According to the National Association of Realtors®, about 86% of buyers financed their home purchase in 2020. Even though it’s common to take out a mortgage to purchase a new home, many buyers still aren’t very knowledgeable about the process. One survey revealed that most buyers don’t know how much they are required to put down to get a mortgage or where to go for reliable information about financing.
Because buyers lack this basic knowledge about mortgages, they often make mistakes when financing a home. Some of these mistakes could complicate the buying process, whereas others could cost buyers time and money. For these reasons, it’s important to learn how to avoid mortgage mistakes. Follow these tips:
Be Mindful of Your Credit
Your lender checks your credit at two different points in the financing process. The first check occurs when you apply for pre-approval and the second occurs a few days prior to closing on your new home. If your credit rating changes drastically between these two checks, this could affect your financing.
For example, say you open a new credit card and charge thousands of dollars to it a few weeks before closing. Opening a new line of credit will add a hard inquiry to your credit report, which will lower your credit score. Charging thousands of dollars to a credit card will affect your debt-to-income ratio and credit utilization, which will lower your credit score even further.
When your lender performs their final credit check, they may see that your credit rating is much lower than it was when they performed the initial check. You may no longer qualify for the loan or the agreed-upon interest rate as a result of this drastic change.
To avoid this problem, it’s important to be mindful of your credit when financing a new home. Do not open any new lines of credit, use your credit cards to make large purchases, or miss any payments.
Keep Everyone in the Loop
A lot can change in the weeks or months between the time your offer is accepted and the day you close on the home. During this time, make sure you keep everyone in the loop regarding changes that could affect the deal. This includes your agent, the seller, your lender, and any other party involved in the home buying process.
For example, say the seller agrees to give you a credit to address certain issues revealed in the inspection report. However, neither you nor the seller tell your lender or agent about this agreement. Because the lender and agent aren’t aware of this agreement, the credit is not included in the final closing documents, which means it is not officially part of the deal.
The best way to avoid problems like these is to keep the lines of communication open with all parties involved in the transaction.
It’s important to shop around for the best offer whenever you are making an expensive purchase. This is especially true when buying a home, which is probably the biggest financial transaction of your life. However, about half of borrowers make the mistake of accepting their first loan offer.
To avoid this mistake, submit applications to multiple lenders in the early stages of your home buying journey. You may worry that submitting multiple applications will negatively impact your credit, but that’s not the case. All mortgage applications submitted within a 45-day period will only count as one credit inquiry on your credit report.
Applying for mortgages with multiple lenders is time-consuming, but it can pay off. You may be able to find a lower interest rate if you shop around and compare offers from different lenders. In fact, NerdWallet found that shopping around for a better mortgage rate can save the average home buyer about $430 in interest on their first year of mortgage payments alone.
Don’t Move Money Around
To finalize your mortgage before closing, your lender will ask you to submit a lot of financial documentation, including your bank statements. Your lender needs to see these documents to confirm you have a reliable source of income that can be used to make mortgage payments. Your lender will also review your bank statements to verify that your assets are “sourced” and “seasoned.”
Your assets are “sourced” if the lender knows where the money is coming from and “seasoned” if the money has been in your account for a decent amount of time. If money is not sourced and seasoned, this could affect your financing. This is why it is so important to avoid making large withdrawals from or deposits to your bank account before closing.
You don’t need to worry about large deposits from verifiable sources such as a commission check from your employer or a tax refund from the IRS. However, if you suddenly deposit a large sum of money with no explanation, this could raise a red flag. Your lender may assume that you took out another loan to acquire this money, which would affect your debt-to-income ratio and eligibility for a mortgage.
To avoid this problem, do not move large sums of money around in your accounts before closing.
Put Career Changes On Hold
Your pre-approval is based on many factors, including your current income and employment history. If you change jobs, this means the income and employment information you provided for your pre-approval is no longer accurate. Your lender may ask you to update your information to determine if you are still eligible for a loan.
Lenders look for income stability when determining if a borrower is approved for a mortgage. Switching jobs could make your lender question whether your income is stable, which may affect your chances of finalizing your mortgage.
It can be tempting to immediately accept a new job offer, but if you are in the middle of closing on a home, it’s best to wait until after closing to switch jobs.
Review the Closing Disclosure
Your lender is legally required to provide you with a closing disclosure document several days before your scheduled closing date. This document outlines important information about the transaction, including the purchase price, down payment, buyer and/or seller credits, mortgage interest rate, estimated taxes, and loan fees.
Take the time to carefully review the information included in this document. You should also compare your closing disclosure to your initial loan estimate to look for discrepancies. Small discrepancies are normal, but if there are significant differences, contact your lender to find out why.
Reviewing this document can help you catch and correct errors that could cost you money.
Put Money Aside for Closing Costs
Every buyer is required to pay closing costs, which are fees associated with financing a home purchase. Closing costs vary, but in general, they are between 3 to 5% of the loan amount. For example, if you are borrowing $300,000 to purchase a home, your closing costs may range from $9,000 to $15,000.
Many buyers don’t realize that closing costs are so high, so they aren’t able to come up with enough cash to cover these fees before closing. The entire deal could fall through if you can’t pay closing costs, so make sure you plan ahead by putting money aside for these expenses.
Understand the Difference Between Pre-Qualification vs. Pre-Approval
The terms “pre-qualification” and “pre-approval” are often used interchangeably, but they’re not the same. Your lender will determine if you pre-qualify for a mortgage, and if so, how much you can borrow, based on information you provide about your income, debts, and employment. However, you will need to fill out a detailed application and provide documentation to the lender to get pre-approved for a mortgage.
In other words, a pre-qualification is based on information you provide, whereas a pre-approval is based on information the lender has actually verified.
The terms of your pre-qualification are not set in stone. For example, say you accidentally submit incorrect information when applying for pre-qualification. Then, you make an offer on a home based on your pre-qualification. The terms of your approval may change once your lender discovers that the information you submitted was incorrect. As a result of these changes, you may no longer be able to afford the home.
To avoid mistakes like these, make sure you are aware of the difference between a pre-qualification and pre-approval. It’s best to get pre-approved rather than pre-qualified before searching for or making an offer on a home.
Work With A Realtor®
Working with a Realtor® can ensure that the process of buying a home goes as smoothly as possible.
If you’re in the early stages of your home buying journey, your Realtor® will be able to recommend reliable lenders that offer loans that fit your unique needs.
After your offer on a home is accepted, your Realtor® can help you complete all of the necessary tasks to finalize your loan, including scheduling an inspection and appraisal.
In the days leading up to closing, your Realtor® can walk you through your financing paperwork, including the closing disclosure document.
Let your Realtor® guide you through the process of financing a home so you can avoid making costly mortgage mistakes.