The Top Mortgage Pitfalls to Watch Out For
June 5, 2023
5 min read
Purchasing a property is a major financial decision with real-term implications. Most people need to consider taking out a mortgage loan to buy their desired home, which requires repayment over the course of 15-30 years.
However, some common mistakes homebuyers make could lead to financial problems down the line.
Top 10 Mistakes to Avoid When Getting a Mortgage
A mortgage loan is a long-term commitment that can impact your finances for years. Making a mistake in this area can have serious financial consequences. With that in mind, homebuyers should avoid the top mortgage mistakes.
1. Not checking your credit score
A credit score is one of the main elements lenders take into account when evaluating a mortgage loan application. Low credit scores may lead to higher interest rates or even loan refusal.
Before beginning the homebuying process, you must check your credit score and dispute any errors or discrepancies found in your report. Doing this allows you to understand your creditworthiness clearly and make necessary adjustments to improve your score if needed.
2. Failing to get pre-approved
Before jumping into the exciting process of house hunting, getting pre-approved for a mortgage is essential. This is when a lender reviews your financial information and will lend you a certain amount of money.
With this critical step out of the way, you can set your budget and avoid wasting time looking at houses that are not in your price range. Getting pre-approved means that you can focus on finding the perfect home for your family, so don't let this critical step slip through the cracks!
3. Not shopping around for the best rate
Not shopping around for the best mortgage rate can be a costly mistake. It's important to take the time to compare offers from different lenders to ensure you're getting the lowest interest rate and the best deal.
With competition increasing among mortgage lenders, options may be available that could save you thousands of dollars over the life of your loan. Don't skip this step in the mortgage process; do your homework and get the best rate possible.
4. Taking on too much debt
Too much debt can have serious consequences when you apply for a mortgage. High debt levels can be a red flag to lenders and could result in a higher interest rate or even being denied the loan altogether. It's essential to take steps to reduce your debt-to-income ratio before applying for a home loan.
Consider consolidating or refinancing existing debts, making extra monthly payments, or increasing your income through side hustles or freelance work to confidently move forward with your home purchase.
5. Not saving enough for a down payment
Not saving enough for a down payment can have serious financial implications. Most lenders will require you to pay a certain percentage of the total home purchase price upfront to minimize the risk associated with lending you money. If you are unable to make a large enough down payment, you may be offered a higher interest rate or be required to pay for expensive PMI policies.
It's important to factor in the cost of your down payment when creating your homebuying budget and be prepared to save ahead of time to have the funds available when buying your dream home.
6. Changing jobs before the loan closes
Changing jobs shortly before the loan closes could put your mortgage loan at risk. Lenders will review your job history to assess your financial stability and look for signs of consistency.
If you take on a new job with different pay, hours, or responsibilities, it could lead the lender to believe that you are not a stable borrower and may reject or postpone approval of your home loan. Make sure to have steady employment for several months before applying for a mortgage to secure the best terms and conditions available.
7. Making large purchases before closing
Making large purchases before the loan closes can derail your mortgage approval. Even if you are in a strong financial position, lenders will look closely at your finances until the loan closes to ensure nothing has changed.
Large purchases could increase your debt-to-income ratio and lower your credit score, both of which are factors lenders consider when approving mortgage loans. It's best to avoid making big purchases or changes to your finances before closing to ensure you have the best chance of getting approved.
8. Not understanding the terms of the loan
It is essential to thoroughly understand the terms of your mortgage loan before signing on the dotted line. Not knowing the details of your loan agreement can have serious consequences, such as late payments, penalties, or worse—foreclosure.
Carefully read the terms and conditions, and don't hesitate to ask questions to make an informed decision before committing to a mortgage agreement.
9. Not considering the total cost of homeownership
Homeownership involves more than just making monthly mortgage payments. Property taxes, insurance, and regular maintenance are all expenses that need to be considered. Not budgeting for these additional costs can lead to financial strain down the road.
It's important to consider the upfront costs of homeownership and all other associated expenses to ensure you can comfortably afford them before committing.
10. Ignoring red flags
Pay close attention to warning signs during the mortgage loan process. If you come across something that looks too good to be true, it probably is. Failing to identify any potential risks can leave you at risk of being scammed or taken advantage of. It's important to research and asks questions to prevent yourself from getting into a difficult situation.
Safeguard Your Homebuying Journey
Home buying can be a thrilling experience! Many people strive to see your vision come to life, and it's easy to make when you equip yourself with the proper knowledge of the mortgage loan process. With the right understanding, you can put yourself in a great financial situation for years to come. Happy house hunting!
