15 Tiny Home Loan Mistakes With Big Consequences

 

When you help clients buy a home, discussing potential issues upfront should be a top focus.

Even small errors can become huge money problems later on. But many real estate agents let eager buyers leap before looking closely. 

Buyers often get swept up in daydreams of beautiful houses with white picket fences. 

And what do they gloss over? 

The tiny terms in tiny print that end up being a big deal.

These slippery issues pop up during the entire loan process. From filling out applications to signing stacks of closing paperwork. 

They range from math mix-ups to misunderstandings about complicated mortgage language. 

While nobody means to make these mistakes, even seasoned buyers overlook critical specifics.

By pointing out what to steer clear of, real estate pros can rightly size up expectations for first-timers. 

And we can remind experienced buyers too. Let's review why these "tiny" mistakes matter so much down the line...

 
 

Chapter 1: Common Paperwork Pitfalls

When applying for a home loan, buyers make small but serious oversights. 

These seem harmless initially but can derail deals later.

Here are 5 documentation slips buyers often make when seeking financing:

Incomplete Applications

Lenders require mounds of paperwork - bank statements, tax returns, employer forms. 

Leaving anything out stops applications in their tracks.

As buyers scramble to find missing documents, their rate locks run out. So they must reapply at today's higher interest rates.

Ensure all paperwork ducks line up in a row before sending in.

Outdated Forms

Mortgage companies update forms regularly. Sending old versions causes delays while lenders request current ones.

Double check you use the latest editions.

Don't depend on templates from past loans or friends. Requirements change so let your specific lender point you to the right paperwork.

Slow Responses

Lenders finalize loans using extra data requests. Slow replies hit reset buttons on closing timetables.

When asked for more documents, rapidly provide them. 

Have someone check emails if you can't, so important questions get quick turnarounds.

Lagging responses risk needing rate lock extensions costing money.

Incorrect Information

Even minor mistakes on applications risk rejections. Underestimated earnings make buyers appear riskier. 

Overestimates raise fraud flags.

Triple verify all entries match source documents 100%. 

Calculate numbers carefully. Validate names, addresses and dates perfectly. Data mismatches force resubmissions and restarts.

Math Errors

Sloppy addition or subtraction affects debt and earnings ratios lenders use to qualify applicants.

Carefully total all values when documenting assets, debts, income, taxes and cash to close. 

A mathematical misstep throws off pivotal loan-to-value estimates.

Mind paperwork pitfalls like these to prove reliability as a borrower. Stay organized and detail-oriented every step of the way.

 
 

Chapter 2: Financial Blunders

Financing flubs also ax loan approvals. Even small money management mix-ups set off red flags:

Mid-Loan Credit Applications

Lenders freeze credit reports 30-60 days before closing.

Earlier credit checks require updates they might charge for.

Once your home loan application starts, don't apply for other credit - even pre-approvals.

Wait until after closing signatures dry. Soft inquiries like employment checks are fine.

Unexplained Cash Deposits

Lenders check bank statement deposits for size and source trail. 

Large unidentified sums suggest hidden income from concerning sources.

Document where deposits come from - prior accounts, assets sold, gifts etc.

Highlight explanations on statements for underwriter eyes. Cryptic cash inflates income estimates used to qualify loan amounts.

Prepaying Debts

Closing paperwork tallies up outstanding debts.

Settling balances early can raise suspicions buyers overstated earnings.

Keep paying minimums normally until the keys are yours. Don't prepay credit cards, auto loans or other recent debts listed on your application yet.

Cashing Out Retirement Funds

Taking retirement account payouts requires letters allowing that without early withdrawal fines.

Verify your accounts won't charge fees for pre-retirement access.

Document reasons for withdrawals clearly to avoid issues.

Large Gift Deposits

Lenders ensure gift funds don't secretly need repaying - hiding applicant debts.

Requirements intensify when down payment gifts exceed 20% of home value.

Tell lenders ASAP about any gift money toward down payment or closing costs. 

Provide gift letters confirming the giver's relationship and paper trail showing the money transfers.

Math matters hugely in mortgages. Calculate carefully and account for every dollar to prove fiscal responsibility.

 

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Chapter 3: Costly Credit Score Slip-Ups

Credit myths also crash closing day dreams. Even small score drops quickly disqualify loan applications:

Only Checking Credit Once

Many assume one score check accurately represents their rating throughout the entire loan process.

Yet scores bounce around a lot, creating surprises.

Recheck your credit every 2-3 weeks after pre-approvals and before closing. Lenders verify again then too. Points matter - a 90 point change can tank deals.

Believing All Scores Are Equal

You don't have just one credit score. 

Different scoring models generate varying numbers. Lenders examine middle market scores consumers rarely see.

Scan credit reports to view your multiple score versions.

Verify the exact type of score model lenders ordered - often FICO 5 or FICO Mortgage Score. Not Vantage or other consumer site scores.

Attempting Fast Credit Fixes

Some scramble to boost scores quickly after learning their true lending rating.

