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Watch Out for These Common Mortgage Pitfalls

September 24, 2021 By JMcHood


Hearing the words ‘you’re approved’ from a lender can be exciting and overwhelming at the same time. Just because you get approved for a mortgage doesn’t mean that you have to take it. All too often, borrowers make mistakes that cost them thousands of dollars and even their good credit history.

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Lear the top mortgage pitfalls many borrowers make to help you avoid these issues yourself.

Taking the Full Loan a Lender Offers

When you apply for a pre-approval from a lender, they qualify you for the maximum amount of loan you can afford on paper. Notice that we said on paper. The lender qualifies you based on your debt ratio, credit score, and income. This doesn’t mean you have to take the full loan amount, though.

Before you accept a loan amount, look at the numbers ‘in real life.’ Don’t just take a lender’s word for it. Take the mortgage payment and see how it fits into your budget. Can you comfortably afford your other monthly payments? Do you have discretionary income available still? Is the amount much higher than you anticipated? Just because a lender says you can have the higher loan amount doesn’t mean you have to take it.

The amount the lender offers is the maximum loan amount you can have. Accepting the maximum loan amount could make you ‘house poor.’ In other words, it may get difficult to make your mortgage payments, forcing you to regret your home purchase. Don’t let that happen to you.

Taking the First Offer you Receive

Again, hearing the words ‘you’re approved’ can make you jump for joy. Before you take the first loan you get approval for, though, take the time to shop around. How do you know that the terms and rates the first lender offers are the best available to you?

We recommend applying with at least three lenders. This way you can compare the loan offers. Look at the terms, first. Are they all offering a fixed rate loan or is a lender giving you an adjustable rate loan? What about the length of the term, are they all 30-year loan terms or are some lenders offering shorter terms?

Finally, look at the interest rate and closing costs. Compare them side-by-side. You may notice that the lender that offers the lower interest rate charges much higher closing costs and vice versa. You want to find the lender that offers the loan with the costs you can comfortably afford.

Looking at the big picture from all of the offers will help you choose the right loan. Choosing the first offer you get could force you to pay much more than necessary for closing costs or provide you with less than optimal terms. Take your time and find the loan that’s right for you.

Not Knowing Your Credit Score

You should be an informed borrower before applying for a mortgage. A big part of this means knowing your credit score. Lenders use your credit score as the basis for determining your approval. A low credit score can leave you with less than optimal terms and higher interest rates. A high credit score may offer you more opportunities for more affordable terms and lower rates, though.

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If you don’t know your credit score, you won’t know what to expect from lenders. Don’t assume lenders will be honest and give you the best terms available to you based on your qualifying factors. Know your credit score so that you can negotiate appropriately. If you know you have great credit, ask for the lower rate, or ask for fewer closing costs. If you know your credit needs some work but you need a mortgage now, negotiate accordingly, asking for help with closing costs or for a lower interest rate by paying a discount point.

If you know you have a low credit score and you have time to fix it, do it. Get caught up on your bills and pay your credit card balances down. Don’t apply for new credit and make sure you have a good mix of installment debt and revolving debt for the best impact on your credit score.

Not Knowing Your Cash to Close Requirements

Your down payment isn’t the only money you need to close on a home purchase. You have to pay the closing costs too and they could cost as much as 5% off your loan amount. This could add thousands of dollars to your cash to close.

Ask your lender upfront how much the closing costs will run you. By law, the lender has to provide you with a Loan Estimate within three business days of you applying for the loan, but you can also ask your loan officer about the closing costs for more clarification.

If you find that you don’t have the cash to close, as the lender about your options. Typically, they allow:

  • Receipt of gift funds from a relative or employer
  • A no-closing-cost loan in exchange for a higher interest rate
  • Seller concessions to help with the closing costs

The sooner that you know about the closing costs the more time you have to figure out a plan. Finding out at the last minute that you need a few thousand dollars can just add to the stress of getting a mortgage.

Not Having Seasoned Funds

When you put money down on a home or pay the closing costs yourself, you need seasoned funds. This means funds that sat in your account for at least two months. Lenders consider this enough time for any potential loans that you have to provide you with the funds to show up on your credit report.

This means that you can’t make a large deposit within two months of applying for the loan and expect the lender to accept them. You will have to provide proof of where the funds came from and how you got them. Lenders need to know that there isn’t another loan out there that will affect your debt ratio. If they can’t prove the origination of your large deposits, they may not allow you to use the funds for closing and/or the down payment.

Don’t make these common mortgage pitfalls. Take your time and shop around for the right loan for yourself. Talk with lenders and find out what requirements they have to help you get through the mortgage process with as little stress as possible.

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Filed Under: Mortgage Process

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