Remove Obstacles Before You Start
For most people, a home is the largest investment of their lives.
The majority of today’s homeowners will use mortgage financing for this investment. Fortunately, more than 75% of home purchase applications are approved and completed, according to a recent study by mortgage software firm Ellie Mae.
Undoubtedly, a portion of the other 25% made a mistake along the way. Mercifully, most of these mistakes are entirely avoidable.
Knowing some of the common missteps –and how to avoid them — can speed up the process and increase your chances of approval.
1. Not Checking (And Fixing) Your Credit
You should always check your credit before applying for a home loan. An early credit check can eliminate surprises down the road.
You can obtain a free copy of your credit report from each of the three main credit reporting agencies – Equifax, Experian, and Transunion.
AnnualCreditReport.com is the only official government-mandated website on which you can get your free report.
The credit check won’t show scores — you have to pay extra for that — but it will reveal small credit issues that you didn’t know about.
You may be able to get these issues resolved quickly and easily, helping to avoid potential delays during the mortgage process.
Creditors make mistakes. Minor credit discrepancies can lower your credit scores enough to have a substantial impact on your interest rate. Just one point can make a difference.
Fannie Mae and Freddie Mac — the agencies that set rules for about 60% of U.S. mortgages — charge extra fees for lower scores. The following is an example from a lender’s rate sheet at the time of this writing:
- 20% down loan for a borrower with a 680 score: 4.0%
- 20% down loan for a borrower with a 679 score: 4.125%
A one-point difference in credit score will cost this applicant $20 per month for thirty years on a $350,000 mortgage. Don’t let an error cost you money.
An important and often overlooked note: having open disputes on your credit report can be a bad thing.
Open disputes can raise red flags to lenders. Before applying for a mortgage, be sure you have cleared up any credit inaccuracies anddisputes.
2. Changing Or Quitting Your Job Before Closing
Your employment and income are major qualifying indicators when it comes to getting a mortgage.
Underwriters look at several dimensions for employment and income: the length of time employed, the amount you make, the documentation for the amount, and stability.
Ideally, lenders like to see consistency for the past 24 months. Quitting your job during the application process, even if it’s for a better job with more pay, can throw a wrench in the loan process.
Your income helps decide how much loan for which you will qualify. If your income changes, the lender will need to reevaluate your mortgage application.
You will need to supply an offer letter for the new company, which sometimes works. Some lenders, though, will require pay stubs covering 30 days at your new job before closing the loan
This could seriously delay your closing.
If you are anticipating a job change before or during the mortgage process, it is crucial to inform your lender as soon as possible.
3. Not Understanding The Annual Percentage Rate (APR)
If you’ve searched online for interest rates, you’ve likely seen two different percentages — the mortgage rate and the annual percentage rate (APR).
It’s important to understand the difference.
Lenders will often advertise super-low mortgage rates to lure homeowners. However, the mortgage rate doesn’t always tell the whole story.
The mortgage rate is the one most people notice. This is the rate by which your mortgage payments are calculated, so naturally, it’s important.
But the APR factors in the costs associated with obtaining the mortgage.
Costs such as processing fees, loan origination fees, mortgage insurance premiums, etc. will almost always be charged in some form or fashion. As such, the APR is essentially the true cost of the loan. For example, which loan costs less?
- 3.875% rate, 4.33% APR
- 4.0% rate, 4.05% APR
In some cases you might take the 3.875% base rate. This structure probably means you’re paying a lot upfront for a lower rate. If you have the loan for many years, it might pay off.
The higher rate and lower APR, however, denotes lower upfront costs. A home buyer or refinance applicant that wants a low-cost or zero out-of-pocket loanl should choose this option.
Be sure to shop and compare the mortgage rate and the APR when shopping for your home loan.
4. Making Major Purchases Or Applying For New Credit Prior To Closing
It’s easy to get caught up in the excitement of buying a new home, or the thought of saving lots of money thanks to a refinance.
A common mistake is to let that excitement lead to spending money on household items such as new appliances and new furniture, or even bigger ticket items such as an automobile.
Be aware that most lenders will take a second look at your credit before closing.
If new inquiries from various lenders appear, you will need to sign documentation explaining why your credit was checked by these institutions.
You will also have to declare whether the inquiry resulted in additional credit being extended, or a new purchase.
An additional car payment or credit card debt could result in a lengthy re-approval process, or worse, losing your approved status.
Be sure to speak with your lender before letting anyone pull your credit, and prior to making any large purchases.
5. Not Getting Documentation To Your Lender On Time
The mortgage application process can be complicated. There are a number of items that your lender will request, both prior to your loan application and throughout the process.
It can be frustrating when you feel like you’re repeatedly asked to supply documentation, some of which you may have already provided.
It is helpful to understand that, from time to time, the documentation you initially provided may actually prompt the need for additional items.
A common example of this is when bank statements are provided.
It’s not uncommon for homeowners scan or copy the front pages only. If your bank statements are double-sided, however, you’ll need to provide the back-side of the statements as well.
Even the pages that contain mostly just fine print, or are perhaps even blank, will be required.
Almost all income and asset documentation will have expiration dates, especially pay check stubs and bank statements.
You may think the lender is asking for the same items you have already provided. Actually, they may just be requesting your most recent and updated documents.
When your lender requests documentation, provide them promptly so as to avoid unnecessary delays.
6. Closing Credit Accounts Prior To Completing Your Loan
Not everyone uses credit cards. For those that do, however, it’s important to pay extra attention to how you manage your credit card accounts, especially when applying for a mortgage.
A common misperception is that closing credit card accounts will improve your credit scores. To the contrary, closing revolving credit accounts will likely hurt your credit. Here’s why.
When you close a revolving credit account, it reduces your total available credit.
Closing the account will increase your debt utilization ratio (the comparison between your available credit and current balances).
Keeping your “used” credit below 30% of the total available credit will make you a lower risk. Instead of closing your credit card account, it is usually better to keep it open, with a balance of 20-25% of it’s available limit.
When in doubt, ask your lender before altering any of your existing credit accounts.
Get Today’s Mortgage Rates
When buying or refinancing, understanding a few “dos”, and even more so the “don’ts”, can help ensure a smooth process and avoid timely and costly mistakes.
Get today’s mortgage rates now. Your social security number is not required to get started, and all quotes come with instant access to your very own live credit scores.