8 Mistakes People Make When Applying For Their First Mortgage

 

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A mortgage is the biggest loan you’ll take out in your life. Getting approved for these loans can be a challenge - especially if it’s your first mortgage. As well as being required to pay a sizable down payment upfront, you’ll often need to meet various other requirements such as having a stable and sufficient income and a high credit score. A small mistake could result in you being rejected by a lender, which could prevent you from buying your first home.

There are also other mistakes that you can make when applying for a mortgage such as failing to plan ahead for future expenses or simply not shopping around. While you may still get approved, such mistakes could be unnecessarily costly.

Below are just eight of the most common mistakes that people make when applying for their first mortgage - and how you can avoid them.

Not shopping around for mortgages

Many first-time buyers don’t take enough time to compare the various mortgage deals that are out there. In doing so, you could end up paying more interest or a larger down payment than is necessary.

There are many sites that you can use to compare mortgage deals. There’s also the option of using a mortgage broker - these are professionals who sometimes have access to exclusive deals not found on the market.

Make sure to look into specialist mortgages too such as USDA loans. While these may only be available for certain properties, they can have perks such as lower interest rates and lower approval requirements. The likes of this USDA loan calculator can help you to work out the costs. Such calculators are worth using for getting an accurate idea as to the cheapest option.

Applying with a poor credit score

If your credit score is low, it’s likely that you’ll get rejected by the majority of lenders. If you do find a lender that is willing to approve you, you could find that there are conditions such as a high down payment and high interest rates. All in all, having a poor credit score is not ideal when applying for mortgages.

If your credit score is good, you stand a better chance of being approved and you will likely be able to explore a greater range of mortgage options. There are many ways in which you can boost your credit score such as using credit builder loans, signing up to the electoral register, checking personal details on accounts match and using a credit card appropriately.

Ignoring first-time buyer assistance programs

There are a number of assistance programs out there that are only available to first time buyers. These vary from state to state - some may include access to low down payments, while others may involve the options of grants to put towards your down payment.

You’ll likely have to meet certain requirements in order to be eligible for these programs. This could include being on a low income or having to complete a homebuyer education course. Do your research to find out exactly what these requirements are.

Saving up too small a down payment

When taking out most mortgages, you will have to pay a down payment upfront. The average down payment paid by a first time buyer is 20% of the property’s value. For a $250,000 home, this could mean saving up a down payment of $50,000.

It’s possible to find mortgages that require much lower down payments - sometimes as low as 5% or even 2%. However, you may need a high credit score and a high income to be approved for these. A smaller down payment also means paying off more in the long run, which usually means much higher monthly repayments.

Consequently, you should aim to save up as much as you can to place as a down payment. This will give you more mortgage options to explore and you could find that credit score requirements and income requirements aren’t so high.

Getting a new job while applying

If you’ve been thinking of getting a new job, you might want to wait until after you’ve bought your home. When assessing the eligibility of an applicant, lenders like to see proof of a stable income. Ideally, you need to have been in the same job for six months before making an application. If you’ve changed jobs within the last six months or are in the process of switching jobs, you could find that you get rejected.

Hold out until after your mortgage has been approved before you start looking for a new job. It could be important not just for the success of your mortgage application but also for your sanity - starting a new job and buying your first home can both be stressful, so you don’t really want to be doing them at the same time.

Taking out other loans while applying

While it’s good to have a history of borrowing, you should avoid taking out loans just before applying to a mortgage. The need to take out extra loans may show that you’re living beyond your means and could cause lenders to trust you less, potentially resulting in your application being rejected.

Mortgage lenders tend to only look back at your last six months of expenses. Try to avoid taking out any fresh debts within this six month time period. Usage of existing credit cards is fine, so long as you don’t max them out or get close to your limit.

Failing to budget for extra home-buying costs

When buying a house, it’s not just the mortgage down payment that you have to save up for. There are numerous other mortgage-related costs such as valuation costs and processing fees. On top of this, you may need to pay fees to a broker for helping you find a mortgage or a conveyancer for handling the legal paperwork.

Make sure that you’ve got enough money set aside to pay for these extra expenses. You don’t want to run out of money during the application process and not be able to afford a valuation or a conveyancer.

Not factoring in the long-term costs

If you find a mortgage that you are eligible for make sure to consider the long term costs before you hand your down payment over. Some mortgages can come with high monthly repayments that could be difficult to keep up with. Others may have high interest rates or other hidden charges such as expensive late payment fees (or even early repayment fees in some cases).

Use calculators to work out how much you’ll be spending in the long run. Be realistic about how much you are willing to pay a month - if you’ve already been living frugally to afford a down payment, you don’t want to continue living frugally once you’ve finally obtained your dream home.

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