But radical short-term shifts raise fraud flags about credit cleaning schemes.

Start improving credit early when buying, targeting slow and steady monthly gains over many months. Big last minute spikes threaten application troubles.

Focusing Only On Late Payments

Mortgages weigh all credit factors - not just missed or late payments. High ongoing balances on credit cards hurt too by signalling financial risk.

Pay down card balances to lower "utilization ratios" below 30% on all accounts.

Tackle installment loans and handle disputes quickly too. Everything influences mortgage credit scores.

Monitor credit diligently, aiming for gradual boosts across all factors lenders scrutinize. Avoid reactionary corrections highlighting existing issues instead.

 
 

Chapter 4: Failing to Lock Rates

Mortgage rates swing daily alongside bond markets. Not locking in timely during volatility can hurt:

Delaying Past Pre-Approval Stage

Most lenders allow rate locks lasting 30-90 days. Act too late and better rates vanish before closing.

Get ready to lock immediately once an offer is approved.

Send the purchase contract to lenders ASAP to lock rates after getting pre-approved. Don't risk gambling on decreases.

Locking Before Offer Acceptance

Mortgage locks cost ~0.25% of loan amount per extension. Lock too early and waste money if the home sale falls through.

Finalize the purchase contract before formally locking rates.

Then lock in as soon as possible as recommended above. You must repurchase extensions if initial locks expire.

Believing Advertised Rates Are Guarantees

Lenders market rates requiring excessive fee buying points to actually secure. Their ads misrepresent true costs at those rates.

Clarify lock rate details seen online, email flyers and printed ads.

Don't assume teaser rates equal locked rates. Inquire about total origination charges at each advertised rate.

Ignoring Total Loan Costs

Comparing only interest rates overlooks thousands in origination fees and closing costs assessed. Total loan expenses determine best overall deals, not just rate.

Have lenders list total origination charges expected for given rates.

Contrast those bottom line totals when shopping around. Slight rate differences pale next to closing cost variations between lenders.

Stay vigilant of rate moves throughout home shopping. Then lock intelligently based on transparent total estimated loan expenses.

 
 

Chapter 5: Picking the Wrong Lender

Choosing the wrong lending partner creates capability gaps reducing approval odds:

Using Unlicensed Lenders

Federal regulators list approved bank and non-bank lenders.

Those lacking proper licensing and credentials face application barriers.

Check license status on the NMLS website beforehand. Non-bank and online only lenders often navigate regulations poorly increasing approval risks. Consider familiar banks instead.

Assuming All Lenders Are the Same

Large banks, local credit unions, online lenders, mortgage brokers - all vary widely in efficiency, tech savviness and approval success rates due to contrasting risk models.

Research lender categories in your local area, checking consumer feedback and closing speed data. 

Community banks and credit unions best understand regional risks giving them an edge.

Not Comparing Customer Service

Spotty communication and delays sink many loan applications.

Yet many buyers overlook vetting servicer reliability upfront via online reviews.

Evaluate call center availability, satisfaction surveys, complaint ratios, and purchase closing times first through Zillow, LendingTree and Google ratings.

Weigh alongside rate deals when deciding lenders.

Confusing Pre-Approvals and Pre-Qualifications

Pre-approvals require extensive income, asset, debt and cash proof. Pre-qualifications just estimate approval odds without formal verification paperwork.

Treat pre-approvals as mandatory for serious purchase attempts and negotiate accordingly. 

Pre-qualifications lack deal-closing teeth allowing homes to slip away.

Carefully weigh lender capabilities against weaknesses spotlighted in complaints and reviews. Only apply once fully convinced they can close efficiently.

 

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Chapter 6: Not Shopping Around Enough

Failing to compare lenders misses out on big rate and fee savings:

Only Speaking to One or Two Lenders

Each lender charges different rates and fees for identical buyers.

Fewer than three quotes leaves major savings out of sight.

Spend a few hours contacting multiple local lender branches to start quote conversations and applications. Meeting in person often allows haggling not possible online.

Assuming Advertised Rates Are the Best

Lenders only publicize higher base rates expecting later downward negotiation. Advertised equals maximum rates.

Better deals often hide 5-15 basis points lower.

Mention competitor rate quotes and anchor to high advertised pricing when negotiating. Local loan officers have flexibility to shave base rates vying for your business. Display industry pricing knowledge.

Not Negotiating Fees

All lender fees and profit margins adjust when pushed. Yet most assume costs are fixed leaving savings on the table.

Request lenders reduce those obnoxiously huge origination charges since you'll refer future clients.

Query if they can buy down rates further using fee concessions or credits. They can often budge 5-15 basis points in both categories.

Not Examining Final Rate Details

Many all-in rates lump static fees like "processing" that actually mask negotiable individual charges. But buyers must identify those charges specifically to question them.

Require lenders explain all closing disclosure fees line-by-line detailing purpose and origin.

This surfaces custom fees hiding like doc prep, underwriting and admin costs to target for line-item removal.

