The mortgage application process can be a daunting task, filled with various forms and documents to fill out and various rules and regulations to follow. With so much to keep track of, it’s easy to make mistakes that can delay or even derail your approval. In this blog, we will discuss the most common mistakes people make when applying for a mortgage and how to avoid them.
From inaccuracies on your application to not understanding the terms of your loan, we will cover all the bases and provide you with the knowledge you need to navigate the mortgage application process confidently. Whether you’re a first-time homebuyer or a seasoned property investor, we have it all covered.
Examine these commonly made things not to do when applying for a mortgage to make sure they don’t prevent you from getting the home of your desire.
- Preapproval step
Before getting to know about how to prepare for applying for a mortgage, obtaining preapproval for a mortgage when purchasing a property is not mandatory, but it is highly recommended. Lenders issue preapproval letters to provide clarity on a borrower’s creditworthiness and ability to afford a home within a certain price range.
Preapproval letters are typically the initial step in the home-buying process and are an important document to have on hand when making offers. Preapproval provides you (and your real estate agent) with an understanding of how much house you can afford, the type of mortgage loan you will likely qualify for, and the interest rate and terms the lender will likely offer.
During the preapproval process, the lender will review your credit scores and credit history, recent pay stubs, current debts and assets, tax returns, and other personal information. The lender will also check your credit report with a hard inquiry, which can temporarily cause a slight dip in your credit score.
Obtaining preapproval gives sellers the confidence that you are a serious buyer and having a preapproval letter may be a prerequisite for your offer to be considered, especially in a hot market. Preapproval allows you to target your home search to your price point and increases the likelihood that you will secure financing when it’s time to purchase.
- Reviewing Your Credit Score
When considering purchasing a home, reviewing your credit early in the process is crucial. Your credit scores and history can greatly impact your ability to qualify for a home loan and play a significant role in determining your mortgage rates and terms. One common mistake some buyers make is not checking their credit score early on in the home-buying process.
Mortgage loan application lenders typically review credit scores from all three major credit reporting agencies – Experian, TransUnion, and Equifax – and use the middle score when deciding the rate to offer. It is therefore essential to review your credit report before applying for a loan to ensure you are aware of your credit standing. If your credit is not where you would like it to be, take steps to improve your credit score before applying for a mortgage loan process.
- Keep a check on mortgage insurance
Not factoring in Mortgage Insurance can be costly. A larger down payment can increase the equity in your home and reduce the amount borrowed, however, a 20% down payment can be difficult for many buyers, especially first-time homebuyers. Without a 20% down payment, lenders will require you to purchase private mortgage insurance (PMI), which typically ranges from 0.5% to 2% of the loan amount per year and is paid monthly as part of your mortgage payment. Conventional loans allow PMI to be removed once you have 20% equity in your home. Before making an offer, consider the added cost of PMI if unable to make a 20% down payment.
- Failing to Explore Mortgage Options
Exploring and comparing different mortgage options can provide you with a variety of choices and help you pick the best mortgage to suit your needs. It also has the potential to save you money every month by securing the best rates and terms based on your creditworthiness.
If you are short on time or unsure of securing the best rates, consider utilizing the services of a mortgage broker. They have access to a network of lenders and may be able to secure more favorable loan terms and a competitive interest rate for you.
- Keeping Track of Closing Costs and Fees is Essential
Closing costs and fees can impede the closing of your home purchase if you are not prepared to pay them when they are due. Closing costs alone can range from 2% to 5% of a home’s purchase price and are typically paid upfront on the day of finalizing the purchase.
Other fees that are usually included in closing costs include fees for appraisal and home inspection, loan application and origination fees, credit report fees, document preparation fees, and others. Some closing costs may be negotiable, but many are unavoidable.
Additionally, consider purchasing discounts or mortgage points which can reduce the interest rate and possibly your monthly payment by prepaying a percentage of the total mortgage amount.
- Loan-to-Value Ratio (LTV)
Not factoring in Loan-to-Value Ratio (LTV) can be costly. Lenders use the LTV ratio to assess the risk of writing a loan. It is the percentage of the loan amount compared to the home’s market value. Several federal mortgage programs have specific LTV limits, and if it exceeds 80%, PMI may be required. You can reduce the LTV ratio by increasing your down payment. Some government-backed loans allow for larger LTVs, such as FHA loans, which require a minimum 3.5% down payment (96.5% LTV), and some VA loans with 100% LTV.
- Debt-to-income ratio (DTI)
Having too much debt can impact your ability to qualify for a mortgage. Lenders use your debt-to-income ratio (DTI) along with your credit score to determine whether you can afford the mortgage. It also helps you evaluate your current debt and determine if applying for a mortgage is the right choice for you. Depending on your credit score, you may qualify for a higher DTI ratio, but generally, it should be below 43%. Some lenders may prefer a DTI below 36%. If your DTI does not qualify for a mortgage, consider buying a less expensive home or saving for a larger down payment.
Conclusion
Navigating the mortgage application process can be a complicated and time-consuming endeavor. By understanding the common pitfalls and taking the necessary steps to avoid them, you can make the process much smoother and increase your chances of getting the best deal. To ensure that you are on the right path, you can also take the help of professional builders like Kundan Spaces, who can provide the right guidance throughout the mortgage application process. With the right preparation and guidance, you can navigate the mortgage application process and achieve your dream of homeownership.
