If you’ve had “homeowner” on your vision board for a while and have finally saved enough money to make that dream a reality, it’s tempting to rush through the mortgage application process. It’s an understandable impulse that could cause you to make unnecessary — and costly — mistakes. Avoid these four errors and save yourself frustration and money.
It’s a good idea to look over your credit score and report before you even start house hunting, and if you haven’t done so by the time you’re ready to apply for a mortgage then you’re taking a big risk. Make sure your report doesn’t have any surprise negative items (like a delinquent account) and that your score is up to snuff — there’s no magic number to aim for, but a higher score will typically qualify you for a mortgage loan with a lower interest rate.
The credit reporting bureau Experian lets you see your credit score for free, and can also show you what activities will help improve your credit score (like paying down certain debts) and what activities might lower your credit score (like opening another credit account).
A pre-approval letter is a statement from a lender saying that they are willing to lend you up to a certain amount of money to purchase a home. Of course, the letter isn’t a guarantee the lender will loan you the full amount when you actually apply for a mortgage. But at least you can avoid falling in love with a property that you never had a chance of affording.
Another advantage you get with a pre-approval letter is speed. Buying a home isn’t like popping into the grocery store to pick up a box of cereal — you’re almost certainly competing with other potential buyers. Pre-approval puts you one step ahead of someone who didn’t bother, and in a competitive market that could be just the edge you need to close on the sale.
Your debt-to-income (DTI) ratio measures how much debt you have relative to your income. Mortgage lenders use your DTI to determine how much of your monthly income goes toward paying down debt you already have.
A low DTI is a sign that you’re able to manage your debts, but a high DTI signals to lenders that you may not be able to pay off your mortgage.
To calculate your DTI for yourself, just divide your total monthly debt payments (credit card bills, rent or mortgage, car loan, student loan, personal loan, etc.) by your gross monthly income and multiply the result by 100 to get a percentage. It’s generally recommended that you aim for a DTI that’s at or below 43%.
Applying for a mortgage with a high DTI could make it more difficult to get approved by your ideal lender, especially if you’re looking to take out a large loan. Before you apply, try calculating your DTI for yourself and lowering it by paying down some existing debt.
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When applying for mortgages, don’t just go with the first lender that approves your application. Applying for loans from multiple lenders can improve your chances of getting the amount you need with as low of an interest rate as possible. Keep in mind that the lower your interest rate, the more money you’ll save over the life of the loan.
Other lenders may also offer loans that don’t charge certain fees, which can save you even more money on the application process. Ally Bank, for instance, doesn’t charge lenders fees like application fees, origination fees, processing fees and underwriting fees. This can save you a decent amount of cash that you can put toward other housing and moving costs.
Ally Home
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Annual Percentage Rate (APR)
Apply online for personalized rates; fixed-rate and adjustable-rate mortgages included
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Types of loans
Conventional loans, HomeReady loan and Jumbo loans
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Terms
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Credit needed
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Minimum down payment
3% if moving forward with a HomeReady loan
Additionally, some lenders may offer qualifying applicants mortgages with enticing features, such as the ability to make a 0% down payment without paying private mortgage insurance (PMI). PMI is a monthly charge that costs 0.5%–1.5% of your total loan amount, and it commonly applies to applicants who make a down payment of less than 20%.
PNC Bank offers a few loan options that offer a similar way to save money. Their Community Loan is a special program that allows homebuyers to put down as little as 3% without paying private mortgage insurance. They also offer specialty loans for certain professions.
PNC Bank
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Annual Percentage Rate (APR)
Apply online for personalized rates; fixed-rate and adjustable-rate mortgages included
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Types of loans
Conventional loans, FHA loans, VA loans, USDA loans, jumbo loans, HELOCs, Community Loan and Medical Professional Loan
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Terms
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Credit needed
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Minimum down payment
0% if moving forward with a USDA loan
While beginning the mortgage application process can be an exciting step toward homeownership, it’s important to avoid making mistakes that can hurt you financially. For even more personalized advice, you can speak to a realtor or financial planner who can take a look at your circumstances and recommend other money-saving moves to make when buying your home.