One of the first steps you need to take on your journey to homeownership is applying for a mortgage. Unless you are a millionaire and you can buy a house in cash, choosing a lender and applying for a home loan is an inevitable part of the homebuying process.
For some borrowers, a home-loan application is a daunting task. Financing rules are becoming more stringent, making it a must for applicants to present a solid case to earn the approval of lenders.
Given the stricter lending rules, there is no room for any mistakes. One error might automatically bring your chances of getting approved to zero. Here are some of the biggest mistakes to avoid when applying for a home loan:
Being dishonest about your income and expenses
One of the biggest mistakes you might commit when applying a home loan is not being honest with your household income and expenses. Lenders use these two factors to gauge your capability to service a mortgage. Omitting a piece of information about your income and expenses is a capital sin when it comes to applying for a home loan. Doing so will result in lenders not being able to assess your borrowing power accurately.
Lying about your income will get you nowhere — it could even get you into trouble. Not only it can derail your application but it can also give your chosen lender a reason to file a case against you. The worst thing that could happen is you serving prison time for fraud.
Banks and lenders have ways to detect red flags in your application. For instance, official documents typically have hidden codes in them that an ordinary person might not necessarily see immediately. This helps banks distinguish official documents from those which have been tampered with.
Your lenders also have the capabilities to uncover inconsistencies using your tax returns, bank statements, and payslips — they can easily discern if you are not honest with your household income by just cross-checking the documents you sent.
Lastly, lenders share data with banks, mortgage insurers, and other institutions to prevent fraud. In short, there is no other way that you can outsmart your lenders. You might get a little advantage if a mortgage broker extends a helping hand, but they would not put their reputation in line just to assist you in your dishonesty.
It also would not help to exclude some expenses — some applicants are tempted to cover up expenses such as childcare costs, extra credit cards, and other personal debts. Even if you do not declare these expenses, your lender has ways to flesh out these bits of information.
Lenders have their tools to trace your expenses. For instance, they can easily verify if you have an extra credit card by looking at your bank statements. Payment for a credit card company which is not mentioned might automatically compel them to say no to your application.
However, there are instances when it is an honest mistake — overlooked bills and debts are common, especially to those borrowers who are doing everything by themselves. It is crucial that you let your banks know of these mistakes immediately to avoid risking your application.
Not shopping around for other home-loan deals
Looking for a home loan is like searching a garden for the best flower — you would not want to stop looking after seeing the first blossom. Borrowers often obsess over interest rates, thinking these are the only indicators of how good a home-loan deal is.
While it is true that interest rate is essential, it does not really tell you everything there is to say about the mortgage product you want to apply for. There are other considerations to watch out for, like the lender's allowable loan-to-value ratio, the home-loan features, and other perks and benefits.
The comparison rate of the home loan is a useful tool that can help you carefully examine which of the available home-loan offers is the best deal. The comparison rate sums up all the fees of the loan — including the interest — in a single number. Lenders are required to include comparison rates when marketing their home-loan products.
The market is teeming with home-loan offers, each with its unique advantages and disadvantages. But only a handful will actually meet your needs. It is your role to shop around and see which one best suits your current financial situation. A mortgage broker can help you find the right loan product, but the responsibility of knowing what you need falls on you.
Making too many home-loan applications
While shopping around is an integral part of looking for the best loan, it does not mean that you apply for multiple lenders. Do not ever go loan-fishing — whenever you file an application to a lender, it gets recorded on your credit file. The bad thing is, the lenders you applied to will surely notice that you have been submitting applications to other financial institutions.
They might think you got rejected from all your other applications and will be a bit suspicious of your actions. As a result, all these lenders might turn you down.
Forgetting to check and review your credit report
Your credit score is a single number that can dictate the fate of your home-loan application. Not being able to check your credit report could ultimately result in you wasting all your efforts in preparing and submitting your home-loan application.
Lenders use your credit report to assess your credibility as a borrower — your credit history paints a vivid picture of your attitude towards your finances. Even if you do not check your credit report, your lender will be able to access it.
What do they find in your credit report aside from your credit score? There is a lot. Lenders will be able to examine your loan enquiries over the last five years, the details of any current debt you have, the names of credit providers you have applied for, and the number of times you opened and closed credit cards, loans, and postpaid mobile plans.
