What not to do when applying for a mortgage

In this blog you will learn the best tips for applying for a mortgage knowing what not to do when applying for a mortgage loan in New Jersey or in any other state.

The real estate market is very competitive, so you must avoid mistakes that jeopardize your chances of achieving your dream home. For many people, buying a home in New Jersey means doing so through a loan. 

With more than 10 years of experience, Curbelo Law is at your disposal for any real estate matter. Contact our New Jersey real estate law firm today by phone, email, or make an appointment at one of our offices located in Newark and Ridgewood.

Tips And What not to do when applying for a mortgage In 2024

The mortgage loan approval process takes time and can be complex. As you determine the loan that’s right for you, you should avoid making certain mistakes that could reduce the amount of financing you qualify for, get you a higher interest rate, or cause your lender to deny your application.

Here are some tips to apply for a mortgage effectively:

1. Do Not Finance A Car Or Make Big Purchases Before Applying For A Loan

One of the biggest mistakes borrowers make before applying for a home loan is buying a car or making big purchases within days of applying for a loan.

New monthly bills create new debt, causing your debt-to-income (DTI) ratio to be significantly high. This poses a risk to lenders and in some cases qualified borrowers will no longer qualify. 

Note that:

• Buying furniture, appliances, or other large items on credit before your new mortgage closes can be very challenging for your application. 
• Lenders will do a pre-closing credit screening check. 
• Not only will your FICO score be at risk, an increase in your DTI will make you unattractive to lenders. 
• Generally, if the DTI is around 43%, you will be considered a risky borrower. 

The advice we give you from here is to avoid making any major purchases or financing a new vehicle for 6 months to a year before buying a home.

2. Keep Your Current Job

Showing consistent and stable employment is an essential part of the process of applying for and obtaining a loan. Job changes can create big problems for this process, especially if your income structure changes from salary-based to commission.

Your lender keeps track of the source of your annual income and its amount. Therefore, a change from fixed salary to hourly payment may present a problem in the application. 

It is recommended that you have a history of continuous employment of two years or more with the same employer or in the same department of labor. However, consider that:

• If you work in accounting and switch from one accounting firm to another before buying a home, you won’t set off any red flags for your lender.
• If you move into an entirely new field, from accounting to hairdressing for example, you may need to work two years in the new job before you qualify.
• Switching to self-employment during this time is not recommended.

3. Avoid Maxing Out Your Credit Cards

Other basic advice when applying for a mortgage is to avoid taking the most out of a credit card. An additional amount of debt payment offsets your income and will qualify you for less financing. Plus, it will also lower your credit score, which can increase the cost of your loan.

• The actual amount of debt does not matter in the credit scoring system, you could owe $1,000 or $30,000. What matters is how much you owe relative to your credit limits.
• If you owe $5,000 and your total card limit is $5,200, your card is nearly maxed out, which can lead to lower credit scores, higher rates and monthly payments when it comes to getting a loan.
• To get a better mortgage rate and keep debt levels low, keep your credit usage below 30% of your total credit limit.

An example of this is if your credit card allows up to $5,000, try to keep your balance under $1,500. Also, pay off the card in full every month if possible. This can improve your credit score, reduce debt, and allow you to qualify for a better loan.

4. Don’t Go With The First Lender You Contact

Although lenders’ interest rates may be similarly priced, in some cases above-average rates are charged. Getting a bad loan with a higher interest rate can be very costly in the long run.

Generally, big banks tend to have high costs in both interest rate and closing costs, compared to a good mortgage broker or other lender. It is recommended that you compare personalized fee quotes from at least 3 different companies.

5. Avoid Depositing Cash In Your Bank Account

Cash deposits can affect your ability to purchase property, since the lender cannot verify the source of the funds. Not knowing if your funds were obtained legally or if someone lent you money puts your mortgage approval at risk.

Generally, it is considered as fraudulent mortgage activities:

• Borrowing money from the seller to make a down payment.
• Using borrowed money to increase your income.
• Misrepresent or fake an unreal work situation.

Lenders are required by law to report any illegal activity they suspect or detect. Therefore, it is important that you know in detail the requirements to apply for a mortgage in New Jersey.

Also, remember that cash deposits also affect your mortgage eligibility because they affect your DTI. For example, if you apply for a personal loan and deposit it into your bank account, you may run into problems. This is because personal loans are considered debt, and therefore negatively affect your DTI ratio.