Leaving rate and fee piles unturned by not shopping thoroughly or negotiating is a common and preventable expensive mistake.

 
 

Chapter 7: Ignoring the Fine Print

Glossing over loan detail hide unpleasant surprises for unwitting applicants:

Missing Prepayment Penalties

Most assume freely paying loans off early but some still penalize prepayments - even just refinancing or selling the home!

Look for prepayment penalty clauses spelling out fines for finishing loans too soon.

Lock out periods also prevent refinancing for 1-5 years. Calculate break even timelines before accepting them.

Not Modeling Adjustable Rate Spikes

Borrowers crave low adjustable rate mortgages with tempting starter payments. 

Yet historically rates soon spike much higher over 5-10 years as markets shift.

Not stress testing higher payments risks unaffordability disasters.

Model worst case adjustable rate scenarios. Compare maximum potential future monthly payments against conservative income growth estimates. Ensure you could still pay the bills if adjustable rates rise later.

Overlooking Balloon Payments

Some exotic loans require huge balloon payments of the original principal after just 5-7 years. Failing to notice these equates agreeing to unplanned future refinancing if unable to make the payment.

Read terms for interest only loans, reverse mortgages, HELOCs, commercial financing etc. checking for scary balloon payment obligations that could trigger financial shocks later.

Disregarding Pre-Approval Expiration

Pre-approvals aren't forever. Their approval windows typically run 60-120 days meaning purchases must complete by then or require reapplying at unknown higher future rates.

Note exact pre-approval expiration dates in bold. Map out orderly purchase timelines allowing ample buffer before drop dead rate locks vanish.

Skipping Home Inspection Review Rights

Most mortgages authorize lenders to demand repairs if appraisals highlight issues. But many buyers don't realize this possibility after waiving inspection contingencies assuming they've secured homes as-is.

Check clauses detailing lender rights to require repairs or improvements even if buyers initially waive inspection demands.

Renegotiations sometimes follow if appraisal issues tank assumed property values.

Giving short attention to the nitty gritty details lands buyers into deals stacked against them. Arm yourself by decoding mortgage legalese purposefully.

 
 

Chapter 8: Failing to Budget Long Term

Short term financial planning causes downstream nightmares too:

Only Considering Current Monthly Debts

Buyers obsessing over existing debts overlook bigger long run obligations that severely swing affordability. Property taxes, insurance, maintenance can all balloon over time.

Document all ownership expenses ahead to visualize total lifetime costs then budget accordingly. Avoid mental accounting that hides future expenses skewing perspectives on affordability.

Not Planning for Higher Rates at Renewal

Today's incredibly low rates lure in first time buyers who don't expect loans renew in under 5 years at possibly much higher prevailing interest rates then - erasing temporary savings that qualified them initially.

Add 2-3 percentage points onto current principal and re-crunch overall affordability numbers monthly.

Ensure adequate income buffer for possibly larger future payments judging true long term impacts beyond the teaser rate period.

Failing To Save For Ongoing Upkeep

New construction warranties skip the fact that all home components age, fail, and must be replaced. Lacking savings for these inevitable repairs causes financial heart attacks later as critical systems reach end of lifespan.

Proactively earmark savings for future roof replacements, exterior painting, appliance swaps, and mechanical upgrades. Budget 1-4% of total property value annually toward maintenance and major repair funds.

Not Saving up 20% for Next Home

First time buyers sometimes drain all cash reserves on initial down payments. Yet 20% down payments on that second step-up home allows eliminating primary mortgage insurance, saving hundreds monthly.

Automate savings of 15% of take home income and earmark specifically for next home upgrades. Embrace starter homes as temporary milemarkers enroute to forever properties.

Home ownership costs exceed principal and interest. Anticipate expenses, model worst cases, and course correct early to optimize affordability around family needs long term.

 

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Final Thoughts

Side stepping tiny but impactful mistakes when financing protects money and prevents headaches.

Overpaying interest, budget mishaps, losing home deals -- all conveniently avoided when aware of what commonly derails buyers.

While no buyer intends these errors, lacking visibility invites them frequently.

Hopefully this breakdown better orients both home buyers and real estate advisors to circumvent typical pitfalls.

At each milestone, prompt clients to double check assumptions:

  • Are all income sources fully verified?

  • Did we submit complete paperwork packages with updated forms?

  • Are debts continuing to be paid on time, every month?

  • Is credit score safely above the recommended minimum?

  • Does our rate lock timeframe bridge us to the closing date without gaps?

  • Could we still afford higher future interest rates when loans renew?

  • Have we budgeted for inevitable maintenance and major repair costs down the road?

Guide setting accurate expectations around lender relationships and the true long term expenses of ownership early.

Sketch reasonable home shopping timetables with wiggle room handling surprises smoothly. And assist modelling worst and best case scenarios that still work reliably.

It's a team effort across borrowers, real estate pros and lenders to nail loan approvals. But early prevention by borrowers with your support gets them on the right track.

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About the Author

Aaron “Kiwi” Franklin

Head of Growth