For most people, purchasing a home is one of the biggest investments they’ll make in their lives. For this reason, it is imperative to carefully consider and review each step of the home buying process to ensure you’re making an informed decision. The process starts with applying for a mortgage. Though there are strict criteria to which a person must adhere to be approved, very often, consumers make mistakes that either slow down the application process or get them denied. If you’re thinking of applying for a home loan soon, take heed of these costly mistakes.
Not Organizing Financial Statements
When applying for a home mortgage, your finances are under scrutiny. Lenders are looking at your financial status and history to determine whether you can afford a loan and how much of a risk you’d be to them. During the loan application process, you will be asked for detailed financial statements, so the loan officer can determine income and review deposits and transactions. Failure to supply these documents can slow down the underwriting process, and even force the mortgage company to deny your application.
Before applying for a loan, gather your bank statements, household bills, income taxes, and pay stubs for the past three to five years. Make copies and keep them in a binder for safe keeping.
Not Considering Debt
Your ability to repay your loan will depend on two factors; your income and your expenses. Though you may look at your monthly household income and assume you can afford monthly mortgage payments, if you haven’t considered existing debt, you could be applying for more home than you can afford. The mortgage company will ask to see your debt to income ratio to determine if you have enough income to afford the payments.
Prior to completing a mortgage application, review your personal finances. Check to see what your monthly expenses are including any outstanding debts. Subtract your total debt and household expenses from your income. The amount you have left each month is what you can consider using to cover the cost of owning a home.
Switching or Quitting a Job
The entire loan application process can take up to a month to be complete. During that time, lenders are paying close attention to your financial status. Lenders feel better working with consumers who appear stable. Those who have been in the same position for several years or have worked with the same company have higher chances of getting approved. Therefore, if you switch jobs or decide to ditch your dead-end job before the loan application is finished, you could be viewed as unstable and be denied.
Instead, you should hold onto your job until the mortgage process has been completed. But even if circumstances force you into a job change things can still work out. This is especially true if you're trying to start your own business as the self-employed can be deemed high risk due to their unreliable income.
The more money you have, the better your chances are of being approved for a home loan. That being said, lying about your income or adding income that isn’t reliable could backfire. For instance, reporting that your income is $2,000 higher because of a bonus you got won’t help you in the long run. Unless you get the bonus every year, you’ve just applied for a mortgage based on income you won’t receive regularly. Another example is including unreliable income like those from side gigs like a snowplowing business. That income is likely to vary widely from year to year.
Though it might be tempting to beef up your income, so it can appear on paper that you can afford your new home, but this only hurts you in the end. Your best bet is to be honest about your income including bonuses and omit unreliable sources of income from the application. This way, you can be sure you’re purchasing a home that you can pay for.
Getting approved for a mortgage might seem like an impossible feat, especially if you’ve been at it for a while. The thing to keep in mind, however, is if you want to be sure that you’re approved for a loan, you need to have all your ducks in a row. So, before you begin applying for mortgages, start by making sure you’ve got all your finances in order, know what you can afford, and fully understand the application process and your responsibilities throughout.