Keys to Avoid a Mortgage Nightmare


Buying a home can be one of the most exciting times in your life. But it can also be a difficult, nail-biting process. Finding a home, getting a mortgage and closing the deal is unpredictable and rarely smooth sailing, and many buyers have their own horror stories. Despite what you might have heard about buying a home, there are ways to avoid your own mortgage nightmare.

  1. Skip the pre-qualification and get pre-approved

There is a difference between a mortgage pre-approval and a mortgage pre-qualification. Some homebuyers assume these are the same processes. So when they receive a pre-qualification from a lender, they think the loan is written in stone and they begin looking at properties in their price range.

A pre-qualification, however, is only a rough estimate of how much the bank “might” lend based on information provided on a mortgage form. At this stage in the process, you haven’t submitted any official documentation, such as tax returns or bank statements. The truth is, a pre-qualification doesn’t get you the keys to a new house. For a better idea of whether you meet the qualifications for a mortgage loan, you have to get pre-approved.

This involves submitting supporting documentation to the mortgage lender. The lender will also examine your credit report and your entire file goes through underwriting. If you qualify, you’ll receive a pre-approval letter with information on the maximum you can spend on a property as well as other terms, such as the type of mortgage, your interest rate and the amount you’ll need as down payment.

If you make an offer on a house based on your pre-qualified amount—which is only an estimate of what you can borrow—you might be disappointed to learn that you actually qualify for much less once the lender checks your income statements and credit report.

  1. Don’t get caught in a bidding

Property bidding wars can escalate quickly. If you’re not careful, you could end up spending more on a house than originally planned. Bidding wars occur when a property has multiple buyers competing against each other. These types of situations drive up the asking price of a property, and some buyers spend more than they can comfortably afford. If you win a bidding war and agree to pay more, there’s also the risk of the home not appraising at the final sale price. If the appraisal comes in low, you’ll have to renegotiate with the seller, or pay the difference between the appraisal price and the sale price out-of-pocket.

  1. Don’t open new credit accounts

One of the fastest ways to mess up a mortgage is opening new credit accounts after you’ve been pre-approved. Remember, your pre-approval is based on your income and debt-to-income ratio at the time of submitting your application. If you open a new credit card or get a new auto loan before closing, this changes your debt-to-income ratio.

Mortgage lenders have strict guidelines regarding debt limits, and if your minimum debt payments—including the future mortgage payment—increase to more than 36% of your gross income, this can cause your mortgage to fall through because the bank may conclude that you no longer qualify for the original loan amount.

  1. Don’t assume your income will increase in the future

When comparing mortgage options, you can decide between a fixed-rate mortgage and an adjustable-rate mortgage. Adjustable-rate mortgages have an interest rate that change on a year-to-year basis after an initial fixed-rate period, typically three to seven years. These mortgages are riskier, but also attractive because they usually start with a lower mortgage rate than fixed-rate mortgages.

Borrowers often choose an adjustable-rate mortgage so they can enjoy a lower payment in the early years of their mortgage term. The problem with these mortgages is that rate increases in the future can skyrocket a home loan payment. Some borrowers take this risk betting on the fact that their income will increase in the future. But this is a gamble you shouldn’t take. There are no guarantees that your income will increase. If a rate increase results in a much higher mortgage payment, yet your income remains roughly the same over the years, this can trigger payment problems and raise the risk of foreclosure. Adjustable-rates are a smarter options for people who plan to move before their first rate adjustment.