Getting a mortgage is a big step in any homeowner’s life. Not only is it often necessary for buying a home, it is also a very important financial commitment. And since you, as the mortgage borrower, will be contractually obligated to repay a very large amount of money over a long period of time, it makes sense to avoid any potential mistakes that could make that obligation more difficult.
In this post, we’ll review some of the most common mortgage mistakes and how to avoid them. Let’s get started…
Mistake #1 – Not establishing a credit history.
Before you apply for a mortgage, it’s recommended that you have a credit history. Does this mean you have to have credit cards with high credit limits? Not necessarily. Having a credit history doesn’t mean you have a lot of credit — it simply means you have been given credit (in some form) in the past and have a documented history or repaying it.
Lenders often like to see at least three lines of credit on your credit report, with a minimum two-year history on each. That’s why, if you pay off your credit cards, you should likely NOT cancel them before getting a mortgage. Keeping an account active, even if you’re not using it, may help build your credit history.
Mistake #2 – Applying without a stable work history.
Trying to get a mortgage without at least two current, consecutive years of employment in the same occupation could significantly reduce your chances of getting approved. And even if you do get approved, you may not be able to qualify for a good interest rate.
Certain special circumstances may provide an exception to this rule. If you are a recent graduate with proof of future income, or someone who is coming back out of retirement, some lenders may not hold a lack of recent employment history against you.
Even if you’ve moved around with respect to jobs, it’s not necessarily going to be a deal breaker. It’s one thing if you moved up within your company or advanced in the field. It’s quite another if you bounced from job to job in several different industries. For example, if you went from store cashier to store manager to regional manager, all in the span of two years, your lender ins’t likely to hold that against you. On the other hand, if you tried being a store cashier for two weeks, then held a temp job at an insurance agency, then quit after a month to go join the circus, you may have a problem.
Mistake #3 – Opening new credit accounts around the time you’re applying for a mortgage.
Some people make this mistake thinking that it will help their credit score, when in actuality it can severely alter their creditworthiness.
Do not open any new lines of credit before you begin the mortgage application process. Remember how we said earlier that lenders like to see lines of credit that are at least two years old? A brand new account may show lenders that you can get credit, but it doesn’t show them that you are capable of repaying it.
Likewise, do not make large or excessive charges on your existing credit accounts around the time you’re shopping for a mortgage. Doing so can increase your debt-to-income ratio.
And, while we’re on the subject of credit, be sure to review your credit report before you apply for a mortgage. You may find that your credit report has errors, in which case you’ll want to file a dispute with the credit bureau and get them removed before you apply for a home loan.
Mistake #4 – Listing your home for sale then attempting to refinance it.
Sometimes, when homeowners are unsuccessful at selling their home, they decide to take it off the market and refinance the mortgage instead. This strategy may make sense for a lot of people. After all, if the primary reason for trying to sell is to save money, refinancing could be the next best alternative. However, lenders generally don’t like to see homeowners try to refinance a home they just tried to get rid of. It suggests they may be having trouble affording it, or that they simply don’t care about the home that much and could let it fall into disprepair. If the home falls into disprepair, it could lose value.
In this situation, it’s usually best to wait at least six months between taking it off the market and trying to refinance. If you’re unable to wait that long, perhaps because you cannot afford the payments, then you should contact your lender immediately and inform them of the situation. They may be able to work with you on coming up with a repayment plan that you can more easily afford, perhaps through a mortgage loan modification. You can also reach out to housing counselors and foreclosure avoidance specialists.
Mistake #5 – Not knowing how much you can afford before looking at homes.
Before you start your home search, you should talk to your lender about getting pre-approved for a loan. This will give you a solid idea of how much house you can afford, which can help you avoid disappointment down the road.
Being pre-approved for a mortgage can also bolster your buying power, as it shows the sellers that you are serious about making an offer and have already begun the process of securing financing. There have been many instances where a home sale falls through because the buyers made an offer that they couldn’t back up with a mortgage. By showing that pre-approval letter, the buyers are showing the sellers they can afford to make good on their offer, and may also be in a better position to negotiate.
Are you ready to begin the mortgage process? Feel free to give us a call to discuss your home financing needs.
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Stamford, CT 06901