comments and come to a resolution about them before they can clear a home buyer to close on a mortgage.  Home buyers would be wise to talk to lenders early enough to get tips and advice on how to repair their credit well before it is time to apply for a mortgage.

Focusing Only on Having Enough for Down Payment – Versus Other Costs

There is more to buying a home than just coming up with the down payment.  There are closing costs associated with buying a home that if the home buyer does not have, they may not be able to close on the home purchase.  Some mortgage loans allow the home buyer to finance some costs into the mortgage.  Some prepaid closing costs like homeowners’ insurance, property taxes, HOA fees, mortgage interest cannot be rolled into the mortgage and instead must be paid up front.  

The buyer can also ask the seller to pay some or all of the closing costs the buyer is expected to pay, but this is not a guarantee that the seller will do so.  Some mortgage loans also limit how much the seller can contribute towards closing costs.  These are sometimes called seller concessions.  FHA, VA, USDA have maximum limits as a percent of the purchase price that a seller can offer as a concession. Home buyers can use gift money to put towards the down payment and closing costs, but there are certain rules to be aware of for receiving gift money funds.

Borrowing More Than Budget Can Handle

Just because one can get pre-approved for a certain amount does not necessarily mean they should be buying a home for that amount.  When a mortgage lender provides a pre-approval letter along with amount of the pre-approval, they are strictly considering the financial pictures presenting in pay stubs, tax returns, credit reports and other documentation provided by the home buyer. 

On the other hand, the home buyer should know their own personal financial situation better since they are living it every day.  From the actual job stability a home buyer may or may not have to what their usual monthly expenses are, the lender does not have these details.  The home buyer therefore needs to keep their own personal financial situation in mind as part of the decision-making process on how much home they can really afford.  Stretching for a home payment is more likely to lead to a house poor situation where maintenance and upkeep have to be put aside due to the cost of simply paying on the home to keep living in it.

Comparing Interest Rates Without Considering Loan Costs

The interest rates may look the same as offered by different lenders but the costs of getting to that interest rate may vary.  Some lenders charge points and other fees to get to a particular interest rate.  It is better to compare the APY or Annual Percentage Yield that takes into account additional expenses associated with a particular lender.  Homebuyers should be shopping around when it comes to getting a mortgage as the savings can add up over time.

Not Providing the Right Documentation for the Mortgage Approval Process

In order to get a mortgage loan quite a bit of documentation from the home buyer is required as part of the approval process.  From the initial application for pre-approval to right before closing the lender can and will ask for documentation.  There could be requests for new documentation (such as information on new debt that was taken out) or requests for updated documents (such as a more recent pay stub).  Failure to provide any of the documentation requested will bring to a halt the mortgage approval process.

Picking the Wrong Loan Type

There a number of different mortgage options and some of them are based on eligibility (such as USDA mortgage and VA mortgage).  If someone is eligible for a VA mortgage but instead opts for a conventional mortgage they could be walking away from some important benefits and savings.  With USDA and VA mortgages the credit score requirements are a little more lenient than compared to conventional mortgages and a borrower could get lower interest rate with those mortgages.

Similarly going with an adjustable-rate mortgage (ARM) versus fixed rate mortgage may or may not make sense depending on how long one wants to stay in a particular home and the interest rate risks.   With an ARM the mortgage rate can be lower since the risk of interest rates increases is shifted to the homeowner versus the lender.  But the rate can adjust both up and down depending on where market rates are.  If a home buyer has a short time frame with which they want to live in the home, they can get an ARM loan that is fixed for that amount of time.  With a fixed rate mortgage though whatever the initial interest rate is on the mortgage is what the homeowner will pay for the life of the loan so long as they don’t sell the home and/or refinance the mortgage.

Final Thoughts

The process of getting a mortgage takes quite a few steps and everything needs to be done to best of one’s ability to ensure a good mortgage is obtained.  Mortgages are a long-term debt commitment and the time spent up front to save money over the life of the loan does add up.