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Whether you're a first-time homebuyer or a seasoned vet, mortgage missteps can happen during the homebuying process—even if you're careful. Being prepared for some of the more common issues can make it easier to plan around them or come up with a strategy to avoid them.
Take a look at these 10 common mortgage mistakes to help ensure they don't cost you the home of your dreams.
1. Not Getting Preapproved
Getting preapproved for a mortgage when buying a home is not a requirement, but it's highly recommended. Lenders provide preapproval letters to offer clarity around a potential borrower's creditworthiness and ability to afford a home within a certain price range.
Preapproval letters are typically a first step in the homebuying process, and are an important document to have on hand once you start making offers. Preapproval gives you (and your real estate agent) an idea of how much house you can afford, the type of mortgage loan you'll likely qualify for and the interest rate and terms the lender will likely offer.
During the preapproval process, the lender reviews your credit scores and credit history, recent pay stubs, current debts and assets, tax returns and other personal information. The lender will also check your credit report with a hard inquiry, which can temporarily cause a slight dip in your credit score.
Getting preapproved gives sellers the confidence you are a serious buyer, and having a preapproval letter may be a prerequisite for your offer to even be considered—especially in a hot market. Preapproval allows you to target your home search to your price point and make it more likely you will secure financing when it's time to buy.
For clarification about what your monthly payment may look like, you can use Experian's mortgage calculator. See the differences in rates and repayment terms and how they may affect your monthly payment and the total cost of a home over time.
†The information provided is for educational purposes only and should not be construed as financial advice. Experian cannot guarantee the accuracy of the results provided. Your lender may charge other fees which have not been factored in this calculation. These results, based on the information provided by you, represent an estimate and you should consult your own financial advisor regarding your particular needs.
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2. Not Checking Your Credit Score First
If you are thinking about buying a home, checking your credit early in the process is key. Your credit scores and history can significantly impact your ability to qualify for a home loan and play a large role in determining your mortgage rates and terms. Not checking your credit score early in the homebuying process is a common mortgage mistake some buyers make.
Mortgage lenders typically look at credit scores from all three major credit reporting agencies—Experian, TransUnion and Equifax—and use the score in the numerical middle when deciding what rate to offer. That is why it's so important to check your credit report prior to applying for a loan so you can make sure you know where you stand. You can check your Experian credit report and score for free anytime. You can also get a free report from each of the credit reporting agencies at AnnualCreditReport.com. If your credit isn't where you'd like it to be, take steps to improve your score before applying for a mortgage loan.
3. Not Considering Mortgage Insurance
Making a larger down payment increases the equity you have in your home while also reducing the amount of money you'll have to borrow. A 20% down payment was the standard at one point in time, but coming up with such a large down payment can be prohibitive for many of today's buyers—especially first-time homebuyers.
If you can't provide a 20% down payment, the lender will typically require you to purchase private mortgage insurance (PMI). The cost of PMI can typically range from 0.5% to 2% of the total loan amount per year and is usually paid monthly as part of your mortgage payment. With conventional loans, the PMI can be removed once you accrue 20% equity in your home. Before you make an offer, be sure to factor in the potential added cost of PMI if you can't make a 20% down payment.
4. Not Shopping Around for a Mortgage
Shopping around for a mortgage and comparing loans of the same amount and type can help lay out your options and pick the best mortgage to meet your needs. It can also mean more money in your pocket every month by getting the best rates and terms based on your creditworthiness.
If you don't have the time to comparison shop yourself or you're not certain you can secure the best rates, you might consider using a mortgage broker. Because they work with a network of lenders, they may be able to get you more favorable loan terms and a competitive interest rate.
5. Not Keeping Closing Costs and Fees in Mind
Closing costs and fees may keep you from closing on your house if you aren't prepared to pay them when they're due. Closing costs alone can range from 2% to 5% of a home's purchase price and are typically paid upfront on the day your purchase is finalized.
Other fees usually wrapped into closing costs include fees for the appraisal and home inspection, a loan application and origination fee, a credit report fee, the document preparation fee and more. You may be able to negotiate some closing costs, but many are unavoidable.
Apart from that, consider purchasing discount or mortgage points, which can reduce your interest rate (and possibly your monthly payment) by prepaying a percentage of the total amount of your mortgage.
6. Not Considering Your Loan-to-Value Ratio
Lenders use the loan-to-value (LTV) ratio on a home purchase to help assess the risk of writing you a loan. This percentage measures the loan amount compared with the home's market value. As part of their qualifying criteria, several federal mortgage programs set specific LTV limits. If your LTV is greater than 80%, you may be required to purchase private mortgage insurance. Alternatively, you can reduce your LTV ratio by increasing your down payment.
Some government-backed loans allow larger LTVs. Federal Housing Administration (FHA) loans require a minimum down payment of 3.5%, which is an LTV ratio of 96.5%. Some VA loans are available with an LTV ratio of 100%.
7. Adding Too Much Debt
In addition to your credit score, your debt-to-income ratio (DTI) helps lenders determine whether you can afford the mortgage for which you're applying. It can also help you figure out how comfortable you are with your current debt and if applying for a mortgage loan is the right choice for you. Depending on your credit score and other factors, you may qualify for a mortgage at a higher ratio, but your DTI generally needs to be below 43%. Some lenders may even prefer a DTI below 36%.
If your DTI makes it impossible to qualify for a mortgage, you may want to consider settling for a less expensive home or saving up for a larger down payment.
8. Overlooking the True Cost of Home Ownership
Comparing your rent payment to your mortgage payment may be a mistake when determining whether or not you can afford a home. The cost of owning a home goes beyond your mortgage payment and includes things such as homeowners insurance, property taxes, utilities, home repairs and renovations. Failing to budget for these additional costs can set you up to be "house poor". Setting a budget, as well as avoiding budgeting mistakes, can help you understand how you spend your money and give yourself a little wiggle room after your mortgage payments and other expenses.
9. Skipping the Home Inspection
Skipping a home inspection might save money in the short term, but it may cause major headaches and additional costs in the long term. The price of mold remediation, fixing leaky plumbing, getting rid of termites or repairing anything else that a home inspector may have found can rapidly add to your homeownership costs.
10. Downplaying How Long the Process Takes
Every home, mortgage loan and borrower is different. The time it takes to buy a home is no exception. You may be able to move into your home in a few weeks, but it often takes longer than that to work through the process. Although the timeline for buying a home can depend on many variables, the average time is typically around four months.
The Bottom Line
Knowledge is power, but mistakes happen. Try to avoid making these mistakes to ensure you don't inadvertently disrupt your home purchase. In addition, monitoring your Experian credit report can help you better understand your credit and take actions to improve your credit score to make it more likely you get the best rates and terms on your mortgage loan.