It’s not every day that you apply for a mortgage, which usually means you won’t accrue a ton of know-how about it. In this article, we will cover some significant don’ts if you ever plan on getting a mortgage to avoid doing them yourself.
1. Neglecting your debt-to-income ratio (DTI)
Being aware of your debt-to-income ratio will let you know how favorable you are in the eyes of lenders. The DTI ratio is a calculation that puts your monthly debt payments to your gross monthly income.
Lenders and various financial institutions use that information to indicate your ability to manage additional debt. That’s why you must know your DTI if you plan on getting a mortgage.
Lenders use this ratio when determining whether you qualify for a mortgage and the terms they are willing to offer you. If you have too much debt compared to your income, it lets lenders know that you have excessive debt, raising concerns about your ability to make timely mortgage payments.
If you don’t know your DTI or know it’s too high, you are at increased risk of lenders denying a mortgage altogether. In a minor scenario, lenders could offer less favorable terms, such as higher interest rates or more significant down payment requirements.
Overall, a poor DTI can impact the affordability of the home you desire and put unnecessary strain on your financial situation.
To avoid this mistake, it is essential to calculate and monitor your DTI ratio before applying for a mortgage. By keeping this ratio within acceptable limits - typically below 36% for most lenders - you demonstrate responsible financial management and increase the likelihood of securing a suitable loan with favorable terms.
2. Plundering your savings
One significant mistake to steer clear of is plundering your savings.
Some people make the mistake of computing exactly how much they need for a down payment on the house as precisely as possible. Thinking that they’ve covered all their bases enough for this, they get tempted to start using their “excess” savings for other expenses. However, this mistake can cost you a good deal on your mortgage.
Using up your savings can leave you financially vulnerable and unprepared for unexpected expenses arising during the mortgage process or once you become a homeowner. You should maintain a financial cushion of savings instead for financial emergencies, regardless if you no longer need them for the down payment.
Additionally, lenders would look at your financial reserves to see your eligibility for a mortgage and whether you can deal with financial setbacks.
Instead of plundering your savings, creating a budget and exploring alternative options for covering expenses related to getting a mortgage is advisable.
3. Not getting pre-approved
Before you ever consider diving deep into getting a mortgage, it’s in your best interest to go through a pre-approval process from the lender of your choice first.
Not getting pre-approved means you won’t understand your financial standing and how much you can afford. Pre-approval provides a clear picture of your borrowing capacity, allowing you to set realistic expectations when searching for your dream home. The lender would show you the loans they provide that you are more likely to get approval from.
Also, sellers often prioritize buyers who have already secured pre-approval, as it demonstrates their seriousness and ability to secure financing. Without this advantage, you may be waiting for approval longer than you wanted in the purchasing process.
This proactive approach enables you to address any concerns promptly and increases the likelihood of smooth loan approval. Ideally, it would help if you were doing this earlier than when you planned to get the mortgage so that you can prepare for the pre-approval results.
4. Not improving your credit score
If you’re planning on getting a mortgage, then it’s time to take a good hard look at your credit score. That’s one of the first things lenders will look at, after all, so ignoring it isn’t do you any favors.
When you improve your credit score before you consider getting a mortgage, then once you do get a mortgage, your interest rates can be lower. Therefore, this step can save you thousands of dollars on expenditures and monthly payments.
5. Not consulting a mortgage broker
Some people find dealing with finances and mortgages too complicated. Some people, on the other hand, can underestimate the complexity of getting a mortgage and all the paperwork and back and forth with lenders that it’s going to take. In both of these cases, the help of a trusted mortgage broker can help with many of the issues they’re facing.
Consulting with the best mortgage brokers in Tauranga for your needs can help you get the best mortgage rates if you feel like you’re not knowledgeable enough about this to handle yourself.
If you don’t have a mortgage broker acting on your behalf, you might miss opportunities that would only open up because they have an established network with lenders. For example, they can hook you up with better interest rates, terms, and loan options which equals massive savings over the life of your mortgage.
Furthermore, if you don’t know much about finances and mortgages, it can be overwhelming to try and understand the intricacies involved while managing other aspects of your life.
With a mortgage broker, they can uncomplicate your understanding of the different types of mortgages available, guide you through the tedious application process, and negotiate on your behalf with lenders.
6. Taking on new debts
Another apparent mistake you shouldn’t make when getting a mortgage is to take on a different kind of debt while you’re still closing.
As mentioned earlier, fixing your credit score can help you when applying for a mortgage. Well, do you know what negatively affects your credit score? Debt. Therefore, avoid taking in new ones, like buying a car or applying for new credit, when you’re applying for a mortgage.
7. Missing or paying your mortgage late
You’d think that after getting that mortgage approval that your mortgage is safe. Not so.
If you miss the mortgage payment dates consistently, the lender might end up recanting their offer in the first place. You’ll then have a more challenging time getting another lender to give you a mortgage at a lower rate or the same rate as your first one. Therefore, make sure to track your payment deadlines to avoid missing them.
8. Skipping the home inspection
Another step before getting a mortgage for the house you want to buy is skipping the home inspection on the place you want to get.
The inspection might unearth issues you don’t want to deal with and have failed to account for that you’ll have to manage in the future. That’s why before applying for a mortgage, ensure that the home in question has been through a home inspection first.
Conclusion
These mistakes are avoidable once you know them. It’s all about managing your finances wisely and in a way that makes you look good in the eyes of lenders. Therefore, make sure that you keep these in mind so that you don’t end up fumbling your mortgage application process.
