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How to apply for a mortgage the right way: Avoid these 5 mistakes [VIDEO]

Maggie Overholt
The Mortgage Reports editor

Mortgage mistakes will cost you. Know how to avoid them when you apply

You’re probably going to need a mortgage before you can buy a house. And if your goal is to find a mortgage as quickly as possible — get it out of the way, then move on to the fun stuff — you’re not alone.

But it pays to start thinking about your mortgage ahead of time.

People who get the best mortgages and mortgage rates come to the table prepared.

On the flip side, people that don’t start thinking about a mortgage ahead of time are prone to make mistakes — and mortgage mistakes can be costly.

Knowing the most common mistakes people make when applying for a mortgage will help you avoid them. It could also help you get a lower rate and qualify for a bigger, better home.

Find and lock a low rate. Start here (Dec 8th, 2019)

Five mistakes people make when applying for a mortgage

Mistake #5: Not checking your credit before you apply

If you’re waiting until you apply for a mortgage to check your credit, you’re waiting too long.

  • Start checking your credit score at least a year before you plan to buy a house. Low credit could mean high rates or not qualifying
  • Even if your credit is strong, working to improve it could get you a better mortgage rate and lower payments

That’s because mortgage rates — and mortgage qualification — depend on your credit. And the stakes are pretty high.

If you check your credit at the time you apply and find out it’s lower than you thought, you’ll likely end up with a higher rate and more expensive monthly payment than you were hoping for.

If you find out your credit score is really low — think, below 580 — you might not qualify for a mortgage at all. You’ll likely be out of the home buying game for another year or more as you work to boost your score back up.

There’s a flip side to this story, too. A higher credit score usually means a lower mortgage rate. So if you check your score and learn that it’s strong, you might still want to work on improving it before you buy.

Mortgage rates are based on credit tiers. If raising your score a few points would put you in a better tier (fair to good, good to excellent), it’s worth waiting to improve your credit before applying.

Consider this: Mortgage rates are based on credit “tiers.” A higher credit tier means a cheaper mortgage. And if your credit score is currently 719, raising it just one point would put you in a higher tier and earn you a lower rate.

Ideally, you should start checking your credit early. It can easily take 12 months or more to reverse serious credit issues — so the sooner you get started, the better.

Find your free credit score at annualcreditreport.com, or check with your bank. Many financial institutions now show members their credit scores for free.

See what rate you qualify for today. Start here (Dec 8th, 2019)

Mistake #4: Being late on rent

Being late on rent is a bigger deal than you might think — and not just because it’ll land you with a late fee from your landlord.

Late rent payments can actually bar you from getting a mortgage.

Your rent history is the biggst indicator of whether you’ll make mortgage payments on time. Late or missed rent checks can prevent you from buying a home.

It makes sense when you think about it. Rent is a large sum of money you pay each month for housing. So is a mortgage. If you have a spotty history with rent checks, why should a lender believe you’ll make your mortgage payments on time?

When you apply for a mortgage, the lender will check your rent history over the past year or two. If you’ve been late on payments, or worse, missed them, there’s a chance you’ll be written off as a risky investment.

Rent is especially important for people without an extensive credit history.

If you haven’t been responsible for things like credit card, loan, or car payments, rent will be the number one indicator of your credit-worthiness.

Mistake #3: Buying an expensive item before applying

You may have heard that you shouldn’t finance an expensive item while applying for a mortgage.

But most people don’t know that it’s a mistake to buy something with big payments even years before you apply.

That’s because mortgage applications depend on your “debt-to-income ratio” (DTI ) — meaning the amount you pay in monthly debts compared to your total income.

The more you owe each month for items like car payments and loans, the less you have left over each month for mortgage payments. This can seriously limit the size of the mortgage you’re able to qualify for.

For example, take a scenario with two different buyers — they earn equal income, but one has a large car payment and the other doesn’t.

