Buying a Home in Nashville: 7 Mistakes to Avoid When Applying for A Mortgage
If you are considering buying a home in Nashville or the surrounding area, more than likely you are going to need a mortgage to finance that home. Applying for a mortgage may seem like a fairly simple and straightforward process on the surface. However, It can actually be surprisingly complicated, particularly if you only ‘sort of know what’s going on.’ If you keep in mind these 7 mistakes to avoid when applying for a mortgage, you will also avoid what could be the worst mortgage experience ever as well as prevent serious problems after closing. For many real estate consumers, the entire mortgage process is foreign. But, it involves your money—and lots of it—so learn as much as you can in order to avoid any potential pitfalls on the road to homeownership.
1). Not Knowing What’s in Your Credit Report
Your ability to qualify for a mortgage as well as the interest rate you’ll get on a home loan is closely tied to your credit score. A single wrong entry can drop your credit score by 20 to 50 points, causing you to pay a higher rate and a higher monthly payment. Unfortunately, nearly 80 percent of credit reports today contain errors and nearly a quarter of them contain mistakes that could result in a denial of credit. If you are going to apply for a mortgage, an important preliminary step is to order copies of your credit reports and go over them, looking for errors. You are entitled to free copies of your credit report from all three credit bureaus every 12 months and can get yours at AnnualCreditReport.com. If you find errors, you can then file a dispute and clear up the problems before applying for a mortgage. Reviewing your credit report in advance will give you the time that you need to correct any discrepancies and improve your overall credit score.
2). Not Getting Pre-qualified
It’s very important to pre-qualify for a mortgage before you start the formal shopping process.Oftentimes, potential buyers will begin searching for homes online and sometimes even attend open houses or new-home communities before knowing exactly what price range they need to stay within, which can be a big mistake. Homebuyers, especially first-time buyers, tend to overestimate how much they’ll be able to borrow. A better plan of action is to shop for a lender and get a pre-approved for a mortgage before you start the house hunting process.
It will help you identify any obstacles to approval, such as having too much debt or a low credit score. It will also help you determine your house-hunting price range. Last but not least, it will make you more competitive in the market, when compared to buyers who have not been pre-approved. All of these things will help your cause when it comes time to shop for a home.
3). Only Factoring in Your New House Payment
There’s a lot more that goes into homeownership than the monthly house payment, and what the bank says you can afford (based on how much they’ll lend you) may not be what you can actually afford at the end of the day. You only want to spend up to one-third of your monthly income on housing costs, which include mortgage payments, insurance fees, and any homeowners association fees. There are also utility payments as well as repairs and maintenance.
If you assume that a $1,500 per month house payment is the only significant expense that you will have as a result of buying a new home, but the actual cost is $2,000 per month when utilities and repairs and maintenance are added, you may find that you are unable to comfortably afford the house. Items such as replacing the water heater, hiring a plumber, hiring a landscaper, property taxes and so on add up.
4). Applying for a New Loan/Credit While Applying for a Mortgage
Applying for a new loan can include such things as running up credit cards for home buying incidentals or even applying for a loan for a new car. Yes, it’s tempting to start purchasing furniture and appliances in anticipation as your closing date draws near -- but don’t do it. Lenders frequently pull credit reports after the fact, and often just before closing. If your lender finds new loans/credit accounts, your home loan may be sent back to underwriting, which could change the outcome.
Apart from the fact that either of these debt situations can threaten your ability to afford the home, there is more than a slight possibility that the lender will find out about these new debt obligations either after you apply, or even after you are approved. It’s important to keep in mind that a mortgage loan approval is not set in stone. If significant changes have developed in your financial profile between the time of application and closing, the lender can modify or even revoke your approval. It’s important that your credit situation remains constant throughout the loan process, especially if your loan qualification is a tight squeeze, to begin with.
5). Not Being Honest
It wasn’t that long ago that lenders were approving mortgages for just about anyone with a heartbeat, which is no longer the case. Lending standards have tightened up considerably since then. Lenders are bound by statute to ensure that the borrower can afford to make payments on the loan. Borrowers are required to provide documentation that proves the income that is stated in their application. It’s in your best interests to be totally honest on all parts of the home loan application so nothing comes back to bite you where it hurts.
Often people lie or exaggerate to get a bigger loan, smaller down payment or a better mortgage rate. Sometimes the applicant won't get approved at all without deception. He or she figures it'd be no big deal because they just want a house -- they don't intend to harm anyone. This, however, is "fraud for housing" or "fraud for property." While it's less serious than "fraud for profit" or "fraud for criminal enterprise," it's still fraud. According to Freddie Mac "Mortgage fraud continues to be one of the fastest growing crimes in the United States." Lenders are responding with increasing vigilance, employing greater resources and more sophisticated detection techniques. Do you really want to take that chance?
6). Changing Jobs After Loan Approval
A common requirement for loan approval is your employment situation. Most lenders will want to see at least two years with your current employer (or in your current field), or two years in business if you are self-employed. It is important to not make any sudden changes to your employment status during the period of time between loan application and closing on your new home. If it doesn't "make sense," delay your job change until your mortgage is fully completed.
Not all career moves are acceptable to mortgage lenders, even if you get paid more. Changes that could jeopardize your approval include Switching from salary to a bonus or commission structure; Altering your status from W-2 employee to contract employee; Changing to a completely different industry or position; and moving jobs with no change in pay, responsibility, or location. Even if your pay increases, be careful about your pay structure. A seemingly small change can make a big difference in your approval status.
7). Closing Broke
This problem is typically avoided by the lender requirement for cash reserves. But that rule is not always enforced, and sometimes new homeowners find ways of spending those reserves, rather than saving them for a future income shortfall. The last thing you want after buying your new home is to find yourself in a major cash crunch. Apart from lender closing requirements, you should have emergency funds set aside when you are a homeowner.
You may need to cover a future mortgage payment and there may be unexpected repairs, necessary purchases, or even cash needed for non-housing purposes. If you close broke, you won’t be able to deal with any of those situations. By making sure you have enough cash reserve on hand, you can keep a problem from turning into a crisis -- one that might even hinge your ability to afford the home. Nothing kills the dream of homeownership quicker than feeling like your home owns you!
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