When you are buying a home, there are a lot of things you need to keep in mind. This is especially true when it comes to managing your financial situation. Mortgage lenders will look at everything related to your finances to determine if you qualify for a loan, so there are various mistakes you absolutely need to avoid in the month leading up to submitting your loan application.
It pays to be as prepared as possible when getting ready to buy a home. Here are some of the most common mistakes that potential homeowners make that could affect interest rates and other loan terms. Or, these mistakes could even prevent you from qualifying for a mortgage loan at all.
1. Overspending on Credit Cards
You should not open any new credit cards just before or during the loan application process. Likewise, you should not be making any excessive charges on your existing lines of credit. Do your best to minimize spending, especially when it comes to your credit cards. Otherwise, it could hurt your credit score and increase your debt-to-income ratio. Neither of these will be good for your loan approval. Wait and buy that big-screen TV and new furniture AFTER the loan is funded and closed.
2. Not Figuring Out How Much You Can Afford
One of the best steps you can take before looking for a new home is to get pre-approved, or at least pre-qualified. It is important to understand there is a difference between the two. I highly recommend pre-approval because it is more detailed and it will mean a whole lot more to buyers when they receive your offer. Click here to learn more about the differences between pre-qualification and pre-approval. Getting pre-approved for a mortgage loan will tell you how much you can afford based on your salary and assets, and if you qualify for a loan at all. Take this precautionary step and you can search for your new home more confidently.
3. Not Comparing Different Loan Products
There are a lot of different types of mortgage loans. Understand the differences between fixed-rate mortgages and adjustable-rate mortgages (ARMs). Then, you have conventional loans, FHA loans and VA loans. All have their pros and cons. It’s worth doing your research and talking with an experienced mortgage professional to see which type of mortgage loan might be best for your short-term and long-term.
4. Going w/ an FHA Mortgage
Some mortgage loans such as FHA loans will allow for lower fico scores and allow you to put as little as 3.5% down toward the purchase price of the home. However, if your downpayment is less than 10%, then you do everything possible to get your fico score up and keep your debt to income ratio down, so you can go with a conventional loan and have the option to avoid PMI (private mortgage insurance) payments. Conventional financing allows for no mortgage insurance with as little as 3% down, but having a high fico score is the key here. Still, even with mortgage insurance, the conventional loan will still cost less over the long run.
5. Forgetting to Consider the True Costs of Homeownership
There are many reasons why owning a home is considered the American Dream. It’s rewarding to be a homeowner and the tax benefits are excellent, as well. However, when thinking about what you can afford to buy and pay each month, keep in mind other homeownership expenses that may affect your bottom line. HOA dues, mello roos, special assessments, repair/renovation costs, homeowner’s insurance, property taxes and more can add to your monthly costs just to live in a house, so you want to factor them in along with your mortgage payment to know what you truly can afford before you sign on the dotted line.
If you can avoid these common mistakes, you will be better prepared to submit your loan application and to start searching for your new home. If you are thinking of buying a home soon any time in the near future, now is the time to start getting your personal finances in order, get pre-approved for the loan, research your loan options, save for a bigger down payment and factor in all homeownership costs.
For more information about different loan options and to get started with your mortgage pre-approval process, contact us at Transparent Mortgage or call me at (619) 929-0199. We’ll help you get started on the road towards owning the home of your dreams.