Sign 1: Not Knowing How To Qualify
Even if this is not your first mortgage, the requirements change frequently so it’s important to learn how to qualify for a mortgage in today’s market. After the housing crisis and crash in 2008, most, if not all, lenders tightened their requirements. The six things that a lender will look at are credit, debt-to-income, proof of income, employment history, down payment, and assets. You can read more about the lending requirements here.
Sign 2: Unsure About The Credit Requirements
Generally, a lender will want you to have a credit score of 580 or above to qualify for a mortgage. Creditworthiness is now measured a few different ways. This includes with the traditional FICO credit score, by social media accounts, phone usage, and your overall online identity. Additionally, some lenders look at your utility payment history. This is used more frequently for folks who have little to no credit at all. More information about creditworthiness can be found here.
Sign 3: Starting A New Job
You must be gainfully employed for a minimum of two years to qualify for a mortgage. This is another big change that happened as a result of the 2008 housing crisis. Before 2008, you could simply “state” the amount of income you earned, and the lender did not verify employment, paycheck stubs, or tax returns. It is believed that this had a direct correlation with borrowers’ inability to repay their mortgages, which lead to the housing crisis. The requirements are different if you are self employed (You can read more about that here under bullet number 4).
Sign 4: Using Credit Cards
Using credit cards right before, or during, the mortgage application process is a huge red flag for lenders. Don’t do it. Lender’s will continuously check your credit until the actual day your loan closes, and if they find hard inquiries, they may deny the loan. Additionally, some borrowers get tempted because they’ve paid down their credit cards to qualify for the mortgage and now have a hefty line of credit which could be perfect for buying furniture, home improvements, or paying for landscaping. The lender is watching, so do not give into temptation and be sure to save all of your big purchases until after you close. Otherwise, you could lose the mortgage altogether.
Sign 5: Unexplained Sum Of Money
Many borrowers use money from a 401(k) or an IRA as a down payment. This is perfectly acceptable as long as the lender is made aware of where the money came from. They may require documentation as proof. It is also important to declare any sums of money given to you by family or friends. The lender will want to verify that it was a gift and not a loan. Lastly, to reiterate our advice about credit card usage, we do not recommend taking out cash advances on a credit card for your down payment. This adds to your debt-to-income ratio and will accrue additional fees from interest, oftentimes in the 20% range.
Sign 6: Not Knowing How Much You Can Afford
This is fairly simple math. Generally, you should be able to afford a home that costs about 2½ times your gross annual salary. Thus, if you make $100K gross income per year, then you should be able to afford a $250K home. However, you should also factor in any outstanding debt and additional expenses such as HOA fees, landscaping and maintenance, utilities, and the annual property taxes. When looking for a property, it is important to know your maximum budget before you start your search.
Sign 7: Unaware Of The Various Loan Types
There are several types of loans to choose from and you will want to educate yourself on the various options. Why? This caught many borrowers’ off-guard during the 2008 housing crisis when their ARM (adjustable-rate mortgage) ended the introductory fixed-rate term and the adjustable-rate term began, making many mortgage payments triple in size. Other loan types to learn about are conventional, government-insured, fixed-rate, VA, FHA, and jumbo loans.
Generally, lenders will want a 20% down payment to qualify for a loan. However, there are other options for borrowers who choose to put less down. FHA loans require a minimum of 3% down payment but may require more down depending on the borrower’s credit and the type of property being purchased. Keep in mind though, anything less than 20% will cost you because lenders add additional fees. You will need to pay PMI (private mortgage insurance) or FHA insurance until there is 20% equity in the home.
Sign 9: Not Comparing Loans
This can cost you a lot of money. Oftentimes borrowers overlook this simple step and end up working with a mortgage broker that was referred by their real estate agent or a friend or family member. Many borrowers do not know that banks are constantly re-balancing their loan portfolios. This means the same exact bank in a different region could be offering a great deal on home loans because they have too many business loans at the time. We suggest you shop and compare loans using Magilla Loans so you can determine what rates and terms you actually qualify for before you start your home search. This quick, free, and simple search can save you thousands.
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