3 mistakes to avoid when getting a mortgage
Mortgage rates may have increased from where they were during the height of the COVID-19 pandemic, but historically speaking, they're not totally unreasonable. In fact, at one point, interest rates on 30-year-loans were well into the double-digits — still higher than today's roughly 7% rates.
Still, mortgage rates aren't set in stone — and they can vary quite a bit based on your lender, loan amount, credit, the timing of your application and many other factors. You can see what kind of rates you qualify for today by using this easy tool.
What are some common mortgage mistakes?
If you're planning to apply for a mortgage soon and want to secure the best rates possible, then make sure to avoid these three costly mistakes.
Choosing the first lender you find
Mortgage loans vary from lender to lender. Each one offers different loan products, rates and terms. In many cases, they have different qualifying requirements, too. Because of this, it's important to compare loan options from at least a few companies.
You can get started on the process now. A mortgage loan provider like Rocket Mortgage can help you compare rates and offers.
According to Freddie Mac, getting quotes from three lenders can potentially save you $1,500 over the life of your loan, while five quotes can save you an average of $3,000. Sometimes, the savings can be even bigger — particularly on larger loan amounts.
When comparing loan options, you may want to consider:
- The bank or credit union you typically bank with. Sometimes lenders offer loyalty discounts to existing customers. This might mean a lower rate or waived fees (or both).
- An online lender or mortgage company. These typically have fewer overhead costs than other companies and may be able to offer lower rates.
- A mortgage broker: These are mortgage experts who have access to loan products from dozens of different companies. They can help you shop around for the best loan (and rate) for your needs.
When comparing quotes, make sure you look at the fees each lender is charging. There is also a section on page 3 of your loan estimate that details the total costs of the loan in five years. This can give you insight into which loan is the most affordable option in the long run. Don't forget to check rates, too!
Not getting pre-approved
Getting pre-approved for your mortgage loan comes with several benefits.
- It gives you an accurate idea of how much you can likely borrow. You can then use that number to help guide your home search and stay on budget.
- It helps you better compete with other home buyers. You can include your pre-approval letter in any offers you submit and it gives sellers confidence, letting them know you have the finances to back up your bid.
- It can sometimes help your loan close faster. Because the lender already has much of your financial information on file, being pre-approved can sometimes help speed up the process.
Failing to safeguard your credit
Your credit is extremely important in the mortgage process. Not only does it impact your ability to qualify for a loan, but it also influences your mortgage rate, too.
Before applying for a mortgage, you want to make sure your credit score is in a good place. You can easily determine your credit score and receive regular credit reports through sites like Experian. See what credit score range you're in within minutes!
Mortgage lenders typically reserve the best interest rates for borrowers with scores of 740 (sometimes 760) or higher. If your score's not at that point yet, you might try increasing it before filing your loan application.
Once you've filled out an application and gotten pre-approved, staying on top of your credit is critical. Your lender will run your credit report one more time before your closing date, and if your score has dropped, your card balances have skyrocketed or you're late on payments, it could delay your loan — or even disqualify you altogether.
To ensure this doesn't happen, in the weeks leading up to your closing, and don't charge any big-ticket purchases either — including furniture or decor for your new home. Your credit should remain as stable and unchanged as possible once you apply for a mortgage, so save buying these items for a later date, once you've closed on the loan.
Other mistakes to avoid
This isn't an exhaustive list, of course. There are other slip-ups that can throw your mortgage off track, too — things like forgetting to budget for closing costs or changing jobs/reducing your income right before closing on your loan. You'll also want to avoid:
- Getting an adjustable-rate mortgage: This is when a borrower is locked in at one rate (usually lower) before having it change later in the life of the loan. The changes can be drastic, jeopardizing the owner's ability to make timely monthly mortgage payments. Fixed-rate mortgages, meanwhile, remain that: fixed. Borrowers should try to get the latter and avoid the former.
- Putting down a small down payment: Granted, this may be out of your control. But if you can manage it, it's beneficial to put down at least 20% on your new home loan. Many lenders require at least this much anyway. Or, if they don't, they'll likely tack on Private Mortgage Interest (PMI) to your loan until you've reached the 20% threshold. Avoid the PMI and use a larger down payment.
To avoid falling victim to these, educate yourself on the mortgage process before applying for a loan. Once you do apply, work closely with your mortgage broker or loan officer, and heed their advice. You can also contact a free housing counselor who can guide you through the process.
