Top 7 Things to Avoid Before Mortgage Shopping
Before you begin your search for a mortgage, it's crucial to set yourself up for success by avoiding certain mistakes that could hinder your ability to secure the best loan for your financial situation.
While it's easy to get excited about buying a home, there are several things you should not do before starting the mortgage process.
These pre-mortgage missteps can hurt your credit, complicate your financial picture, or cost you more in the long run. Below are the top seven things you should avoid before looking for a mortgage:
1. Ignoring Your Credit Score
Your credit score is one of the most important factors in determining the interest rate and terms you’ll receive on a mortgage.
If you don’t take the time to check your credit score before applying for a loan, you could be in for an unpleasant surprise.
A lower credit score means higher rates, which can lead to paying tens of thousands more over the life of the loan.
If you find errors on your credit report or have debts that can be paid off to improve your score, taking action ahead of time can have a substantial impact. Make sure to request a free credit report from the three major bureaus (Equifax and TransUnion) and dispute any inaccuracies.
2. Taking on New Debt
Before you apply for a mortgage, it's crucial not to take on any new debt, whether it's a car loan, credit cards, or personal loans.
Mortgage lenders assess your debt-to-income ratio (DTI), which is the percentage of your monthly income that goes toward paying off debts.
Adding more debt can raise your DTI, making it harder to qualify for a mortgage or limiting the loan amount you can secure.
In addition, higher debt levels can lower your credit score, which could result in a higher interest rate.
If you’re planning on making any significant purchases, such as buying a car or financing appliances, it’s best to wait until after you've secured your mortgage.
3. Changing Jobs or Careers
Lenders want to see stability when they evaluate your mortgage application. A steady income helps assure them that you’ll be able to make your monthly mortgage payments.
If you change jobs or careers before applying for a mortgage, it could raise a red flag for the lender.
Job changes can disrupt your income flow and make you seem less reliable, even if you're earning more money in your new position.
If possible, avoid job changes at least six months before you begin looking for a mortgage, especially if you're moving to a less stable field.
4. Making Large Purchases
Making large purchases, like buying furniture, expensive electronics, or a new car, before or during the mortgage process can be detrimental to your approval.
When you apply for a mortgage, lenders look at your current debt levels, and large purchases can increase your debt load, thus affecting your DTI ratio.
Even if you have a great credit score, significant new purchases might cause lenders to reconsider your application.
It’s important to keep your finances steady before and during the mortgage application process. If you need to make large purchases, do so only after your loan has been approved and closed.
5. Co-Signing Loans for Others
When you co-sign a loan, you are taking on the financial responsibility for that loan if the primary borrower defaults.
Lenders consider co-signed loans as part of your overall debt profile, which could increase your DTI ratio and hurt your chances of securing a mortgage.
Even if you aren’t the primary borrower, the debt still shows up on your credit report and could affect your loan eligibility.
Before applying for a mortgage, avoid co-signing loans for family members or friends. If you've already co-signed for someone, explain it to your lender upfront and be prepared to provide documentation showing that the debt is being paid as agreed.
6. Changing Your Financial Habits
Before looking for a mortgage, it’s important to maintain stable financial habits. Avoid making drastic changes to how you manage your money.
For example, don't drastically reduce your savings or start spending large amounts on discretionary items.
Lenders want to see that you have a reliable financial track record, which includes a consistent pattern of saving and spending.
If you suddenly stop saving or begin spending recklessly right before applying for a mortgage, it could raise concerns for lenders about your financial stability. Instead, continue saving and keep your spending in check as you prepare for the mortgage process.
7. Not Understanding Your Budget
A critical mistake is not fully understanding your budget before mortgage shopping.
It's essential to have a clear understanding of your current financial situation—how much you’re earning, your monthly expenses, and what you can realistically afford in terms of a mortgage payment.
Failing to create a budget or misjudging how much you can comfortably spend on a mortgage could lead to you overextending yourself.
It's not just about the loan; you need to account for property taxes, insurance, maintenance, and other living costs that come with homeownership.
Understanding your budget will help you avoid taking on a loan that you can’t afford, ensuring long-term financial stability.
Conclusion
Buying a home is an exciting journey, but it requires careful planning and consideration.
Before diving into the mortgage process, make sure to avoid these key mistakes: checking your credit score, taking on new debt, changing jobs, making large purchases, co-signing loans, changing your financial habits and not understanding your budget.
By avoiding these pitfalls and preparing your finances in advance, you'll be in a better position to secure the right mortgage at the best possible terms.
Taking these steps ensures that your mortgage process goes smoothly and that you won’t face unexpected challenges along the way.
