Most common mistakes when applying for a mortgage loan
When looking for a new home and considering financing the purchase with a loan, you wouldn’t want oversight or missing any detail to deprive you of your dream home.
There are several common mistakes that can hinder you in one way or another, limiting the amount of the loan you can withdraw or increasing the price at which it will be provided to you. It is even possible for the bank to refuse to grant a mortgage loan if any of the following mistakes are made:
- Accumulating debts
Taking out additional loans before applying for a large mortgage loan is definitely not a good idea. Your debt-to-income ratio (also known as “credit indebtedness”) will increase significantly, which will automatically have a negative impact on your credit profile.
Each bank has its own methodology for calculating your credit indebtedness. In general, if the share of your monthly loan installments exceeds 50% of your income, most banks would classify you as a high-risk borrower. Of course, there are banks that would grant you a mortgage loan even with a credit indebtedness level above 65%, at the expense of its cost.
- Skipping loan installments and utility bill payments
When you fail to pay your obligations on time, your credit rating worsens. It is a key indicator that the lender uses to assess whether you will be able to repay the loan granted. Therefore, it is essential to make sure that you have a good credit record even before applying for a more serious mortgage loan.
Do not miss the deadlines for payment of installments, as sometimes even a delay of two to three days can have a negative impact on your rating.
If your credit history shows that you are unable to pay your household bills on time, it is very likely that the bank will assume that you will have the same difficulties with the mortgage payments.
For the same reason, it is not a good idea to use up the entire limit on your credit cards, as this can also worsen your credit file.
If you have credit cards with a total limit of 8000 leva and you have made purchases for 5000 leva, the ratio between the current and potential credit is 62.5 out of 100. Ideally, this indicator should not exceed 30%.
3. Changing jobs
Changing jobs a few weeks before applying for a mortgage will minimize your chances of success. The reason is that lenders want you to have a stable and consistent source of income. Ideally, when applying for a mortgage, you should have a Permanent Employment Contract of at least 12 months without interruption.
There are banks that would consider your credit request even with a shorter Employment Contract. However, this may affect other credit indicators. They may offer you a lower percentage of financing, not take into account your full income, offer a higher loan price, etc.
4. Major purchases before taking out a mortgage
Big purchases, such as furniture or a new car, are usually not a good idea right before applying for a large loan. The reason is that when buying a house, you need to have a relatively large amount of “cash on hand” to cover the down payment, transfer costs, and insurance.
If you have to take on additional obligations, whether it’s a personal loan or a credit card, your credit rating can be seriously affected.
Therefore, if you are determined that you no longer want to pay rent and are ready to own your own home, it is a good idea to consider clearing your remaining obligations before applying for a mortgage.
- Guarantees for other loans
It is important to think carefully before agreeing to be a guarantor for a loan taken by a relative or friend, especially if you are planning to apply for a large mortgage loan. When you become a guarantor for someone else’s loan, you are jointly responsible with the borrower for its repayment. If they fail to make their payments on time, your credit history will also be affected. Even if the loan for which you are a guarantor is being paid off regularly, the installment on it will still affect your credit liability.
The same applies to your spouse. Many couples start considering buying a home after saying “I do”. However, keep in mind that the bank takes into account the credit history and incomes of both partners.
Author: Stanimir Stankov / VIP Clients Manager, New Home 1 / tel.: 0894 555 690
Photos: Freepik