The recent changes in the credit reporting system will now also allow your lenders to see the type of credit products you held in the last two years as well as the amount and frequency of your payments. Credit limits will also be included in your report.
However, the two most crucial things that could raise eyebrows in your credit report are overdue balances and missed payments. If lenders see such marks, you will be immediately tagged as high-risk and your borrowing power will be severely diminished. You can even get an instant rejection if your lender has stricter-than-average rules when it comes to credit history.
It is of great importance, then, for you to have your credit report checked every year or so. Some negative marks in your credit report might not be your fault at all and could be just an honest mistake by your credit provider. You would not want to be turned down for something you did not do.
To ensure that your credit report is spotless, see to it that you immediately take note and address any outdated personal information, repeated debts, inaccurate debt records, erroneous credit defaults, and doubtful accounts.
Submitting an application with errors
When done in haste, home-loan applications would only get you nowhere. The application process is almost 100% paperwork, making it a must for you to be organized and detail-oriented.
Mistakes could happen as you go through the process, but sending in an application with a lot of errors is unforgivable. Not only you are putting your home-loan application at risk, but you are also tarnishing your credibility as a borrower.
Errors could cause suspicion and they could send your application straight to the paper shredder if they are left unchecked. Even with the slightest of mistakes, you might get in trouble if banks think your application is fraudulent.
Other banks might be lenient and will inform you if they wish to clarify some dubious information that you might have included. They might give you a conditional approval on your home-loan application. However, you might have to settle the inconsistencies in your application as soon as possible to gain your lender's full approval.
It is best to consult a professional to check your requirements to avoid committing errors in your application. A mortgage broker can help you sort out everything, including all bits of personal information, documents, and certifications.
Mortgage brokers can also detect things that might alert banks and lenders when they start to assess your application. They can write an explanation letter, if required by banks, to discuss specific parts of your application that might not be as crystal clear as they appear to be.
Undergoing significant life changes
Life events can drastically impact your mortgage application. Changing careers is one.
Lenders usually require their borrowers to have steady employment to ensure a constant source of income. If you have recently switched jobs, your chances of getting a home loan will decrease. It is usually not a good sign for these lenders if applicants are new to their job — they typically tag these people as unstable, which means they have higher chances of defaulting on the loan.
It is highly recommended that you do not make any sudden career changes before applying for a home loan. If you are new to your job, then it is better to wait for at least six months to one year to increase your chances of getting approved.
Making large purchases before applying for a mortgage is also a no-no. You do not want to buy a new car or a new gadget before you process your home-loan application. If you take out a loan for these big purchases, it gets added to your credit report and lenders would be hesitant to let you borrow further for a house.
Additional debt adds to your overall debt-to-income ratio, which is one of the most critical considerations lender use to assess your creditworthiness. The higher your debt-to-income ratio is, the lower the chances of you getting approved or getting the sufficient loan amount.
Even if you made these purchases using your savings, they are still considered a bad move. Banks would like to see that you have enough savings in your account — this way, they can assess your borrowing power more efficiently. It will also show them that you are prudent in spending your money.
Not having genuine savings
As mentioned earlier, banks want their borrowers to have savings — this tells them a lot about their clients' financial health. If you are applying for a home loan without a considerable amount of funds stashed in your savings account, then do not expect your lender to give you a call.
You cannot depend on your lender to finance the entirety of your home purchase – you are only allowed to borrow up to 80% of the property's value. Some lenders will let you borrow as much as 90%, but you might be subject to pay the lenders' mortgage insurance. This is a policy that will cover the losses of your lender should you default on your home loan.
Banks are more willing to provide you with features and perks such as low interest rates and waived fees if you shoulder a significant amount of deposit for your home purchase.
Depositing large amounts before application
If you think it’s a wise move to deposit in bulk before applying for a home loan in the hopes of showing your lenders that you have significant savings, think again.
Before applying for a home loan, you will need to document every single transaction in your your savings and credit accounts. Your lender would be very distrustful if you did not have an explanation for the large amount deposited into your account. Record everything and ask your mortgage broker to help you with explaining the transactions to your lender.