Do most first-time home buyers know that the mortgage application process can take up quite some time?
Are the many steps involved in the application process likely for people to make more mistakes?
Can mortgage mistakes cost first-time home buyers a lot of money?
Yes, it does!
They sure are!
Oh yes, it can add up!
Okay. We have now set the record straight that the entire mortgage application process is far from easy, even more so, one is more prone to make mortgage mistakes when going in unprepared!
It always amazes me to see how much research people do prior to buying that new 4K SUHD TV, going through one review after another for days or weeks on end. Yet, when it comes to getting properly prepared to buy one of life’s most expensive assets (ie. one’s personal home), they’re somewhat okay going in blindly!?
No need to worry: the upside is that a lot of these mortgage mistakes (or mis-information) during the application can entirely be avoided!
Regardless whether you’ve bought and sold a number of houses these past few years, or whether you’re first-time home buyers, it is rather easy to make some of these mortgage mistakes (especially, if you weren’t aware some of these things were actually big things!).
In order for us to learn from these mortgage mistakes and hopefully avoid them going forward, let’s have a look at the 10 Biggest Mortgage Mistakes First-Time Home Buyers Make:
Read through the summarized 13-slide version on SlideShare:
Mistake #1 – Not reviewing credit report
A lot of people, especially first-time home buyers, tend to be quite nonchalant about their credit report.
Is it perhaps the lack of understanding of how important credit scores are when applying for a mortgage loan? Unless you’ve got a clean credit record servicing your debt over the years, the financial institutions are unlikely to hand over any loans!
A credit score is calculated by looking at a number of financial statistics, such as one’s payment history, new/old credit, amount outstanding, types of credit, length of credit availability, to name but a few. The better the score, the lower the interest rate at which you will borrow; and subsequently, the lower the credit score, the higher the interest rate!
If one were to stick a dollar amount on the difference between the two, I’m sure it could pay for a very nice overseas vacation, don’t you think?
Did you know that each of the major credit report agencies allows you to order a free credit report once a year!?
And why would one need to be worried about checking out one’s credit report prior to applying for a mortgage?
Well, based on a study by U.S. PIRG, a shocking 80% of credit reports (that’s 4 out of 5!) contains errors! I’m sure in South Africa, this won’t be too much different!
In other words, unless you’ve tackled those errors prior to applying for a mortgage, your credit score will now be lower than it could to have been. And, guess what?
If you had done your credit report homework before the mortgage application process, this wouldn’t be an issue! Noticed a small mistake? No problem, go ahead and dispute it. Seen a ‘bad blemish‘ on the report? Time to start repairing it now before it’s time for the mortgage application.
Any experienced mortgage broker will be able to assist you in analyzing your credit history and make a plan how to pay off some of the outstanding debts. Figure out a way to repair your credit report and you’ll end up saving thousands! Make sure you have ample of time to correct the necessary, so set aside about 6-12 months before you start applying for mortgages! After all, a good credit rating isn’t achieved overnight!
I once heard a bond originator say, “The golden rule of credit is that you can’t get it until you’ve had it.”
That little piece of paper is something you ought to know by heart, especially when it’s the ‘final check’ before the mortgage loan application!
Plus, as first-time home buyers, this will save you a lot of stress waiting for the interest rate quotes from the financial institutions!
Mistake #2 – Using low or zero down payment
Lenders tend to be of the impression that, “If the buyers don’t have any skin in the game, why should we?” when referring to how much of a down payment they normally expect buyers to come up with.
While I’m sure there are quite a few reasons why a bigger deposit is beneficial to first-time home buyers, here’s a short list of the 5 most important ones:
- Ease of approval:
A big(ger) deposit is a great sign of borrower strength and informs the lender you don’t mind putting some equity into the property already, which will increase the odds of getting a mortgage approval. Besides that, in the negotiation stage of the bidding process, a bigger deposit will go a long way as well! - More favorable interest rate:
With a preferably 20% or more initial deposit, the financial institution will see its exposure reduced, as the so-called loan-to-value ratio is lower! Lower rates over the life of the loan will save you thousands in interest as well! - Lower monthly mortgage payments:
It doesn’t take a rocket scientist to figure out if your interest rates will be lower, that your outstanding monthly mortgage payments will be lower as well! Nothing stops you from paying more into your bond than agreed, hereby reducing the time it takes you to pay the entire mortgage off. - Reduce mortgage insurance:
It normally takes a handful of years before some equity is build up, depending on the type of loan. Keep in mind that the majority of the initial years’ worth of payments is made of interest! At one point, you can look into adjusting the private mortgage insurance (unless you like paying an extra few hundred per month of course). Having more equity in the property, the financial institution is less at risk if you were to get into trouble repaying. - Avoiding negative equity:
As the previous housing crisis clearly has demonstrated, property values do fluctuate and if they were to start sliding, the odds of you getting into a negative equity scenario are small.
