First-time homeowners usually do not know the time it takes for the mortgage application process to be reviewed and approved. There are several steps in the mortgage approval process that someone new to the process may make mistakes and that can eventually cost the new owners a lot of money. So, if you are ready to learn and avoid the top 5 mortgage mistakes by new homeowners, here is a list by Realtor Fred Franks of Local Realty Service.
Mistake#1: Credit report review
Better the credit score, the lower the interest rate. A new home buyer, like many people, is usually nonchalant about their credit reports. Even though you may have a clean credit record and nothing to worry about, yet it is one of the elements that will decide whether you can own a home. The financial institutions will not simply hand-over the loan.
If you lack the understanding of what a credit report can do to your dream, then it is time to recognize its importance. Your credit score is calculated based on a few things like payment history, credit – old/new, outstanding amount, length and type of credit availability and much more. You can review a free credit report once a year from the agencies and surprisingly based on a study, 4 out of every five credit reports contain errors. Review your report everything including mistakes and blemishes can be taken care of well in advance, before applying for the mortgage application. This can take 6 to 12 months before applying for a mortgage.
An experienced mortgage broker will be able to assist in analyzing the credit report. They will lay out a plan to pay off the debt, which will affect your credit history and rating. This will save you the stress of waiting for the interest rate quotes from financial institutions.
Mistake#2: Zero/Low down payment
There are reasons why new homeowners must choose a bigger deposit instead of Zero/Low down payment. If you do not have one, begin planning and saving stringently before applying for a mortgage. A deposit shows the homeowner’s strength and increases the chances of getting a mortgage approved. With a deposit as big as 20 percent or more, the loan-to-value ratio is lowered and the financial institution’s risk is reduced leading to lower interest rates over the life of the loan which will save thousands eventually. The initial years of payments are towards the interest before any equity is built up which helps reduce private mortgage insurance as well as avoids negative equity when property values fluctuate and tilt low.
Mistake#3: Impact of existing debt
Before applying for a mortgage bond, it is good to pay off the credit card debt, car loan or any other type of debt as lenders check the debt-to-income ratio. Too much debt will decline your loan application as they will check the amount of credit that you are eligible to borrow they can lend based on your credit history. Debt cannot surpass a certain percentage of the income.
Mistake#4: True cost of homeownership
First-time homeowners forget to calculate the actual cost of the property, which must include the house they can afford based on the income, 1-2 percent towards routine maintenance, monthly taxes, and insurance, unexpected maintenance, utility bills. It is advisable to spend less than 28 percent of the pre-tax income on housing costs like mortgage payments, fees, and insurance. New homeowners tend to forget closing costs which include costs like – lender fees, pre-paid homeowner’s insurance, title insurance, attorney’s fees, and taxes which amount to 2-7 percent of the purchase price.
Mistake#5: Not shopping for the best mortgage deal
Almost 50 percent of the new homeowners make the mistake of not shopping around for the best mortgage deal according to the recent statistics from U.S. Consumer Financial Protection Bureau. Approximately 77 percent of borrowers apply only to one lender. Many lenders customize packages based on the elements like credits score, down payment, the amount needed that lead to different terms and conditions as well as interest rates.
Mortgage is a stressful process and not getting pre-approved or qualified for a loan, withholding information on the mortgage application, or one of the top 5 mortgage mistakes by new homeowners may lead to the application being rejected.