Mortgage lenders are still celebrating record profits as business is booming in the real estate industry. We want to make sure you’re part of this celebration by successfully owning your home without any hiccups.
Applying for a mortgage is a big decision, and there are a lot of steps involved. It can be easy to make a mistake during the process, but fortunately, most mistakes are avoidable with a little bit of knowledge.
In this blog post, we’ll go over seven common mortgage shopping mistakes and how you can avoid them when applying for mortgages.
1. Not Knowing Your Credit Score
Ensuring you are aware of your credit score is pivotal if you want to be approved for a loan. More often than not, your credit score will dictate whether or not you’re able to get a mortgage, so aim to stay updated on where yours stands.
You can get a free credit report from a variety of sources online. Reviewing your report ahead of time will also help you catch any errors that could hurt your score.
You also want to avoid applying for new credit cards or loans before you apply for a mortgage. Whenever you apply for credit, it will cause a hard inquiry on your credit report which can then lower your score- although only temporarily. If you can, wait to apply for a mortgage until after you’ve gotten any other new lines of credit you need.
2. Assuming All Lenders are the Same
One common mistake borrowers make is assuming that all lenders offer the same rates and terms. This isn’t the case! Mortgage rates can vary significantly from lender to lender, so it pays to shop around for options for mortgages. In addition to interest rates, you’ll also want to compare fees, points, and loan terms before making a decision.
Some lenders offer programs that can help you qualify for a loan with a lower interest rate. For example, if you’re a veteran, you may be eligible for a VA loan with competitive rates. There are also programs available for first-time homebuyers and borrowers with low incomes.
3. Not Shopping Around for Rate Quotes
Getting rate quotes from multiple lenders is the best way to ensure you’re getting the best deal on your mortgage. Some borrowers make the mistake of only getting one quote, which could cost them thousands of dollars over the life of their loan. When shopping for rates, be sure to compare apples to apples by getting quotes on the same type of loan with the same terms.
Make sure to read the fine print on rate quotes. Some lenders advertise low rates but make up for them with high fees. Others may offer a lower interest rate but require you to pay points upfront. It’s important to compare all the terms of the loan before making a decision.
4. Failing to Compare Loan Estimates
A loan estimate is a three-page form that lenders must give borrowers when they apply for a mortgage. The form provides an estimate of the loan’s interest rate, monthly payments, closing costs, and more. Be sure to compare loan estimates from different lenders before choosing one – remember, the lowest interest rate isn’t always the best deal!
Always make sure you understand the terms of your loan before signing any mortgage agreement documents. If something doesn’t make sense, ask your lender to explain it. Don’t be afraid to walk away if you’re not comfortable with the terms of the loan.
5. Skipping Pre-Approval
Many homebuyers make the mistake of skipping pre-approval and going straight into home shopping without knowing how much they can afford. This can lead to heartbreak later on if you find your dream home but can’t qualify for a loan large enough to cover its purchase price.
Getting pre-approved will not only tell you how much house you can afford, but it will also give you an advantage when bidding on homes against other buyers who haven’t been pre-approved yet.
With mortgage pre-approval, the lender will pull your credit history and verify your employment and income. They’ll also give you a letter stating how much they’re willing to lend you, which can be helpful in negotiating with sellers.
6. Not Understanding Mortgage Types
There are many different types of mortgages available, including fixed-rate loans, adjustable-rate loans, FHA loans, VA loans, and more. Borrowers often make the mistake of choosing a loan type without first understanding all their options and how each type works.
For example, adjustable-rate mortgages may have lower interest rates initially, but they can also increase over time, which could end up costing you more in mortgage interest payments in the long run. And 2nd mortgage hard money lenders can get you a loan even if your credit score is low. Before choosing a loan type, be sure to do your research and compare the mortgage interest rate and all your options.
7. Making Large Deposits Before Closing
Depositing large sums of money into your bank account right before closing could trigger a red flag with your lender and delay or even derail your closing. Money coming from unknown sources could be considered “suspect” by your lender, so it’s best to avoid any deposits over $500 in the weeks leading up to your closing date.
If you have any large deposits that cannot be avoided, be sure to document where the money came from so that your lender can see that it is not “suspect.”
Avoid These Common Mortgage Shopping Mistakes
Mortgage shopping involves many steps, so it’s easy to make mistakes along the way. However, by following these tips, you can avoid these common mortgage shopping mistakes and end up with a mortgage that’s right for you.
For more ways you can avoid making mistakes when shopping for a mortgage, be sure to check out our real estate category for tips and tricks to land the perfect deal.