Having read the above, doesn’t it just make financial sense to avoid using a low or zero down payment?!
Mistake #3 – Underestimating the impact of existing debt
Do you have any idea how much credit you have available to you right now?
Most lenders will check your so-called debt-to-income ratio, as well as timeliness of your payments, types of accounts and overall payment history. Having too much debt when going into a mortgage application process is simply asking to be declined for a loan. There’s only so much credit a lender is willing to extend to you, which is why the consumer debt accounts for such a large potion of the credit score.
A lot of first-time home buyers don’t necessarily think everything through when applying for a mortgage loan. Financial institutions, on the other hand, will closely look at an applicant’s current outstanding debt, and bring it in relation to their income. They won’t allow the debt (i.e. car loan, credit cards etc) to surpass a certain percentage of the client’s monthly income.
If there’s one lesson to be learnt when applying for a mortgage bond, try to pay off as much of your credit card debts and other types of debt before you start with the mortgage application!
Mistake #4 – Changing jobs mid-application process
It’s rather advisable to avoid interrupting one’s employment during the mortgage loan application.
It really comes down to one word: stability.
Financial institutions prefer to see a recent career history, which shows consistency. Unfortunately, changing jobs mid-way the process won’t necessarily kill all chances of getting the loan; the application process might just be (heavily) delayed, and you might need to bring forward some extra supporting documents to state your case. Some might even argue there’s a big difference between a job change vs. career change during the application process.
Even if you feel horrible at your current job and you’re ready to tell your boss his fortune: do not change jobs until you’ve closed on the home loan!
Will it really be that tough for you to hang on a few more days/weeks until all the necessary paperwork has been signed, approved, received, confirmed, sealed, emailed, …?
Mistake #5 – Forgetting about total cost of homeownership
It pretty much comes down to managing expectations of the first-time home buyers!
How much house can they afford with their income? How much are the monthly taxes and insurance? How about basic maintenance? Or unexpected maintenance?
Are you aware that 1-2% of your property’s value ought to yearly be going towards routine maintenance of the property?
Financial institutions are very pedantic about their 30% rule, which states that total housing costs cannot exceed 30% of that person’s gross income.
First-time home buyers should get a pre-approval prior to the start of their home search, so they’ll know how much house they can afford. Ideally, they should not try to maximize that amount, as one needs to realistically calculate in some extra monthly expenses. Owning a home can be an expensive ordeal, once you start adding up all the costs, such as property taxes, utility bills, repairs, homeowner’s insurance, etc!
A rule of thumb which can be used is to try to spend less than 28% of your pre-tax income on housing costs (i.e. monthly mortgage payments, insurance premiums, associations fees etc)
Mistake #6 – Buying big-ticket items mid-application process
We have mentioned stability before.
Besides job stability, this also applies to credit (card) accounts. During the mortgage application process, there’s no need whatsoever to be opening or closing credit accounts, as it’ll negatively affect your credit rating score!
As tempting as it might be to start shopping for new interior decorations and furniture for the new house, any large purchases will be flagged and hit your credit score. Unfortunately, most first-time home buyers are not aware of the ramifications of buying refrigerators, washers, dryers, garden equipment etc. on their credit card whilst the mortgage application process is underway.
The financial institution does (re)check your credit report up onto closing date, and any large deviations in your purchasing activity (affecting the so-called debt-to-earnings ratio) might result in an adjustment in the loan amount and/or the proposed interest rate level! Paying with card would adjust your outstanding debt; paying cash could potentially signal a flag when your cash reserves are being monitored during this critical time!
That’s a big no-no, as one of the biggest mortgage mistakes first-time home buyers make is purchasing a new car or living room leather furniture set during the mortgage application process!
Mistake #7 – Forgetting about closing costs
Let’s be serious here: even if you have honestly forgotten about the closing costs when buying property, and while I’m sure there are a lot of things you might blame the real estate agent for, but I’m afraid every single agent out there (even the “less good” ones) will have touched on the topic of closing costs.
Numerous times!
The day you get your loan (which tends to be the same day you take ownership of your new property) is pretty much the loan closing. Before that point, you’ll need to have paid the necessary funds to pay for closing costs, such as attorneys fees, transfer costs, bond costs, taxes etc.
All-in-all, you’ll probably be looking at 2-7% of the purchase price (upper range of that percentage tends to be when buying a lower-priced property, and lower range percentage if you’re getting a bigger property).
Mistake #8 – Not shopping around for the best mortgage deal
When you booked your last airline tickets, did you go to one particular airline company’s website and buy a round-trip ticket Los Angeles – New York at their suggested price? Or did you search for all the available options for that particular route across different airlines, and depending on the price, you then decided to purchase the ticket?