  Buyer 1 Buyer 2
Income $75,000 $75,000
Existing debt $100/month $100/month
Car payment $500/month $0
Qualified mortgage amount $300,000 $390,000

In this scenario, both buyers qualify for a 36% debt-to-income ratio. But for Buyer 1, much of that monthly allowance is taken up by a $500 monthly car payment. As a result, Buyer 1 has less wiggle room for a mortgage payment and ends up qualifying for a home loan worth almost $100,000 less.

That’s a big deal. $100,000 can be the difference between buying a house you really want (something nice, updated, in a great location) and having to settle for a just-okay house — maybe one that needs some work or isn’t in the location you wanted.

So if home buying is in your future, examine your priorities. Consider a car with inexpensive payments or one you can pay off quickly. And try to avoid making other big-ticket purchases that could compromise your home buying power.

Mistake #2: Applying with only one lender

It’s a huge mistake to accept the first mortgage quote you get.

Many first-time home buyers don’t know it, but mortgage rates aren’t set in stone. Lenders actually have a lot of flexibility with the rate and fees they offer you.

Never take the first mortgage quote you get at face value. Compare lenders and make sure you’re getting the best deal.

That means a lender you’re looking at might be able to offer a lower rate than what they’re showing you.

But in order to get those lower rates, you have to shop around and get a few different quotes. If you get a lower rate quote from one lender, you can use it as a bargaining chip to talk other lenders down.

Shopping around for mortgage rates also lets you know if you’re getting a good deal.

For example, a 4% rate and $3,000 in fees might sound alright if it’s the first quote you’ve gotten. But another lender might be able to offer you 3.75% and $2,500 in fees. That makes the first offer a lot less appealing — but you won’t know it until you look around.

Compare personalized rate quotes from at least three lenders to make sure you’re getting the best deal.

And make sure you’re comparing apples-to-apples quotes. Things discount points can make one offer look artificially more appealing than another if you’re not watching out.

Compare rates from major lenders. Start here (Dec 8th, 2019)

Mistake #1: Applying too late

This is it — the biggest mistake you can make when you’re trying to buy a house. Applying for a mortgage too late.

How late is too late to start the pre-approval process? If you’re already seriously looking at homes, you’ve waited too long.

The number one rule of home buying: Know how much you can buy and get it in writing before you get your heart set on a price range or a specific home.

That’s because you really don’t know what you can afford until you’ve been officially pre-approved by a mortgage lender. They’ll look at your full financial portfolio — income, credit, debts, assets — and determine your exact home buying budget.

Even if you think you know what you can afford, you might be surprised.

As we described above, debts can take down your home buying power by a startling amount. And you can’t be sure how things like credit will affect your budget until a lender tells you.

By not getting pre-approved for a mortgage before you start shopping, you run the risk of falling in love with a house only to find out you can’t afford it.

Or, you might find out you can afford the house you want, but lose it to a more prepared buyer who came with their pre-approval in hand and made an offer on the spot.

Start your pre-approval application today (Dec 8th, 2019)

How to apply for a mortgage the right way

If you want to qualify for a big loan and a low rate, it’s crucial to prepare for your mortgage application ahead of time. Don’t fall into the trap of thinking “I’ll cross that bridge when I come to it.”

There are five things you can do to give yourself the best shot at a mortgage:

  • Check your credit at least a year in advance and take steps to improve it if necessary
  • Pay your rent on time every month
  • Avoid big purchases in the years before you plan to buy, if they will leave you with a hefty monthly bill
  • Compare rate quotes from a few mortgage lenders and find the best deal
  • Get pre-approved before you start house hunting — not after

With a little preparation ahead of time, you could potentially add upwards of $100,000 to your home buying budget.

Find a low mortgage rate and save

If you plan to buy a house any time soon, now is the time to start thinking about your mortgage application.

Take a look at your credit, get your debts in check, and start shopping around for rates.

Remember, the most important thing you can do before house hunting is to get pre-approved and determine your budget. You can get started below.

Start your pre-approval application today (Dec 8th, 2019)