While purchasing a home is a very exciting time, it’s no secret that homebuyers may encounter some hiccups throughout the process. In order to ensure your home purchase goes as smoothly as possible, be sure to avoid these common mistakes homebuyers make.
1. Receiving a gift
It always important to notify your lender if you are receiving a gift during your loan process. If you’re using gift money as part of or all of your down payment, you’ll need the donor to write a letter to your mortgage company that states that the money is a gift and not a loan. Here’s what the letter should include:
- The donor’s contact information: name, address, and phone number
- The donor’s relationship to the client
- The gift amount
- The transferring of funds date
- A statement from the donor that no repayment is expected, proving the gift is not a loan
- The donor’s signature
- The address of the property being purchased
It’s important to understand that the gift letter still might not be enough evidence for the mortgage company. The gift giver may be required to provide a bank statement in addition to a gift letter.
2. Applying for credit during the process
Applying for credit during your mortgage process might seem innocent, but the truth is, it could cause a slight dip to your credit score and keep you from receiving the best rates.
When you apply for credit or a loan, the lender or credit card issuer will pull your credit report. This shows up as an inquiry on your credit report. A hard pull is an inquiry authorized by you when you apply for credit, and a soft pull is an inquiry triggered when you pull your own credit report.
Hard pulls might hurt your scores by a few points, so if your scores are hovering around a certain number (good or bad), that’s a score hit you might not want to take.
Click here for more information on how to improve your credit score.
3. Not properly calculating cash needed for closing
Closing day – the day you’ve been waiting for! Everything has been leading up to this day, but not knowing the exact dollar amount you owe in closing costs could cause things to go south.
At Loan Pronto, we have zero lender fees (these add up quickly with other companies), and we only have a few closing costs:
- Escrow fees
- Title insurance
- Per-diem interest
- Recording fees
- Transfer taxes
As a company, we often pay a portion of the closings costs. The portion we pay varies with each borrower based on what you qualify for.
4. Not getting properly pre-approved
When shopping for a home, a letter of pre-approval is needed from the lender to purchase the home. Many buyers do not know the difference between being pre-qualified and pre-approved. Pre-qualifications are based on estimates from what the buyer has told the lender. A pre-approval is an official letter from the lender after reports that have been pulled.
- First step
- Less robust
- Based on estimates
- Doesn’t require a credit pull
- Carries less weight/not a sure thing
- Based on verified information
- Must complete an actual loan application
- Requires a credit pull
- Must be underwritten (manual or automated)
- Written conditional commitment
- Shows sellers/real estate agents you’re serious
5. Past derogatories that don’t show up on credit
In the beginning, lenders pull the borrower’s credit report to see if there are any initial discrepancies to take into consideration. Further into the process, lenders do a more in-depth report that may show more than what was on the credit report, such as:
6. Not understanding debt-to-income (DTI) ratio
How DTI is calculated:
It is important to understand your DTI before starting the mortgage process so you have realistic expectations for what you can borrow. Lenders calculate your DTI ratio by dividing your monthly debt obligations by your gross income. Most lenders look for a ratio of 36% or less, though there are exceptions.
You’ll want the lowest DTI possible to qualify and buy the home you want and ensure you’re still able to pay your debts while living comfortably.
How to lower your DTI:
The higher your DTI, the more likely you are to struggle with getting approved for a mortgage and making your monthly mortgage payments.
There are several ways to lower your DTI ratio, such as:
- Avoid taking on more debt
- Don’t make any big purchases on credit before you buy a home
- Try to pay off as much of your current debt as possible before applying
Now that you know what to avoid when buying a home, click here to find out what you should do!
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Originally published July 27, 2018, updated August 24, 2022.
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