Common Mistakes That Can Delay the Loan Process
The home mortgage industry can be confusing. Rates, points, caps—there’s a lot to take in. Take some time to educate yourself about the process—and be aware of the big missteps home buyers often make.
Thinking Too Big
Banks qualify their customers on their “debt-to-income ratios.” Simply, that’s the ratio of how much money you make vs. the money you owe to other institutions. Banks don’t take into account other expenses like your weekend entertainment and the tuition to your children’s school.
Ask yourself, what goes into your budget every month? List it all out—restaurants, car payments, taxes, insurance, cable, cell phone, gym memberships, etc. You don’t want to find yourself spending all your money on your house. A good rule of thumb: No more than 30% of your gross income should go toward total housing expenses.
Waiting for Pre-Approval/Pre-Qualification
Besides offering a rough idea of how much home you can afford, a pre-approval gives you leverage when you make an offer on a home—it lets a seller know your offer can be seriously considered. One thing to know: You don’t have to secure your mortgage from the lender that “pre-approves” you. You’re free to take out a mortgage from the bank or lender of your choosing when you’re ready to buy.
Getting the Wrong Loan for You
Although it’s a classic, not everyone needs a 30-year fixed-rate mortgage. Today there are many different products, designed to accommodate different financial plans. Everyone’s life trajectory isn’t the same. Maybe you don’t plan to be in your house for more than five years; maybe you can afford to put more money down than most people. Take a moment to visit http://www.usa.gov/shopping/realestate/mortgages/mortgages.shtml that explains several of the different products out there. Talk to a trusted financial advisor if you’re having difficulty understanding the type of loan that’s best for you.
Choosing Not to Shop Around
When looking for a home loan, don’t go with the first quote from a bank. Shop for a loan the same way you would shop for any other big purchase. One percentage point on a mortgage rate can mean the difference of tens of thousands of dollars difference over the course of a loan.
It might be a good idea to call an experienced mortgage broker who can access many banks across the country. Although the broker is a middleman, you won’t get charged anything extra. Brokers receive loans at wholesale rates and will pass them to you at retail. You might be able to get a better deal than reaching out to banks on your own. If you’re building a new-construction home, you might want to get a quote from an in-house lender like NVR Mortgage or compare developer financing incentives.
Forgetting to lock in a rate
Don’t rely on the verbal promises of a loan officer. Mortgage rates can change daily. If you find a great rate, lock it and get the rate quote in writing. Once a home mortgage rate is locked, your rate is guaranteed for a certain period—anywhere from seven days to a month or more.
When do you lock in a rate? Basically, after an offer has been accepted, you’ll need to backtrack and figure out when you’re going to close. But know that the longer the lock-in, the more the loan will cost you in fees or rates. Why? Basically, the bank is hedging its risk—they don’t know if rates will change either.
Don’t Spend, Change Jobs, Etc.
Many new homebuyers make the mistake of rushing out to buy things to fill their home with as soon as the seller accepts their purchase offer and the lender pre-approves their loan. But there are still a few major hurdles to overcome before the keys are handed out. Here are some things to avoid during the home buying process to assure your transaction goes as smoothly as possible:
- Don’t make an expensive purchase. It may be tempting to order that new sofa for your soon-to-be living room, but its best to avoid making major purchases like furniture, cars, appliances, electronic equipment, jewelry, or vacations until after the closing. Financing that furniture with a store credit card or even one of your own credit cards could jeopardize your credit worthiness during the time it means the most. Using cash to purchase big items can also create a problem because many banks take into consideration your cash reserve when approving your mortgage.
- Don’t get a new job. Lenders like to see a consistent job history. Generally, changing jobs will not affect your ability to qualify for a mortgage loan – especially if you are going to be making more money. But for some people, getting a new job during the loan approval process could raise some concern and affect your application.
- Don’t switch banks or move money around. As your lender reviews your loan package, you will likely be asked to provide bank statements for the last two or three months on your checking accounts, savings accounts, money market funds and other liquid assets. To eliminate potential fraud, most loans require a thorough paper trail to document the source of all funds. Changing banks or transferring money to another account – even if its just to consolidate funds – could make it difficult for the lender to document your funds.
Don’t disregard your lenders requirements.
You may have been pre-approved for the loan but your work with the lender is far from over. In order to process your loan, you need to meet certain requirements. Your lender will need copies of your bank statements, W2s, tax returns, and other paperwork. It is up to you to get it to him or her as soon as possible. Failure to submit certain qualifying documents could cause you to lose your loan and the financing you need to buy your home.