Just as you would go about getting your airline ticket, that’s ideally how you should go shopping for a mortgage!
Yet, this is one of the biggest mortgage mistakes many first-time home buyers make!
There are so many different elements at play for your particular mortgage loan (i.e. your credit score, size of down payment, mortgage amount needed, etc) that every financial institution or lender will each put together a customized package specific for your situation.
Obviously, the interest rate charged and terms & conditions will vary across the different parties!
However, you won’t know that until you actually head out there and shop around! I’m not saying to be doodling for weeks to make a decision, but a little time spent shopping around will more than likely result in thousands saved over the period of the loan!
And yet, reading over some recent statistics from the U.S. Consumer Financial Protection Bureau, almost 50% of consumers who take out home mortgages fail to shop prior to application. Furthermore, for most borrowers, the mortgage shopping process stops after their first application!
As it turns out, 77% of borrowers only applied to ONE lender?!
Is the entire mortgage application process such an intimidating procedure, or is the excitement of finally buying that dream house getting in their way of thinking straight?
It’s no surprise to hear that the majority of these consumers may not have received the best mortgage solution for their specific circumstance!
Going online and doing your own thing when applying for a mortgage is indeed an option. So is doing your own taxes or defending yourself in a court of law!
Is it necessarily something you’d opt for or would you rather leave it to the professionals who do it day-in, day-out?
Mistake #9 – Not getting pre-approved for a loan
Looking at houses for sale without knowing how much you, as a first-time home buyer, can afford is setting yourself for failure and disappointment!
Plus, when you’ve finally found that house you’ve been dreaming about, and you’re ready to put an offer forward, there will be an enormous reality check when the seller won’t even be interested in considering your offer, given you’re not pre-approved nor even pre-qualified! Sorry to be the bearer of bad news, but another interested buyer with a lower offer but a pre-approval will make a much stronger case in getting the property!
One of the worst feelings for a seller (and the real estate agent, for that matter) is when the offer on the house falls through due to problems securing the necessary loan.
Everybody got all excited about that great offer (without pre-qualification / pre-approval), but as it turns out, the buyer was completely out of his league offering such an amount on the place.
What lesson can we learn out of this painful experience? That’s right: get pre-approved!
For the record, let’s not forget that being pre-qualified and being pre-approved is not the same thing!
A pre-qualification is a very casual procedure where the lender will have a quick look at how much money a person can borrow based on their income, outstanding debt, savings etc. There are many online calculations available to arrive at this rough figure. It’s an estimate of how much you might borrow with the information you plugged into the calculator.
On the other hand, a pre-approval is more of an involved process, where a number of documents are requested (such as tax forms, pay slips, employment etc), its information gets verified, one’s credit gets checked, and an agreement gets made up to provide you with a loan. Not set in stone, mind you, as it’s not a guarantee! The lender has verified your information and has agreed to give you a certain amount at a particular interest rate (with certain terms & conditions).
I must say that getting pre-approvals were more common a decade ago than they are now, as the financial institutions are less likely to do it.
Mistake #10 – Withholding information
And last but not least, we have the problem of withholding information on the mortgage application, whether that ‘forgetting’ to disclose a previous bankruptcy, foreclosure, late mortgage payments etc. Some of this may have passed 10 years ago, but times have seriously changed – for the better! No more fictitious numbers on fake payslips!
It’s pretty clear that if a financial institution were to find out after submitting the application that you have (purposely) omitted to come forward with certain information, or plainly lied about certain points, that there’s now a big shadow of untruthfulness over everything else you have supposedly fully-disclosed.
More often than not, your mortgage application will be declined, and may potentially jeopardize future applications as well.
Closing thoughts
There’s no doubt about it that the mortgage application process can be a stressful one!
Unfortunately, most people are rather shocked when they’re first explained how their credit report reads! Not everybody’s financial health is as good as they believe it to be!
Exactly why you need to check up on your credit history every year! As a general takeaway, if you would like a good credit rating, make sure not to get into more debt than you can afford (and make sure to pay it back on time!). It does sound so simple, however it’s anything but!
In the end, if your mortgage application gets declined, there’s a great chance one or more of the above mortgage mistakes were likely the cause!
Please use the above information to avoid mortgage mistakes as first-time home buyers! Who knows, it might result, not only in saving you thousands, but also avoid unnecessary emotional drama!
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About the author: The above article “10 Biggest Mortgage Mistakes First-Time Home Buyers Make” was originally posted and written by Xavier De Buck, your top-producing Johannesburg real estate agent. Xavier has been nationally recognized and awarded for providing service excellence, exceptional property sales, whilst exhibiting the highest level of professionalism. With over 15 years combined experience as a real estate agent and real estate investor, if you’re thinking of buying or selling a home in Johannesburg, Xavier would love to share his property knowledge and expertise.
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