Given that the median U.S. home just sold for $407,600, according to the National Association of Realtors, it’s fair to assume that most of us can’t afford to just buy one outright. For many buyers, getting a mortgage is an absolute necessity to make homeownership possible.
But your mortgage might be the single largest sum of money you borrow in your lifetime. So it’s important to be strategic when you’re getting a home loan. And that means avoiding these all-too-common mistakes.
The average 30-year mortgage rate at the time of this writing is 6.94%, according to Freddie Mac. But remember, it’s up to each mortgage lender to figure out what rate it wants to offer you based on factors like your credit score, income, and loan amount.
So don’t just accept the first mortgage offer you get. Instead, shop around with different lenders so you can compare offers.
But also, do your rate shopping quickly. If you apply for different mortgages within a 14-day period, you shouldn’t have to worry about each application counting as a separate hard inquiry on your credit report.
That’s important, because each hard inquiry on your record could drag your credit score down a bit. The lower your score, the more expensive it usually is to borrow — in the context of a mortgage or any other loan you might need.
More: Check out our picks for the best mortgage lenders
2. Assuming you can afford the amount a lender is willing to loan you
Each mortgage lender you apply with will look at your financial information to figure out how much you can borrow for a home. Lenders consider your down payment, current salary, and any other income streams you have.
But don’t assume that the amount your lender says you can borrow is the amount you should borrow. Your lender will have a basic sense of your financial picture based on the information you provide. But there are certain factors your lender won’t know.
For example, your lender will know about monthly debts you’re currently paying off. But it may not know that you’re spending $600 a week on daycare for two children. So if your lender says you’re able to borrow $250,000 for a mortgage, don’t just take its word for it. Instead, run your own numbers.
Generally, your total housing costs, including mortgage payments, homeowners insurance, and property taxes, should not exceed 30% of your take-home pay. Once you have a mortgage offer, you can run the numbers to see if you’re within that limit. (This mortgage calculator might help.) But if you have exceptionally large expenses, like daycare, then you may want to keep your housing costs to 20% or 25% of your pay.
3. Not boosting your credit score before applying
The higher your credit score, the lower a mortgage rate you might qualify for. The result? Lower monthly payments.
Let’s say you’re taking out a 30-year, $200,000 mortgage. With great credit, you might snag a 6.7% interest rate, leading to monthly payments of $1,290 for principal and interest. With credit that’s only OK, you might end up paying 7.3% on that same loan, resulting in monthly payments of $1,371. That’s roughly an extra $1,000 a year.
To boost your credit score fairly quickly, get a free copy of your credit report from annualcreditreport.com and make sure it’s accurate. If your credit report shows a mistake, like a delinquent debt that’s actually current, correcting it could lead to a credit score increase.
You can also boost your credit score by paying your creditors on time and paying off credit card balances you’re carrying, if possible. These moves, however, may take time. Try to be patient and give your credit score an opportunity to rise before putting in your mortgage application. It could make a huge difference in your monthly payments for many years.
Applying for a mortgage is a major step on the road to homeownership. Avoiding these mistakes could leave you with a loan that’s less expensive to pay off.
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