Moving On Up - Five Do's and Don'ts for Mortgages

It’s up to us to make our house a home and buying a dream home is a goal that most families share.  Here are five do’s and don’ts from mortgage experts on how to make a smart move into your new home.

Please do:

1. Make On Time Debt Payments – Every 30-, 60- or 90-day delinquency on a loan or credit card is going to reduce the credit score on your report.  This is a consideration the loan officer will have to take into account when approving your mortgage and the amount of the loan.
2. If You Have to Miss Something:  If you experience some unforeseen financial situation where you cannot pay your bills and you are going to have to miss a loan payment of some kind then be strategic in choosing that missed payment.  You should miss the credit card payment first, followed by the payment on any installment loan you might have and finally the payment for an existing mortgage.
3. Pay off Debt –  It’s important to pay off as many smaller debts as you can so that when you go to apply for a mortgage, you will have a better chance at getting a good rate.  Even if you end up putting down a smaller amount at closing and end up with a larger mortgage, you will be better off than the high interest rates of most consumer debt.
4. Mortgage Takes Priority – If you or your spouse have a new job and the means to secure multiple loans (such as a mortgage, new car and new credit cards), then secure the mortgage loan first.  Whenever your credit is scored, each application for credit becomes a liability to your rating.  Numerous credit inquiries, such as these, can hurt your overall credit score, especially if they are filed in the months prior to the mortgage loan review process.
5. Save, Save, Save – It is best to increase the size of the down payment you’re able to make by saving as much as possible.  Invest these savings in secure accounts that offer reasonable rates of return, automatic payroll deductions or other financial incentives to save.

Five Don’ts

1. Avoid Big Purchases – If you have to get a loan for a large purchase such as a $15,000 auto loan, it could prevent you from qualifying for the mortgage amount you want.  Lenders do not look favorably upon adding debt upon debt.  Besides that, the more money you are spending on loans, the less you will have to put toward a mortgage.
2. Live Within Your Means – If you try to obtain a loan that would raise your payments from $500 in rent to a whopping $1600 per month principle/interest/insurance payment, then you are likely to experience what the industry calls “payment shock.”  A lender will look at this differential and you will find yourself in one of two situations:  1) you won’t qualify for the loan or 2) you will end up having to cover too much loan with too little money.
3. Pre-Qualified versus Pre-Approved – When you are pre-qualified for a loan, you are basically given an estimate of how much of a loan you will qualify for after you’ve submitted income, credit and debt information.  In this case, the lender does not pull credit reports, check debt to income ratios and perform other underwriting steps.  But by getting pre-approved, these latter steps are performed and you are that much closer to obtaining a loan and locking in a rate and term.  The first is an estimate, the latter is much closer to the final product.  
4. Money Personalities – Everyone has a different kind of money personalities—some are born spenders and others are savers.  Don’t forget this when it comes to getting a mortgage loan.  If you take out a 30-year fixed rate loan rather than a 15-year mortgage and invest the money saved on monthly payments you might earn a higher return on your money in the long run.  But few money personalities have this kind of discipline.  If you are the kind of personality that spends any extra money you have, then it would be better to get the shorter term, which will force you to invest your money toward paying off your house in a shorter amount of time.
5. Hidden Burdens – Don’t forget the “extras” involved in home ownership.  You will have to cover short term and long term repairs and maintenance:  when something breaks you will pay to have it repaired or replaced.  On the financial side of the equation, don’t forget that home ownership brings the additional responsibility of greater financial accountability.