If you are a fan of the real estate shows on HGTV or Netflix, you will know the benefits of homeownership and may be considering taking out a mortgage. For most people, purchasing a property is the single most significant investment in their lifetime, so it is essential that they are well informed and avoid the common pitfalls.
Here’s a list of common mistakes to avoid when applying for a mortgage in 2022.
Table of Contents
1. Not Knowing Your Credit Score
Your credit history reveals more about you than you may realize, and not knowing your credit score might cost you the loan approval. A low credit score usually translates into higher interest rates and unfavorable lending terms that favor and protect the lender.
Lenders check your credit score, giving them valuable insight into your financial situation and how likely you will repay the loan on time. Missed or late payments and high credit utilization all contribute to lowering your ratings, which means a higher interest on your mortgage.
So before applying for a mortgage loan, it is important for you to check your credit score. Ideally, you would want it between 781 – 850, which is considered excellent and gives you the lowest rates. Anything lower than 660 means you need to reevaluate your finances and see if you can increase it, as interest in this range is usually a bit high. And if you have a credit rating below the 500 mark, you are unlikely to get loan approvals, and even if you manage to get loans, it is likely to be of very high-interest rates.
Another pro tip is to increase your score as much as you can; even a difference of 20 points can save you a fortune in the long run. Here is a detailed article on how credit scores affect your mortgage rates to help you find the lowest interest rates.
2. Not Shopping Around
This may come as a no-brainer, but many people have the false impression that they should apply for the mortgage from the bank they currently have an account with. This is not always an intelligent move, as mortgage rates vary a lot between lenders.
Your mortgage is likely to be your most significant monthly expense for years to come, and it’s critical that you get the best deal possible. So, compare the market and consider all the lenders before you make your decision.
You can use an online mortgage calculator to compare rates across all lenders using free tools.
3. Changing Jobs Right Before Applying for a Mortgage
Lenders would want you to have a stable income so that you can pay off your monthly payments without any hassle. One way lenders deduce if you have a steady income or not is through your employment history. The longer you have worked with a company, the likelier it is for you to stay on that job, thus increasing your chances of getting a loan approved.
This does not mean you can’t change jobs at all; if you can show your lender that your skills are in demand and you switched jobs because you got a raise, it can actually work in your favor. But do note that changing jobs right before applying for a mortgage is a mistake as most lenders will at least want you to pass the probation period ( which usually takes 4 to 6 months) before approving you a loan. So don’t change jobs right before applying for a mortgage, as there is a chance it can work against you.
4. Not Knowing About Payments and Fees
Not many are aware that to get a mortgage approved, you at least have to deposit 10% of the property price to the lender ( 20% for the second time homeowner). For example, for a house costing $500,000, you will need to make a deposit of at least $50,000. So you must have some kind of savings before applying for the mortgage.
On top of this, you also need to save up for other expenses and fees like stamp duty, land registry fee, solicitor’s fees, surveyor’s fees, etc. So make sure your savings reflect this added cost before applying for a mortgage, as having just enough for the downpayment will not make the cut. It also shows a lender that you may not be in the best of situation financially and might even reject your loan application altogether.
5. Not Knowing Your Limit
Buying a property is a big life decision, and it is entirely natural to be excited about it. But do not let this excitement overwhelm you into purchasing a property you can not afford. It is essential to know your limits, and maybe you can afford the monthly mortgage payments now but think about the future. Will you be able to pay off the same loan after you have a baby? Life is unpredictable, and it is hard to predict what will happen in the future, but you still need to have a proper plan.
Settle for a mortgage that you are absolutely sure you can pay off; sometimes, it is better to have a smaller house than to worry about mortgage payments. Here are some tips on paying off your mortgage fast.
6. Pretending to Have a Higher Income
The key to getting a mortgage loan approved is to prove that you have the financial ability to pay off your loan in time. To prove this, lenders will ask for different information and evidence to see the differences between your income and expenses. The wider the difference, the easier it is for you to get loan approvals. But many people fall into the trap of altering the information to show that they have a higher income or a lesser expense in hopes of increasing the loan amount. This is a big mistake as fabricating results is counterproductive. Lenders will check all the documents, and any inconsistency in your documents can result in an instant refusal of your mortgage, and they can even report their findings to law enforcement agencies as it is against the law. Take the time to compile all of your information and present as clear documentation of your genuine income and spending as possible.
7. Applying for Multiple Loans from Different Lenders
You may think that applying for multiple loans from different lenders will increase your odds of getting a reasonable rate on your mortgage, but you would be wrong. But while it’s important to shop around with different potential lenders, as we mentioned earlier, actually sending multiple loan applications is counterproductive. Every application you make is recorded in your credit file. This may raise a red signal for lenders, who may wonder why you have been denied credit by other financial institutions in the past. They may go further and seek reasons why they shouldn’t be lending you money as well. Depending on what they discover, they may offer you unfavorable loan terms to balance the scales in their favor, or they may outright refuse any loan offer.
So, give yourself plenty of time when applying for a loan, and do not apply to multiple lenders. Do your research and find the best lender before applying.
8. Jumping the Gun
Before you seek a mortgage, it’s critical to understand what goes into homeownership and make informed decisions. Examine your budget, lifestyle, and future goals to see if a real estate purchase is good for you right now. Remember that just because your friends are purchasing or you’re in the middle of an economic boom doesn’t mean it’s the correct time or that you should pull the trigger.
9. Not Getting Mortgage Protection Insurance
Mortgage protection insurance is a type of coverage that assists in making monthly mortgage payments in case of unfortunate life events like if you are unable to work due to illness, major accident, or redundancy.
Monthly charges typically range from $30-$45. However, you may get mortgage payment insurance for as little as $20 or as much as £60. Many people try to cut corners and opt-out from mortgage protection insurance, leaving them wide open to be a victim of an unfortunate event in case they become critically ill or injured and can no longer work. Mortgage protection insurance protection in such a situation is recommended for everyone thinking of getting a mortgage approved.
10. Leaving Home Insurance for Too Late
Unlike mortgage protection, most lenders require you to have home insurance for the entire duration of your mortgage. This ensures the safety of your home and protects it from natural or manmade disasters. But many leave it too late to apply for insurance and, more often than not, can not compare rates to find what’s best for them. So, do not leave home insurance too late, especially when you know you will certainly need it. For more details on how to get the best rates on home insurance, click here.
Bottom Line
Applying for a mortgage is a big life decision, and it is okay to feel a bit overwhelmed. But do not let your emotions blur your judgment and fall for these common traps. You can learn more about loans and mortgages on our daily blog.
