7 Things You Need to Know Before Applying for a Mortgage—From a Credit Expert

Check this list before you sign on the dotted line. Helloquence/Unsplash

Buying a house is one of the most stressful things you can do. Don’t make it more stressful—and more expensive—by making one these very common mistakes during the mortgage process. Getting a home loan is complicated and time consuming, and it pays to make sure you get the best advice so you avoid falling into one of these financial potholes.

  1. You don’t check your credit score before you begin the process.

Believe it or not, a lot of prospective home buyers don’t know what their real credit score looks like before they sit down with the person who will be originating the loan for the biggest financial transaction they’ll probably ever undertake. Many people don’t understand the numbers in the score—and are usually surprised by them when it’s explained. It’s hard to make an informed decision about a loan—or correct mistakes you see on your credit report—if you don’t prepare ahead of time. How far ahead? At least 90 days ahead, so you have a chance to see where you stand and clean up potential errors.

  1. You think that your income matters more than your credit score.

My office is filled with high-net-worth clients who come to me because they’ve been turned down for a mortgage—even though they have millions in the bank. Your assets and income matter in the loan process, but no matter how much cash you have, if you don’t have a good credit score you aren’t going to get a loan. You need to make sure your credit score looks as good as your balance sheet.

  1. You think the mortgage originator is on your side.

Maybe you’re getting your loan through your bank or credit union, or you’re using the broker suggested by your real estate company. And maybe the person working with you on your loan is super friendly. That’s great, but don’t forget the most important thing: The mortgage originator is trying to make money—and that money is coming from you. Go in with your eyes open, and don’t automatically trust everything you hear.

  1. You don’t shop for a mortgage the way you shop for any other big-ticket item.

Because of some widespread misunderstandings about the credit reporting system, many people think their credit will be damaged if they have too many inquiries over a certain period of time. This leads many people to go to one mortgage originator and hope for the best. But you have a window of 45 days to have multiple inquiries on your credit report without it hurting your score much—which means you need to be shopping around, especially if you have good credit. The difference of a half a percentage point on a 30-year mortgage can be tens of thousands of dollars. You wouldn’t walk into a car dealership with a blank check and hand it to the salesman. Don’t do the equivalent when shopping for a mortgage.

  1. You don’t understand that every credit score point matters.

Where you fall on the credit tiers pretty much determines how good of a deal you’re going to get on your home loan. Just missing one of the cutoffs can be an expensive proposition. If your credit score is, say, 735 instead of 740, the difference between being a “tier 2” customer versus one in the first tier can be a full percentage point on your interest rate. That can be hundreds of dollars in extra interest you have to pay per month. The difference in a 735 and 740 credit score? The small balance on one of your credit cards, or late payment on a credit account that could have been erased with a phone call to the lender. Go through your credit report carefully and go in with your best score.

  1. You don’t understand the rules of the game.

Because the numbers in most mortgage transactions are so large, and the lengths of the loans are so long, most people go in without any real grasp on what it all really means. To many, a quarter of a percent over 30 years doesn’t seem like a big deal, or all of the talk about “paying points” doesn’t make sense—or seems like an automatic turn-off because you have to come out of pocket for more money. “Paying points” means you’re prepaying some of the interest in the loan in exchange for getting lower payments. Most people don’t want to shell out any more money than they have to at closing, so the option to fold that cash right into the payment is attractive—especially because it “only” changes the payment a couple hundred dollars a month on the average home sale. But avoiding paying a few thousand dollars in points can cost you tens of thousands of dollars over the life of the loan. Make sure you understand the math, and if you don’t, hire a real estate attorney to explain to you. That’s money well spent.

  1. You get careless at the end of the process.

Getting approved for a mortgage is just the first step of a long process. You have to go through the entire closing process, and then, right at the end, the mortgage originator will pull your credit a second time to make sure nothing has changed in your financial landscape. Many, many people get a rude surprise at this point, and have their loan agreement voided because their credit score has deteriorated. The most common culprit? Opening a bunch of new credit accounts in anticipation of moving. Wait until after you officially close on your new house to get that charge card from the home improvement store or to sign a lease on that new minivan.

These tricks and best practices (and about every part of your life in the world of consumer credit) are all covered in my upcoming book, Your Score.

 

Anthony Davenport is the founder and CEO of Regal Credit Management, a credit management firm that has become the go-to firm for many of the country’s professional athletes, celebrities, and top financial professionals. With credit scoring certification from FICO®, Davenport has been cited in numerous publications, including USA TodayForbes, Yahoo Finance, and Wise Piggy. He lives in Brooklyn.

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