Top 10 Mistakes to Avoid When Applying for a Mortgage

Buying a home is a thrilling venture. However, it is also a big financial decision, and the mortgage process can be complex. You may have heard stories of loan denials that halt sales or may be concerned about making a mistake. 

The good news is that knowing what mistakes to avoid can help minimize some common homebuying challenges. That is why we have outlined 10 mortgage mistakes and how to avoid them.

1. Shopping for homes before getting pre-approved

It is one thing to have inspiration in mind for your new home, but looking at houses before you know what you can afford can set you up for disappointment. Without pre-approval, you do not have the benefit of a tangible budget or a way to show sellers you are a serious homebuyer.

Do this instead:

Be sure to get pre-approved for your mortgage before you start house hunting. Not only can it help you narrow your search, but it also strengthens your offer when you do discover the perfect home.

2. Making major financial changes during the process

Changing jobs, opening new credit cards, overspending on current cards, or even buying a car during the mortgage process can affect your chances of approval. Most lenders will reassess your financial profile prior to officially approving your application for closing. Any sudden shifts or changes can derail your homebuying journey.

Do this instead:

If at all possible, wait until after closing to make other life changes. In the event you cannot avoid changing jobs or taking on new debt, be sure to communicate with your lender first so they can help you understand the potential impact on your mortgage approval.

3. Choosing the wrong mortgage lender

Not all lenders are created equal. Some may offer better rates, others may provide a smoother servicing process. There are even lenders that can give you access to a wider variety of loan products or networks of quality real estate agents.

Do this instead:

Shop around and research lenders thoroughly. Compare their rates, fees, and customer reviews. Do not hesitate to reach out to a few directly to ask about their turnaround times and get an idea of their customer service support. It is important to select a lender who communicates efficiently and offers solutions that match your financial goals.

4. Draining your savings for the down payment

Putting every penny of your savings into your down payment may help you avoid mortgage insurance, but it can leave you vulnerable to unexpected expenses.

Do this instead:

At minimum, maintain your emergency fund—even after closing. It is typically a safer option to put a bit less down and still have a financial cushion intact.

5. Failing to check (and fix) your credit report

Credit scores play a big role in determining the loan terms a borrower qualifies for. Errors or unresolved issues on your credit report can hurt your chances of loan approval—even if they are not your fault.

Do this instead:

Take a look at your credit report. You can then dispute errors or pay off delinquent accounts. Even if you do not find any mistakes that need fixing, you can still spend some time working to improve your score, so you are more likely to qualify for a better mortgage rate. You will likely not see changes to your score immediately, but working on improving your score will make a difference in the long run.

6. Ignoring your debt-to-income (DTI) ratio

Aside from your credit score, another important number that lenders use to determine your financial readiness to buy a home is your DTI ratio. It tells lenders how much of your income is dedicated to paying back debt. A higher DTI can present as a risk to lenders, even if you have a strong credit score.

Do this instead:

Before you start the mortgage application process, take the time to pay down your existing debts. Ideally, your DTI ratio should be under 43% to improve your chances of approval and qualifying for better loan terms.

7. Failing to keep good records

You will need to provide a variety of financial records to your lender, including tax records, investment records, bank statements, employment verification, and more. There are a lot of documents to keep track of throughout the homebuying process, and missing paperwork or disorganization can slow down your approval process.  

Do this instead:

Start organizing your records from the beginning so that you can provide them quickly when requested. It can be helpful to create a dedicated folder (physical or digital) where you can keep and easily access all of the documents and records associated with your mortgage application.

8. Choosing the wrong type of mortgage

Different types of mortgages come with varying terms, borrower qualifications, and down payment requirements. It is important for you to understand all of the different mortgage options available to you so that you can make the right financial decisions—both long term and short term. Not all mortgages are ideal for every homebuyer. Choosing a 30-year fixed mortgage when you plan to move in five years or picking an adjustable-rate mortgage before understanding the implications can lead to regret. 

Do this instead:

Do your research and make sure you understand your options: fixed-rate, adjustable-rate, Federal Housing Administration (FHA), Veterans Affairs (VA), or conventional loans. Talking to your lender about your future plans can also help you find the best mortgage fit for your unique needs.

9. Buying more house than you can afford

It is easy to get swept up by the excitement of real-life house hunting and end up with a house that costs more than you can afford. It may be tempting to max out your pre-approval amount, but a higher mortgage means higher risk, especially if your income changes.

Do this instead:

Talk to your lender and your real estate agent early in the process and put together a budget that makes sense, both for your income and for your lifestyle.

10. Buying with the wrong person

Remember that when you purchase a home with a friend, family member, or significant other, your interest rate and approval amount are based on the financial history you share. That can mean that you could end up paying a higher interest rate because of their credit rating. Make sure that your co-buyer is trustworthy, fiscally responsible, and truly ready for homeownership.

Do this instead:

Have honest conversations. Consider speaking with a real estate attorney before co-buying to set clear expectations and protect everyone involved.

Buy smart, not scared

Applying for a mortgage does not have to feel like an unpredictable situation. By avoiding these common mistakes, you will be in a stronger position to secure your mortgage and close on a new home with confidence.

Knowledge and preparation can help you make informed decisions and are key to a successful homebuying experience. Know your numbers, ask questions, and surround yourself with trusted professionals. Your dream home is out there, and with the right steps, you can be ready when the time comes.