10 Costly Mistakes People Make When Applying for a Mortgage

Are you in the market for a mortgage? How prepared are you?

A mortgage is a major undertaking that can become more difficult if you don’t make the right moves early on to have a smooth transition to your next — or first — home purchase.

Before you start your mortgage application process, review these common mistakes to avoid wasting money and time with your new purchase.

Your credit score can be an important part of the home-buying process, so don’t brush it off as something you won’t have to worry about just because you’re not checking it daily.

Check your credit score with the three credit reporting agencies before you start the home-buying process. You need to know what kind of bargaining power you have (or don’t have) when you talk to lenders.

You can get a free copy of your credit report at annualcreditreport.com, so keep more money in your wallet by avoiding services charging you for your credit report.

You may have a recommendation for a particular lender from friends and family, or perhaps you assumed you’d just get a mortgage from your local bank or financial institution.

However, lender rates can differ from place to place, so it’s important to check different options and compare rates before you decide on a specific lender.

You may be surprised at the different specific points of each lender, not only for rates but also potentially for buying points, penalties for paying your mortgage off early, or other points in the loan.

You may have found the perfect house, and you need to make an offer before someone else snatches it up, but you can’t because you don’t have a pre-approved lender.

Consider getting approved for a loan before you put in an offer. A pre-approval can make the buying process much smoother and help you secure your dream house rather than scrambling and losing out without a pre-approval.

A mortgage can be daunting with all the details, but ignoring those details could cost you more later.

Make sure you review all the finer points of the loan, such as your repayment schedule, to see if there are any changes in your interest rate over the term of the loan or penalties for paying your principal early.

You should also check for other issues, such as how much you have to put down, what kind of extras you might have to pay (like mortgage insurance), or any unexpected fees or term conditions.

You may think you just need to afford the mortgage each month, but there are other costs associated with being a homeowner you need to consider when budgeting your home costs.

You might be able to afford the home, but factor in heating and cooling, insurance costs, and HOA dues. It’s also important to include annual maintenance for your HVAC system, dryer vent, and water heater.

You should also have an emergency fund to cover surprises like major repairs. Aim to save enough to cover three to six months of living expenses.

Banks will give you a specific figure for how much they can lend you once they review your paperwork.

But the amount the bank can lend you and the amount you feel comfortable spending might differ. There’s nothing wrong with searching for a home at a lower price than what the bank approves you for.

Remember to factor in other living expenses, your monthly budget, and potential goals for saving money when deciding how much you’re comfortable paying.

During hot housing markets, some buyers may decide they’re okay with waiving a home inspection and dealing with whatever issues arise after they buy the home.

But it’s important to schedule a home inspection and make sure it’s completed before you close on the house.

Skipping a home inspection simply to get a home could cost you quite a bit of extra money that might not be within your budget if you find expensive repair issues after closing the house.

Pulling some papers together, showing them to the bank, getting approved, and buying a house shouldn’t be that difficult.

But there are plenty of steps in between that take time to process, so make sure you account for any issues that can arise and the extra time it takes for each step.

It’s a smart idea to start the mortgage application months before you’re ready to actually put an offer on your home.

You may be in such a rush to buy a home that you don’t care if you only have 5% or 7% saved for a down payment.

But a small down payment can cost you a lot. Putting down less than 20% could force you to pay monthly mortgage insurance, which can add up over the life of the loan. 

A small down payment could also mean big monthly payments that cause you to struggle.

You may be all set to close on your home with your mortgage in place and ready to go, and then you realize you have to bring extra cash to the table for closing fees.

Closing fees could include homeowners insurance, homeowners association fees, property taxes, title insurance, and appraisal fees.

Make sure you clearly understand all the money you have to bring when you close on your next home.

Taking on a mortgage is a major endeavor. Do it right, or you could ruin your financial future or struggle with the stress of trying to fix your mistakes later.

Remember, you can get a free copy of your credit report, so make that an early step and clean off any debt or reporting errors before you begin the loan process.

You should also factor in other costs such as groceries, gas, or savings to retire early to make sure your monthly expenses aren’t dominated by your home alone.