It’s exciting to look for your first home. However, most first-time homebuyers need a mortgage to purchase a house. And you’re probably worried that you will be turned down for a mortgage loan because of poor credit scores.
Fortunately, by educating yourself on the home loan process, you will be in a better position to get a loan at favorable interest rates. Although buying real estate is a complicated and time-consuming process, there are several things you can learn NOT to do to when applying for a home loan.
Things You Must NOT Do Before Applying for Your First Mortgage
Home buyers often make mistakes that ruin their chances of getting a loan, or a loan at good rates. It’s important to get your finances in order at least six months prior to looking for or applying for a mortgage.
Everything you do from your job to shopping to paying your bills will have an impact on whether or not you qualify for a home mortgage.
If you don’t follow good financial advice, lenders may reject your application. You may even lose the financing you need at a desired low interest rate.
When Applying, DO NOT:
1. FORGET to Check Your Financial Health
When you apply for a home loan, the mortgage company will scrutinize every aspect of your financial life. This includes income, debts, assets, and credit reports. Check your credit reports from all three credit bureaus to look for errors.
Any mistakes on a credit file can lower your credit scores. Do whatever you can to improve your financial situation before you apply for a loan.
2. INCREASE Your Debt Further with Big Purchases
Your home is the biggest purchase you will ever make, and your mortgage company wants to make certain you’re a good candidate for paying back the loan. If you make a large purchase, such as a new car or a boat, right before you apply for a mortgage, the lender will question if you’re financially responsible.
The mortgage company will worry that you have overextended yourself and might have difficulty making monthly mortgage payments. If a lender sees you as a higher risk, you may only quality for a lower loan amount or a higher interest rate.
You want to pay down your debt to get a mortgage, not add more debt.
3. APPLY for a New Line of Credit
It’s not a good idea to take on any new credit when you are about to apply for a loan. At the stage you don’t need a new credit card or a new charge card. Such moves increase your debt and your debt-to-income (DTI) ratio, and often lower your credit score.
Your DTI is the amount of your monthly debt payments compared to your monthly income. Lenders view a debt-to-income ratio that is higher than 43% negatively.
4. SPEND Any of Your Savings
Lenders want you to have plenty of money saved for the down payment, closing costs and other expenses incurred when buying a house. The amount of your savings is something that lenders check.
If an emergency happened such as a broken refrigerator, try to buy it with cash instead of using a credit card. At the same time, try to spend as little of your savings as possible to make you seem less of a risk to lenders.
5. CO-SIGN Any Loans
Although it’s nice to be generous, if you’re ready to buy your first home, you can’t afford to co-sign a loan for a family member. By agreeing to co-sign a loan, you become responsible for paying back the loan if your relative defaults.
This default will appear on your own credit reports and lower your credit scores.
6. MAX Out Your Credit Cards
Using your entire credit limit increases your debt-to-credit ratio. This is the amount of your credit limit you have used. Keep this ratio below 30% because it’s one criterion lenders use to determine your risk as a borrower.
If possible, stop using your credit card for a while to reduce your overall debt. Focus instead on paying off your balances.
7. CLOSE Any Credit Accounts
You shouldn’t close any credit accounts you have, even if you haven’t used them in years. By closing an account, your debt is now a higher percentage of your overall credit limit, which reduces your credit score.
Lenders then see you as a higher credit risk. Keep your credit consistent.
8. Pay Bills LATE
Pay all your bills on time to prove to the mortgage company that you are a good risk. In some situations, a late payment appears on a credit report and this negative item can greatly affect your ability to get a mortgage.
9. MAKE Major Life Changes
Maintain the status quo during the application process. This means NOT making any major life changes that could affect your income, savings or credit score.
For example, don’t change jobs or take a leave of absence. Lenders want to see stable, long-term employment. Deciding to have a baby, quitting your job and starting a business, or going back to school; These things all cost money and reduce savings.
10. DEPOSIT Large Amounts without Proper Documentation
If you get a gift from a relative for the down payment, get a gift letter. This states, from the donor, that the money is a gift that doesn’t have to be paid back.
With no financial obligation for this gift, the lender won’t view a sudden large deposit in your bank account as questionable. Include all the required documents regarding this gift with your home loan application.
It’s now more difficult to get a mortgage loan. As a homebuyer, you don’t want anything to jeopardize the purchase of your dream house. Getting approved for a mortgage is one of the most important steps in the property buying process.
By making wise decisions in how you manage and use your money before you apply for a mortgage, you increase the chances of getting the home loan that meets your need.
If you’re in the home buying process, what kinds of situations have you experienced in applying for a mortgage? Share your thoughts below or ask a question to learn more about getting a home loan.
Kym E. Booke, a CNE designated REALTOR in Las Vegas, offers experienced assistance throughout the Vegas Valley and its surrounding areas.