6. Don’t Assume You Have To Make A 20% Down Payment

The vast majority of first-time homebuyers in New Jersey believe they must make a 20% down payment to purchase a home. Although this can bring certain advantages, such as avoiding mortgage insurance (PMI), in certain cases it is not the best option.

Waiting until you have a 20% down payment could set your home purchase back for years. The longer you wait to buy, home prices could be higher. Fortunately, there are several mortgage programs that require little or no down payment, such as the following loans:

• VA: 0% down payment (only available to qualified military or veteran borrowers).
• USDA: 0% down payment (only available in select suburban and rural areas).
• FHA: 3.5% down payment.
• Conventional mortgage: Between 5-10% down payment.

You can get more information about this by visiting our article related to the types of mortgage loans in the USA.

Generally, you must pay mortgage insurance if you pay less than 20%. But some mortgage insurance companies may charge lower monthly rates if you have good credit.

7. don’t shop for houses without getting preapproved

Before looking for a new home, it is important to have a mortgage approval in advance. If possible, find your desired home and then try to get pre-approved for the mortgage loan, as the home may disappear from the market before you finish getting pre-approved.

This process involves submitting a request to the lender to verify your income, credit history and assets. Only after being verified can the lender approve or deny the loan. If approved, they will be able to tell you the actual price range.

8. Avoid co-signing on a loan

Co-signing loans can put your credit at risk and limit how much money you can borrow. When homebuyers co-sign other loans, it’s usually for family members. However, if you have not officially closed your house, then you should avoid it at all costs.

Even if it’s not your debt, it can affect your credit and leave you liable for any money due in the future.

9. Try Not To Apply For New Credit

Applying for a new credit card can negatively affect your score and jeopardize your chances of getting a mortgage. However, if you have a decent credit score to begin with, a new credit card may not hurt your chances.

Everyone’s financial situation is different, so your chances vary. However, lower credit scores may determine your interest rate and your eligibility for approval.

10. Do Not Close Any Credit Card Accounts

It is not advised to close any credit accounts if you are about to apply for a loan, as it may affect your credit history and lower your credit score. So if you’re applying for or plan to apply for a home loan in the future, keep all of your credit accounts open. Plus, you can pay off your credit cards or balances before closing.

Lenders can increase your credit until closing, so it is important that you take care of your finances and do not make significant changes in your bank account, credits and so on. 

11. Do Not Make Payments On Collection Accounts

If you make payments on an old collection account, the account is considered “current”. This can cause your credit score to drop and affect your chances of getting approved for the loan. 

Also, payments on old collections can revive their collection status, since a creditor can only chase you for a payment for 7 or 10 years from the date of your last payment (depending on the state where you live).

If it’s approaching the 7-10 year range, it’s best to let it quietly disappear from your credit report.

12. If You Marry Someone With Bad Credit, Improve Your Score

It is common for couples to buy a house soon after getting married. However, if you want to get a house together, your credit scores could be taken into account. 

If you’re getting married to someone whose credit isn’t in the best possible status, it’s a good idea to improve your score to pay off the wedding loan or additional debt you both have before trying to get a home loan.

13. Keep Your Bills Up To Date

Since credit scores are important to the lender, you should improve and protect them before you apply for a loan. This means you shouldn’t do anything that could hurt your score, like not paying your bills.

Most lenders use the FICO score, so if you send a check after the due date, it can significantly lower your credit score points. If your history shows that you can’t pay your bills on time, your lender will likely assume that you’ll also be making late payments on your home loan.

14. Check Your Credit Before Applying For A Loan

Your credit score talks about you, it lets lenders know how fiscally responsible you are. Before you apply for a home loan, it’s important to check your credit score. 

Final Recommendations 

To improve your chances of getting mortgage approval and qualifying for a much lower interest rate, it’s important to be cautious in the weeks and months leading up to applying for a loan. 

Any asset, credit, or income issues should be reviewed and enforced to ensure your loan can be approved. Among the best tips for applying for a mortgage is to fully disclose and discuss your plans with a loan expert before applying for the financial nature.

As a final recommendation, we advise you to review your three credit reports through Annualcreditreport.com and work on correcting or eliminating any errors you observe.

How Can Curbelo Law Help You When Applying For A Mortgage Loan?

We hope that you find our tips for applying for a mortgage useful. If you face problems regarding a loan application or need any advice on real estate matters our firm is also experienced in real estate foreclouse in New Jersey so we can guide you in many areas of real estate.

Our attorney Carolina T. Curbelo has more than 10 years of experience in real estate matters. If she needs professional assistance, do not hesitate to contact our firm.