There are many considerations to make when applying for a mortgage to ensure the process runs smoothly from beginning to end. Some homebuyers make financial mistakes while their application is under review, causing them to lose their approval. Here’s a list of some of the major do’s and don’ts to follow during your mortgage process to secure financing and get the keys to your dream home.
What affects mortgage approval
Your income, credit score, debt, assets and more are all taken into consideration by lenders when they review your mortgage application. Specific requirements vary from lender to lender, but as a whole, they are on the lookout for red flags that may indicate you aren’t a reliable candidate for paying back the loan. Factors like a high debt-to-income ratio, defaulted payments on debt, inadequate savings, or inconsistent employment all play major roles in keeping a borrower from being approved.
What do you need to do to get a mortgage
There are a host of financial decisions and mortgage factors that can affect your application for a home loan. Let’s begin with what you should do when applying for a mortgage. Repairing your credit and/or building a credit history, shopping around for the right lender, and determining a long-term budget are all ways to keep your mortgage process free of surprises.
Do: Repair credit
Your credit score holds a lot of weight in a mortgage approval and ultimately your interest rate because it’s directly tied to your credit history. Lower scores may result in paying higher interest rates, costing you more over the life of the loan. Most negative items, like late payments or defaults, may not come off your credit report for up to seven years. Before you start applying with lenders, taking the time to increase your score can set you up to save more money in the long run.
If you aren’t sure where to start, here are some ways to improve your credit score:
- Pay debt and monthly bills on time
- Lower your credit card balances
- Avoid applying for new credit cards and other loans (retail cards, personal loans, car loans, co-signing for others, etc…)
Do: Build credit history
Since lenders will run a credit inquiry, also known as a hard credit inquiry, it’s important to establish a good credit history as it showcases your financial responsibility to potential lenders. If you have a car loan, student debt, or open credit card accounts, and you’re making payments on time (even if it’s the minimum) you’ll be well on your way to establishing a solid credit history.
Do: Shop around for lenders
Choosing a lender to finance your loan goes beyond finding the best rate. Working with a trusted lender is vital — some may offer a larger variety of loans, including government-backed loans with low down payment options for first-time buyers. You also want to find a lender with great customer service as you’ll be in constant contact with them throughout the buying process.
Will pre-approval hurt your credit score?
Obtaining a mortgage pre-approval is the first big step to purchasing a home. However, it’s important to note that it does have an effect on your credit score. Since getting pre-approved for a mortgage or car loan could cause a minor but temporary decrease in your credit score by up to five points. That’s why it’s important to take the time to build up/repair your score and thoroughly research different lenders before choosing one and submitting a mortgage application. That way you can feel secure in who you choose as your lender.
Do: Save money for a down payment
The sooner you’re able to start setting money aside for a down payment, the better position you’ll be in for negotiating and standing out in a crowd of other buyers. Plus, the larger your down payment is, the less your monthly mortgage payment and interest rate will be. You can use this mortgage and affordability calculator to get a clearer idea of what you can afford for a down payment and monthly mortgage payments.
In order to save for a down payment, you’ll want to set up a budget and stick to your goals. Remember that there are other expenses, such as fees and closing costs, that you’ll have to pay for in addition to the down payment. Be sure to factor those into your savings goals, too.
Do: Reduce debt
The less debt you’re carrying, the better. Taking the time to reduce your debts prior to applying for a mortgage will increase your credit score and showcase your financial readiness to lenders. You’ll be eligible for a better interest rate, plus lenders will be able to see you can afford a monthly mortgage payment.
Do: Maintain stable employment
While it is possible to buy a home at the same time as a job change, you’re better off avoiding any big employment changes during the loan process. Most lenders require two years of work history to prove you have stable employment. Whether you’re laid-off, switching companies, or quitting, any changes in your employment and salary will require your lender to restart the underwriting process for the loan.
First-time homebuyer mistakes
There are many ways to set yourself up for a successful mortgage approval process. However, there are just as many (if not more), ways to increase the hurdles you may face during the homebuying journey. Here are the biggest don’ts to avoid while you’re applying for a home loan:
Don’t apply for new credit accounts
As tempting as it may be to open a retail credit line at a big box store or home improvement store as you prepare for your upcoming move before closing on your home, it could impact the final mortgage closing approval. Opening or increasing any liabilities, including credit cards, personal loans, or other credit lines during the application process may impact your qualifying ratios for loan approval. This also applies to co-signing on a loan, as it is considered a new debt. Even if you are not making the payments, they count against you, and your qualifying ratios will rise.
Don’t switch jobs while buying
Notify your loan originator of any employment changes such as a change of employer, recent raise, promotion, transfer, change of pay status (salary to commission), or a layoff. Keep in mind that switching employers may negatively impact the approval of your home loan as it was issued based on your current employment situation.
Don’t make large purchases
Don't make large purchases, such as a new car, furniture, or appliances, as they may impact your loan qualification ratios. Even if you are approved for a mortgage loan, carrying more debt can stop you from qualifying for better interest rates.
Don’t close credit accounts
For the duration of the homebuying process, you should avoid making any big changes to your finances. That includes closing any current credit accounts you have, as your lender will have to run two credit checks: once when you apply and next just before you close on a home. Closing an account prior to closing may hold up the process entirely and make it more difficult to collect important documents if you’re no longer a customer.
Don’t overuse or max out credit cards
If you’ve read this far, this mistake may seem obvious, but it’s worth mentioning — do not increase the amount of debt you’re carrying by overusing your credit cards. A higher debt-to-income ratio will ultimately decrease your credit score and keep you from getting a better interest rate. Most lenders prefer a DTI of 36% or lower.
Don’t fall behind on bills
No matter what lender you choose for your loan’s financing, they all want to see a history of financial responsibility. Falling behind on bills, or not making monthly payments on your current debt, may be read as an indicator you’re not a reliable lendee.
Understanding the do’s and don’ts of applying for a mortgage is the first step to ensuring the process is a speedy and stress-free experience. As a first-time homebuyer, it’s important to do your research, understand the home loan process, and prepare your documents and finances for the biggest purchase of your life.