Top 10 mortgage mistakes and how to avoid them

Here's a list of the top 10 mortgage mistakes home owners/buyers should avoid when planning to finance a home purchase or refinance an existing mortgage.

Anything on this list should be avoided at all costs to ensure your credit score is as high as possible and that you don’t run into any qualification problems when it comes time to get that sparkling new mortgage. Otherwise you could end up with a higher-than-necessary mortgage rate, or simply get declined!

1. While an obvious no-brainer, avoid bankruptcy or foreclosure. Either could keep you out of the mortgage game for several years.  Also avoid late mortgage payments. Even if your credit score is up to snuff, a late mortgage payment that shows up on your credit report can disqualify you with many banks and lenders. 
2. Not "locking in" a mortgage rate. If you fail or forget to lock an interest rate for your mortgage in the months before you purchase or refinance, rates could increase.  Yes, you have the option to lock and float down a rate, but make sure you understand both options and keep an eye on interest rates before and during the home loan process. 
3. Listing your property on the MLS and then attempting to refinance that same property within six months (or longer). Lenders don’t love the idea of giving you a loan on something you don’t actually want, or tried to get rid of just months before.
4. Applying for a mortgage with charge offs and collections on your credit report (consumers may have these in error. They can be removed via a credit bureau dispute. They crush your FICO score!). Regularly review your credit report to ensure there are no surprises long before you begin the mortgage process.
   
   Put simply, a low credit score will lead to a much higher mortgage rate, and even disqualification if it drives your monthly mortgage payment high enough. Also steer clear of credit counseling. (Many banks and A lenders won’t lend to borrowers who have used these services in the recent past.)
5. Not figuring out how much you can afford well before beginning your property search. You should get pre-qualified or pre-approved before you even start looking at homes. Once you know how much home you can afford based on your salary and assets, you can properly assess the situation. Otherwise you could just be wasting your time and setting yourself up for disappointment.
6. Opening new credit cards or making excessive charges on existing credit lines before and during the loan application process. This can hurt your credit score and increase your debt load, which could lead to disqualification.  See debt-to-income ratio for more on that. You can buy your new leather couch and big-screen TV once the loan is funded and closed.
    
7. Attempting to get a mortgage with less than two years consecutive employment in the same occupation or field (unless you’re a recent grad with proof of future income). You must prove to lenders that you will actually continue to make the money you’re currently making to obtain a mortgage.
8. Trying to get a mortgage without documented 12-month housing history or your own verifiable assets that cover at least two months of your proposed mortgage payment, including taxes and insurance. Yes, lenders want to know that you paid your rent on time previously and have enough in your bank account to cover future payments.
   Oh, and the money needs to be in your account, not under your mattress.  
9. Not establishing your credit history. You generally need at least three credit tradelines (that show up on your credit report) with a minimum two-year history on each. Yes, credit is the root of all evil, but also a necessary one in the mortgage world, that is, unless you plan to pay for your expensive house with cash.
10. Not shopping around. If you don’t take the time to comparison shop, as you would any other product you buy, like a big-screen TV or a car, you’re doing yourself a major disservice. Put in the hours to ensure to find the right bank to work with and snag the best deal or better still, engage the services of a Mortgage Broker. They will do the shopping for you.
    
    Bonus tip: Don’t forget to compare different loan products, such as fixed-rate mortgages vs. variable rate, and conventional loans vs. insured loans. All have their pros and cons, and should be carefully considered before applying for a mortgage. There is no one-size-fits-all approach folks.

*Many mistakes on this list pertain especially to first-time homebuyers. Homebuyers usually always have to verify assets, employment, and credit history. Sure, you might find a lender willing to give you a mortgage without those requirements, but your mortgage rate will be less than desirable!

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