The most crucial element in buying a home is financing. Before going home shopping, you must make sure you’re financially ready and will qualify for a good mortgage.
Watch out for common mistakes that can lead to unfavorable mortgage terms or, worse, getting declined for a loan. Here are some of these mistakes:
- Not getting pre-approval
It’s best to get mortgage pre-approval before looking for a home. Pre-approval is not binding. The lender can still approve different terms on your final mortgage application. However, you can use the pre-approved amount in setting your budget and narrowing your home search. If you apply for a loan amount larger than what you can truly afford, you could only end up disappointed.
- Not checking your credit report
Your credit report shows all the details of your credit history and is used by lenders to determine your credit score. The higher your credit score, the better the terms you can obtain in a loan. Conversely, when your credit score is low, you can expect to get less than stellar mortgage terms, such as a higher interest rate and shorter mortgage period.
Before applying for a mortgage, check your credit report for items that could be pulling your credit score down. Work on improving these issues and make sure the report does not include derogatory accounts by mistake. For example, charge offs and collections, which can significantly lower credit scores, still show in some credit reports even beyond the maximum seven years that they’re required to be reported. You can have erroneous entries like this removed from your credit report through a simple process.
- Making big purchases before and during a mortgage application
One of the things lenders look at in reviewing your loan application is your debt-to-income ratio (DTI), or the percentage of your monthly debts and payables relative to your monthly income. The lower your DTI, the more favorable for you. Most lenders are looking for a maximum DTI of 43%.
Large purchases, such as expensive appliances or a new car, can raise your DTI and bring your credit score down. It’s highly recommended to avoid big spending until your mortgage application has been approved.
- Not having a solid credit history
In reviewing your mortgage application, lenders look at how financially responsible you are, and one way to determine this is by looking at your credit history spanning at least two years. You need to have at least three credit tradelines or credit accounts, such as credit cards, lines of credit, car loans, and others, and show that you have used these tradelines responsibly. This means you have been paying your dues on time and staying well within your credit limit. Not having enough credit history can cause lenders to be skeptical about your ability to pay.
- Not comparing mortgage products
Similar to products in other markets, there are also several types of mortgage. In addition, lenders offer various mortgage products to entice borrowers to their business. Make it a point to review these products and mortgage types to find the one that best suits your present and future financial situation. Working with a mortgage broker can shorten the process as they can present several options to you in one sitting.
Looking to buy a home in the Metro Denver area? I can help you find the right home and guide you through the financing process. Call me, Sacha Faxon, at 720-940-0099 or send an email to Sacha(at)SachaSellsDenver(dotted)com.