The Five Biggest Mistakes Mortgage Borrowers Make
Don't lie to Brian Koss about your monthly income. Don't try to hide your debts when you're asking him for a mortgage loan.
You won't fool him.
"We will find anything you try to hide," said Koss, executive vice president with Mortgage Network in Danvers, Massachusetts. "We know everything about you when you apply for a loan today. We know more than we ever wanted to know. I can probably tell you what you had for breakfast. It's that bad."
Lying about income and debts is one of the most common mistakes that consumers make when applying for a mortgage. But it isn't the only one. Lenders say that borrowers tend to routinely make the same mistakes during the application process.
Understanding these mistakes is important: If you avoid them, you'll boost the odds that your mortgage application moves smoothly through underwriting. If you don't? At best, you'll slow the process. At worst, you'll scuttle your chances to even qualify for a mortgage.
Lying about your income and debts is a good example. Koss has seen clients try to hide properties that they own but don't have a mortgage on so that they don't have to include the taxes or insurance on these properties as debt. Clients have tried to hide the loans on which they've co-signed for their sons or daughters.
Fudging the numbers -- whether for income or debts -- never ends well. As Koss says, your lender will find out. And when it does? You can expect a delay as the new numbers are plugged in. You might find that you no longer qualify for the amount of mortgage money for which you applied.
So be honest when applying. As for the four other mistakes that lenders see borrowers make too often? Here they are. Avoid them if you want the lending process to move as smoothly as possible.
They don't have enough money
Buying a home is expensive. Peter Grabel, managing director of Luxury Mortgage Corp. in Stamford, Connecticut, says too many borrowers fail to understand that they'll need to cover more than the down payment.
They'll also need to have funds to cover the prepaid items due at closing such as tax escrows and homeowners insurance. Then there is the issue of post-closing liquidity. Grabel says that banks require that you have money left in your accounts after closing, even after you pay for everything that goes into taking out a mortgage.
"Unfortunately, many people contact me when they are on the verge of making an offer or about to sign a contract to purchase a home," Grabel said. "The best piece of advice I can give is to find a mortgage professional you feel comfortable with and start the process early."
They're not lying about their income, but ...
... they're not right about it, either. Faramarz Moeen-Ziai senior vice president of national sales and production for San Ramon, California-based Commerce Home Mortgage, says that some applicants think they make more qualifying income than they actually do.
The key word there is "qualifying."
Borrowers might have received a big bonus at the end of the year. They want to count that bonus as part of their regular income. But there's a problem: Lenders have to follow specific rules when it comes to bonuses. They can't count bonus income unless applicants have received that bonus for at least two years. Lenders then take a two-year average of the bonus. That two-year average is the actual dollar amount that lenders will consider when determining applicants' annual income.
"You have to think about your income as an underwriter does," Moeen-Ziai said. "Don't think of it the way the rest of the real world does."
They inadvertently damage their credit score
Lenders pay close attention to your three-digit credit score. It tells them how likely you are to pay your bills on time. If your score is too low, you'll have to pay a higher interest rate. And if it's especially low -- say under 640 -- you might struggle to find a lender to loan you mortgage money.
David Reis, research director for the Center for Urban Entrepreneurship at Brooklyn Law School in Brooklyn, New York, says that many borrowers damage their credit scores during the application process without even realizing it.
Here's an example: Reis says he was speaking with a mortgage banker recently who told him of a client whose credit score dropped 100 points because of an unpaid debt of $4 to a retailer. The consumer wasn't even aware of this debt, Reis said. But because of that $4, he had to pay a higher interest rate on his mortgage, a mistake that might cost him thousands of dollars over the life of his loan.
"Many people don't realize how easily their credit score can change," Reis said. "It is worth checking your credit score as soon as you think you may be applying for a new mortgage or refinancing an existing one."
They change jobs
It can take a month or longer to close your mortgage loan. During this time, you might be tempted to jump to a new job. Be careful. Doing this might hurt your chances of closing that loan.
Moeen-Ziai says that most consumers move to a new job because it'll pay more. They think that the higher income they receive will make them more attractive borrowers. But lenders like to see stability, too. It's why they prefer to work with borrowers who have held the same job -- or at least who have worked at the same company -- for at least two years. The reason? Lenders think you are less likely to lose your job if you've held it for a significant period of time.
Moving to a new job during the application process or immediately before you apply for a loan could hurt your chances to qualify, Moeen-Ziai said.
"And the real deal killer? If you go self-employed," Moeen-Ziai said.
Lenders want to see two years' worth of steady self-employment income before they'll loan you mortgage money, Moeen-Ziai said. Going the self-employed route right before you apply for a mortgage -- or during the underwriting process -- could scuttle your chances of qualifying.
Want to close your loan quickly? Malcolm Hollensteiner, director of retail lending sales at TD Bank in Washington D.C., says that consumers who quickly provide the information their lender asks for without embellishment will boost their odds of a stress-free closing.
"We urge customers not to paint a picture that is not realistic," Hollensteiner said. "Today, everyone in the mortgage industry is focused on sustainable homeownership. This means that there is a healthy degree of reality involved in the lending process."