8 Financial Mistakes When Qualifying For A Home
1. Applying With One Lender
You don’t want to settle for even a short period of time with the wrong mortgage.
Investigate all of your options, and then you need to lay your choices side-by-side and do the math—making sure you have emergency savings for worst-case scenarios (three months mortgage and expense savings should be minimum).
Loan shop with several different lenders and use a mortgage calculator to fine-tune your estimates. You can submit your loan application to as many as 3 lenders of the same type (ex. mortgage lenders instead of credit card) within 45 days without hurting your credit score.
(Qualifying for a mortgage at the time of purchase sometimes means you have to settle for higher interest rates because your financial position doesn’t allow you to qualify for lower rates. (I know, it doesn’t make sense because a person with lower income shouldn’t have to pay more per month))
Choosing A Lender:
Small Versus Large Lenders
Choosing between a small local lender or a larger national lender is mostly a matter of preference, but knowing which you’d prefer can help you find the right mortgage for your situation.
If you enjoy the face-to-face contact with personal service, it may make sense to choose a small mortgage lender in your local area. These companies may be able to own your loan and not have to sell it to the secondary mortgage market. They may also be able to choose an appraiser that they know is more suited to your mortgage type.
If you don’t have much time to waste and seek a well-organized lender (not all big lenders deliver mortgages quicker), using a national lender may be the choice for you. Also, the large lenders may have more payment options such as online payments or automatic banking deductions.
Mortgage Company Reputation
Generally, a good lender will have a solid reputation with accreditation and reviews to back it up. To figure out where your lender stands, start by doing this research yourself:
- Check with the Better Business Bureau for ratings, reviews and complaints against the mortgage company.
- Look for a posted mission statement or customer service rewards on the lender’s website.
- Verify the lender’s standing with the local Chamber of Commerce.
- Check review sites for both negative and positive reviews of the mortgage company.
Mortgage Company Customer Service
Finding a lender with great customer service can make things easier, especially if you have questions about the application or terms—or find yourself needing help with your mortgage down the line.
Test the mortgage lender’s customer service skills by calling with a few simple questions about the lending process. After you talk with a representative, ask yourself these questions:
- Did the lender seem knowledgeable?
- Was your phone wait-time too long?
- Did the lender offer suggestions?
- Did you feel rushed?
Remember, first impression can be very telling in the business world, and buying a home is a big financial commitment—so you should expect to be treated well by your mortgage company.
Good Faith Estimate
Once you’ve narrowed down your choice to three lenders, ask for a good faith estimate: a detailed list of costs that will appear on your HUD statement (closing statement), required by law. The costs will include the following:
- Settlement or closing costs (can be paid at closing or POC – paid outside of closing)
- Title insurance (a one-time payment to protect you from any past debtors staking claim on your property)
- Taxes (yearly property taxes)
- Attorney fees (in NC, the buyer pays attorney fees)
- Interest rates (the interest rate you “locked-in” when applying for the loan)
- Partial month interest (prorated interest for the month when a whole payment can not be collected)
- Credit check costs (may be none or may have to be paid up front)
- Hazard and property insurance rates (homeowner’s insurance)
While this is only an estimate and may vary slightly from your actual costs at closing, you can use your good faith estimate as a tool to help you chose the most reasonable lender.
2. Confusing Pre-Approval For Pre-Qualification
When you’re pre-qualified, the lender is simply giving you an estimate about how much you can borrow based on information you’ve provided. (Sometimes this is done solely by checking your credit score – not much to determine!)
When you’re pre-approved, the lender has verified everything you’ve provided and is offering to lend you a determined amount at current interest rates under certain conditions (like down-payment involved).
It’s much better to be pre-approved when shopping for a home, but it’s still not a guarantee: the lender’s final clearance and a loan commitment are subject to an appraisal satisfactory to the lender and the mortgage in question, a clear title, a last-minute credit check and other verifications.
3. Having Too Much Debt to Credit Ratio
Even if you pay your bills on time, lenders tend to focus just as much on how much credit you have available to you — that is, your debt-to-income ratio, as they do with paying your loans on time. Did you know that you can raise your credit score simply by calling your creditors and raising your credit limits?
Having tons of debt is a sure way to be turned down for a mortgage. Postpone any big-ticket purchases until after you buy your house! – That new car can wait!
4. Forgetting Your Credit Score
Before you apply for a loan, you should know your credit score and credit report inside and out. You can get a free credit score at http://www.freecreditscore.com/ – MAKE SURE YOU CANCEL YOUR CREDIT CARD AFTER PURCHASE so you won’t be charged monthly. Call to cancel – (877) 300-2506
Thoroughly check your credit report for any possible mistakes. You can order a free credit report from each of the big three credit report agencies—Equifax, TransUnion and Experian—once a year, but you can only get your “credit score” by paying for it.
If you see a mistake, dispute it. If your credit is bad, that’s okay: just work on repairing itbefore you apply for a mortgage.
The length of your credit history accounts for 15% of your credit score. By closing your oldest accounts, you are shortening your overall account length, which will only hurt your credit score. Instead, once you pay off a credit card, take it out of your wallet and keep the account open to keep boosting your credit history’s length.
5. Lying On Your Loan Application
Exaggerating your income on a mortgage application can be a federal offense.
If a lender finds out, they can make your loan due and payable. And while some loan officers may stretch the truth to get a client approved, it’s the borrower who ends up paying the price.
6. Ignoring Creditor Calls
The worst thing you can do is ignore phone calls and letters from your lender when you are behind on your payments.
Lenders have many options at their disposal to help keep borrowers from losing their homes to foreclosure, but they can’t do anything for you unless they can talk to you about your difficulties.
7. Skipping a Home Inspection
Failing to make your purchase contingent on a satisfactory home inspection could be a costly mistake.
A good home inspector examines the home from stem to stern. They’ll be able to tell you whether the roof or basement leaks, whether the mechanical systems are in good shape and how long the appliances should last. They may also recommend further investigation by an engineer or other professional.
Don’t get caught off guard by needed repairs, or it will mean more money for your mortgage payments.
If you’re unsure of where to find a good home inspector, ask a REALTOR® for a referral.
8. Changing Jobs
Lenders like stability. It’s a good idea to have kept your job for at least a year or two (most lenders prefer 2) before applying for a mortgage, and it’s even more important to keep your job from the beginning of the mortgage process through the closing.
If you’re looking to change careers or just the company you work for, wait until after you have closed the deal.