Buying a home is one of life’s most significant milestones that represents an exciting and rewarding experience. It can also be very daunting, particularly when it comes to the mortgage application process. While there are many complexities and moving parts involved when you obtain a mortgage, if you avoid making these five common mortgage mistakes, your quest for successful homeownership will run a lot smoother.
#1 Not being prepared
It’s extremely easy to get caught up in the excitement of buying a home, but it’s essential that to understand all that homebuying entails. You’ll be making one of the largest financial investments of your life, so you want to be armed with as much information as possible. There is terminology to learn, government mortgage rules to understand, decisions to make (think rate, term, amortization), down payment requirements, types of homes to consider, as well as determining how much you can comfortably afford.
There’s no one-size-fits-all solution. Be prepared by educating yourself, creating a budget and setting goals to ensure you’ll be able to navigate the mortgage process with skill and confidence.
#2 Basing your decision on rate alone
Many homebuyers, particularly first-time homebuyers, tend to be preoccupied with finding a mortgage based solely on the lowest interest rate. The rate you pay is certainly an important element of your mortgage, but there are many other, equally important factors you need to consider. While lower rates generally signify lower payments, they can also represent less flexibility, so you need to consider all of the features that make up a particular mortgage to obtain the best overall product catered to your unique requirements.
Similar to the house-hunting process whereby you look at multiple homes before making the final decision, you need to dedicate time and attention to mortgage selection. Making the right choice could save you thousands of dollars over the life of the loan.
#3 Underestimating the importance of credit scores and ratios
Both your credit score and debt-to-income ratio directly impact your ability to obtain a mortgage.
Your credit score, which is based on your credit history, plays a critical role in the mortgage application process and represents one of the biggest factors when it comes to being approved or declined with traditional lenders. If a lender isn’t satisfied with your ability to handle your current financial obligations, the likelihood of granting you a mortgage is slim. If you have a high credit score, you’ll improve your chances of receiving a mortgage with an attractive rate.
You can request a free copy of your credit report, which contains an overall summary of your financial history, from Canada’s two credit bureaus (Equifax and TransUnion). It’s important to review your credit report to ensure that all of the information is correct. If there are any inaccuracies, you’ll want to have them corrected before shopping for your mortgage as this could negatively impact your application.
Another important tool used to determine your creditworthiness is a debt-to-income ratio, which is a comparison of your monthly debt payments versus your monthly income. Lenders use this ratio to help assess your overall debt as well as your debt management capabilities. Unlike your credit score, which should be high, your debt-to-income ratio should be low. A higher DTI could mean you’ll pay more interest or you may even be denied a loan, so watch your spending.
#4 Skipping the pre-approval stage
It’s unwise to start house hunting without knowing how much you can afford, as well as your maximum borrowing capacity. Before granting you a loan, your financial institution will take into account many factors to determine the amount they’re comfortable lending you. It’s important, therefore, that you seek pre-approval for a mortgage before you start looking at houses to avoid unrealistic expectations and, more important, allow for an efficient mortgage transaction and smooth buying process. At Approved Equity, we can help you secure a pre-approval before you begin house hunting.
A pre-approval is a conditional commitment by your lender to grant you a mortgage, which allows you to determine the maximum amount you can spend on a home. A pre-approval signifies that your financing is in place, which provides a certain comfort level with sellers, and is helpful in a competitive marketplace. Also, there is usually a ‘rate hold’ during the pre-approved period – meaning that, even if rates rise during this time, you’re guaranteed to receive the lower rate.
#5 Doing it alone
One of the most important things to know about the mortgage process is that it’s a team effort. An extremely important member of your team is a qualified mortgage agent, who will guide you through the entire mortgage financing process. We’ll take the time to discuss and analyze your situation, and work with a variety of different types of lenders to ensure you receive the most suitable mortgage based on your needs and circumstances. With so many options available, professional advice is invaluable.
Have questions about mistakes to avoid during the mortgage process? Answers are just a call or email away!