What you don’t know can hurt you — especially when shopping for a mortgage. Before wading into the world of home financing, it’s important to do some research so you don’t make a costly mistake.
To save you money, time and headaches, here are four common mortgage errors and how to avoid them.
- Not shopping around with different lenders.
- Waiting too long to address credit problems.
- Changing jobs before your loan closes.
- Omitting information on your mortgage application.
Not shopping around with different lenders
Consumers tend to comparison shop to get the best deal on big purchases like cars, appliances and TVs. But nearly half of borrowers don’t shop around for a home loan, according to a study from the Consumer Financial Protection Bureau, or CFPB.
Borrowers tend to fixate on the home’s purchase price, followed by the mortgage interest rate, says Paul Sian, a real estate lawyer and Realtor with United Real Estate in Cincinnati.
But factors like closing costs, the loan’s total price, whether the loan is fixed or variable, and whether private mortgage insurance is required can all influence what borrowers end up paying, Sian says.
Shop around with mortgage brokers, large lenders, credit unions and online lenders. The extra legwork could potentially save you from overpaying for your loan.
Cost of half a percentage point
To drive home the importance of shopping around, let’s look at a small difference in interest rates. Let’s say a lender offers you a 4.5-percent interest rate on a $200,000 fixed-rate, 30-year mortgage. But that loan with a 4 percent rate is $59 less a month. That adds up to $3,512 in the first five years. Ouch.
The lower interest rate means the borrower would pay off an additional $1,421 in principal in the first five years, even while making lower payments.
Waiting too long to address credit problems
If you plan to buy a home soon, don’t wait until it’s time to make offers to discover credit problems. Even if you don’t plan to buy a home for several months or even a year, pull your credit report and scores now to see where you stand. (You can track your credit through Bankrate.com for free.)
Borrowers with higher credit scores tend to get better interest rates, which impacts your monthly payments and how much house you can afford. It may take months (or longer, depending on the complexity of your finances) to repair bad credit and see meaningful bumps in your credit score, too.
Look for errors on your report, or debts that have slipped through the cracks and gone to collections. These issues can hurt your preapproval chances so the sooner you know about them, the better.
Some effective ways to boost your credit: Pay off balances to below 30 percent of your maximum credit lines, avoid large credit purchases or opening new loans/accounts, and pay your bills on time.
Changing jobs before your loan closes
Job-hopping from one salaried position to another (especially for a raise) can be a good thing. Lenders will want to speak to your new human resources department or see a copy of the offer letter to confirm your new salary and status.
When borrowers switch from a salaried position to self employment, though, they fall under different underwriting guidelines, says Elan McMillin, a mortgage banker with USA Mortgage in St. Louis. Lenders look closely at your employment and income history to establish your debt-to-income ratio, a key metric for evaluating your ability to repay a mortgage.
Self-employed borrowers, or those who rely heavily on commission and bonuses as part of their income, must show two years of federal tax returns to calculate an average income, McMillin says. Starting your own company, or moving to a commission-based salary, can put the brakes on your loan approval, he adds.
In other words, it’s better to wait until after closing to make a major job shift, McMillin says.
Omitting information on your mortgage application
A mortgage application is your first step to getting preapproved. Leaving off items (or intentionally misrepresenting them) on the application can sabotage your loan approval.
“Common liabilities people tend to leave off of their applications, either intentionally or inadvertently, are child support and alimony payments,” McMillin says. “These won’t show up on a credit report so no one would see them; it’s up to you to list them.”
Also, tell your lender if you have deferred student loans or if you’re on an income-driven repayment plan, McMillin says. Although you might pay little or no money on that debt now, lenders want to ensure you can still afford your mortgage payments when those loan payments kick in later.
Doing your homework about the mortgage process can help you avoid these slip-ups. With some preparation and consistent communication with your lender, you’ll be ready to act fast when it’s time to make offers.