Merely putting money aside is not sufficient to help you complete a mortgage application. There is a series of financial habits that you must have before you can be on your way to homeownership. Most people don’t learn about these habits until they get turned down for a mortgage.
Your credit report needs work before you need it
Many people don’t pay attention to their credit rating until someone else makes them. If you wait until you’re about to apply for a mortgage to check in, you’ve missed the optimal opportunity to fix things.
Correcting errors, reducing debt-to-available credit limits and allowing those changes to become registered with the reporting agencies are also factors that need time to have an impact. 4 to 6 months is a good rule of thumb for improvements to register.
Don’t underestimate the effect. The interest rate difference can amount to tens or even hundreds of thousands of dollars over a 25-year term. Order your credit report early; look for accounts that were incorrectly labelled delinquent, duplicate entries of the same loan, and old collections that should have come off. Very easy to do and they will investigate for free.
The lowest rate isn’t always the best mortgage
Shopping around for rates is a good idea. Opting for a mortgage because it has the lowest rate is not. Structures that offset any potential interest rate savings rampantly exist. In the end, that mortgage with the rock-bottom rate could cost you thousands more.
For instance, a ‘no frills’ mortgage product with a rate that is a tenth of a percent lower than competitors comes with restrictions that prevent the mortgage from being broken or refinanced, forcing you to sell your home if your circumstances change, which would mean paying tens of thousands in penalty.
When comparing lenders, it’s wise to consider prepayment privileges, portability features, and the penalty cost to get out of your mortgage early. An Interest Rate Differential (IRD) penalty on a fixed-rate mortgage can vary from lender to lender and can amount to tens of thousands of dollars.
Experienced brokers like those at Metro Mortgage Group compare the total cost of a mortgage over the term – not just the interest rate on page one. This requires a lot of context. Rate comparison websites don’t do that.
Don’t borrow anything during the process
Once you are pre-approved or in application mode, your debt-to-income ratio locks in from the lender’s perspective. Any new credit obligation – a car loan, a 12-months-same-as-cash furniture purchase, even a new credit card – affects your GDS and TDS ratios right away.
Lenders don’t just check your finances at the start of the process. Many will pull your credit again just before closing. A new monthly obligation that looks small to you can be enough to push your TDS over the threshold and kill the deal. This catches people off guard because the purchase feels separate from the mortgage – it isn’t.
If you’re out shopping for ahouse, put off all the borrowing you can until after you have keys in hand.
The down payment isn’t the whole number
Saving up to a certain down payment amount and then calling it a day is a direct route to closing underfunded. You’re forced to get used to the idea that closing costs are real, they’re substantial, and they’re due the same day your down payment is – as is the per diem interest that will begin accruing as soon as you compete.
Closing costs are composed of your land transfer tax, legal fees, disbursements, application costs, title insurance, and property tax “portion” adjustments. Depending on the cost to purchase and the custom in your location, these can amount to 1.5% to 4% of the total property value. So you do the math. If you’re buying a
half-million dollar home, is an additional 20K going to amount to 4%? Then that cash has no business in your down payment. Which means your new savings target needs to account for both whilst also ensuring you keep your emergency fund untouched – three to six months of expenses held in liquid savings. The mortgage process will make everything feel like it should go toward the purchase. Don’t fall for it.
Get pre-approved, not just pre-qualified
The difference between a lender saying “you look like you could qualify for around X” and a formal mortgage pre-approval is that the second one is an actual number they’ve underwritten against your income documents and credit report. It’s a number you’ve not been shopping with yet.
If you haven’t gotten one, it means you’re shopping with the number you thought you could afford. Which often results in buying a house that “felt” right (emotional overspending) in the short window you had to make a decision before your financing condition was up on your offer. You fell in love with something you couldn’t afford. Pre-approvals help prevent this. It’s a firm number and you should do this before you emotionally attach to a house you think “might” be in your range.
Financial hygiene is the prerequisite
Buyers who reach closing drama-free all seem to have one thing in common: they approached qualifying for a mortgage as a year-long process, not a week before they started looking at homes. Credit health, debt management, liquidity, and product selection are all controllables – but only if you get serious early enough about doing so.
It’s not enough to know you need to save money, generally. You need to know exactly what you need to save, and how.