Ready to buy a home and want to ensure that you’re in a position to obtain the mortgage that you need with terms that are favorable to you? With so many variables that factor into acquiring a home loan, knowing the common blunders that potential homebuyers make when they go shopping for financing can put you ahead of the game when it’s your turn. Navigate more easily through the mortgage process, and increase your likelihood of securing a loan that will allow you to afford the home you want, by sidestepping these five mistakes:
Neglecting to check credit and clean it up if necessary: In general, it’s a good idea to obtain copies of your credit report from the three major credit bureaus (Equifax, Experian and TransUnion) about six months before you start seriously looking for a home to buy. In addition to income and assets, mortgage lenders base much of their decision on whether to approve a loan, and for what amount and at what interest rate, based on how creditworthy they view an applicant. It’s essential to give yourself a window of time to review your reports and correct any errors that could be lowering your scores (e.g. unauthorized accounts in your name, inaccurate balances and incorrectly reported charge offs) before a potential lender can run your credit. At www.annualcreditreport.com, you can obtain a free copy of your credit report once per year from all three credit bureaus. And if your credit score needs improvement (700 and above qualifies you for the best interest rates) do what you can to raise it by paying down debt, making bill payments on time, and reducing balances on revolving lines of credit.
Applying for new loans or credit cards and closing old accounts: Any time you apply for a line of credit or a loan, your credit reports are checked. Since a hard inquiry on your credit history will temporarily lower your score, it’s advisable to avoid major purchases that require new credit or a loan until after you’ve closed on your new home. Also think twice before closing any old credit lines during the mortgage application process. Closing an account will reduce the amount of available credit you have to use, which will raise your credit utilization rate— the percentage of credit you’re using as compared to your credit limits. Credit utilization is a major factor in determining credit scores, and a higher credit utilization rate translates as a lower credit score.
Failing to obtain pre-approval: In today’s Bay Area housing market, those who don’t demonstrate that they are serious about buying a home and are well-qualified to make a purchase with a pre-approved loan are at a major disadvantage among buyers who have completed this process with a lender. The reality is that potential buyers without a pre-approved loan may be passed up by real estate agents and sellers in favor of those who appear to be a safer bet. When you obtain a pre-approved loan, you go though most of the loan process prior to making an offer on a home. Unlike pre-qualification, which is a simpler process whereby a lender offers a tentative assessment of the size of a loan they may provide to a borrower, pre-qualification requires that the borrower provide documentation of income and assets such as tax forms, bank statements, pay stubs, and more.
Applying for a mortgage without the necessary verifiable assets: In assessing a potential borrower’s risk, lenders look for assurances that the applicant has sufficient liquid assets to provide for a down payment, at least two months of mortgage payments, and closing costs. Lenders also seek to ascertain whether the funds available in an applicant’s bank account truly reflect the person’s overall finances. In other words, lenders want to know that the money in an account represents savings from legitimate income sources and not from a temporary transfer of funds from a relative or friend. For this reason, most lenders require that potential borrower’s have the requisite funds in their accounts for a minimum of two months before applying for a loan.
Not properly budgeting for closing costs: Before a home is formally transferred to a homebuyer, the buyer must pay the entire amount of what is referred to as closing costs. The various items that comprise a buyer’s closing costs vary somewhat depending on the transaction and the area where the home is purchased. Some examples of typical closing costs include prepaid taxes, a portion of the homeowner’s annual insurance premium, title search or exam fees, attorney fees, loan origination fees (the commission paid to the person processing your application), government filing fees and the first month’s premium of Private Mortgage Insurance (PMI) for those who are required to purchase it. Be sure that you have a good estimate of what your closing costs well ahead of time to avoid any surprises.
If you’re looking for more help in the home buying process and want to work with trusted real estate professionals, SF Police Credit Union’s Realtor Referral Affinity Program for SFPCU members is a great place to start. Not only does this program provide an excellent referral source for reputable real estate agents, SFPCU members will also receive up to 25% of the commission credited back to them at the close of escrow, plus a $500 refund in fees, amounting to thousands of dollars in savings! In addition, this program offers members special discounts on home security systems, moving services, rental cars and more. For details, visit https://www.sfpcu.org/realtorreferral.