Buying a home is most likely one of the biggest purchases you will ever make, not to mention one of the most stressful and emotional. To add to the pressure, the lingering tight credit market has banks beefing up their borrowing standards—and one misstep can cause a hard-earned deal to crumble.
With interest rates staying near 4%, more individuals are looking to get a mortgage or refinance, but experts warn that even though the low rate is enticing, you have to be prepared for a long, paperworked-filled process.
Knowing your credit score and studying your credit history should be done before starting the mortgage journey, says Polyana da Costa, a mortgage expert with Bankrate.com. If you find errors, fix them before applying. The next step should be determining how much you can afford to borrow, and then start the house hunt.
The road to sealing a mortgage transaction is a long road, and to keep you on track and avoid any potential potholes, here are nine mortgage mistakes to avoid.
Making major purchases before closing. Mortgage preapproval is only the beginning of the home-buying deal. The bank will run your credit score before sending a commitment letter and before closing, so avoid making big purchases that change your debt-to-income ratio, advises Jean Allard, senior real estate specialist and vice president of Keystone Real Estate Group.
Not knowing how much the house is worth. “Just because you're willing to pay $300,000 for a home doesn’t mean it will appraise for that much,” according to da Costa. Many deals fall apart because applicants offer a higher purchase price than the home's appraised value. In this situation, applicants must pay the difference and wind up with negative equity, or back out of the deal.
Not vetting lenders thoroughly. “Amazingly, most people spend more time picking a movie on any weekend than they spend selecting their mortgage lender,” says Todd Huettner, a mortgage broker and president of Huettner Capital. “Far too much of my business come from referrals who spent weeks or months trying and failing to get a loan closed with another lender. In a few cases, it is obvious there was no way they could qualify yet they spent $2,000 on appraisals and inspections with other lenders. Find an expert.”
Closing under pressure. “You never have to close,” says Huettner. “While it may cost money to wait, closing with a mistake can cost far more. Get answers, make things right and only close your loan once you are satisfied.”
Withholding Information. Withholding detrimental credit and/or personal information from your lender could jeopardize the transaction and your ability to secure a mortgage. Always be open and honest about your financial situation, warns Allard.
Taking too long to supply documentation. “Some borrowers take days to get back to their lenders when asked for additional documentation,” says da Costa. “That's a waste of time and can end up costing you thousands of dollars if the rate you locked in expires and rates rise. Whether you're refinancing or getting a new mortgage, you must be on top of your game until the mortgage closes.”
Failing to review loan documents. Read everything thoroughly and ask your lender as many questions as necessary for you to understand the entire document prior to signing, says Allard. You will not have much time during the closing to absorb all the information in front of you.
Waiting too long to lock in a rate. “Borrowers should lock the rate in when it gives them a payment they can live with instead of trying to time the bottom,” says da Costa. Also know a lender's relock policy. “Most lenders require that your rate improve by 0.375% or more and charge a large fee, but some only require a 0.125% improvement and smaller fee,” Huettner says. “With current market volatility, you can often lower your rate by choosing the right lender and knowing the rules in advance.”
Failing to explore all financing options. If you don't consult with a qualified lender about all your financing options, you could be leaving money on the table. For example, you may be eligible for federally-backed programs with the Federal Housing Administration, U.S. Department of Agriculture and Veteran's Affairs with low interest rates and little to no down payment requirements, says Allard.