Steering clear of the most common mortgage mistakes

Even though home buying is usually thrilling, sometimes it can feel like trying to thread a needle, especially when it comes to shopping for a mortgage. Your mortgage could be the largest loan you'll ever obtain, and tiny errors can cost you thousands of dollars or delay your sale longer than you'd like. But with a little forethought and guidance, nearly every pitfall is preventable once you know what to look out for.

Take the following list as a windshield, not a rear-view mirror. We'll put the mistakes mortgage loan officers observe most frequently into the spotlight and add some simple steps to avoid them, so you can go from offer to funding with less surprise, fewer fees and more peace of mind.

What you'll learn

• Mistake 1: House-hunting prior to prequalification
• Mistake 2: Focusing on rate, instead of pricing tiers
• Mistake 3: Leaving out the whole monthly housing cost
• Mistake 4: Underestimating cash to close
• Mistake 5: Shaking up finances during underwriting
• Mistake 6: Comparing only one loan structure
• Safeguards checklist: Keys to a smooth closing

Mistake 1: House-hunting prior to prequalification

Touring homes that are on the market is exciting, but without getting prequalified, you may be in the dark about which you can afford. Realtors and vendors want proof you can close, and a strong prequalification letter can also tell you if you have any credit, cash reserve or documentation issues that must be addressed.

Being prequalified also brings price limits into context. Without prequalification, buyers may fall in love with houses that are beyond what they can pay for. Being prequalified, however, places your price limit, intended payment and any rate change into context with your credit score or loan-to-value ratio. You'll save time by looking at fewer homes and write more qualified offers that could get more seriously considered by sellers.

Mistake 2: Focusing on rate, instead of pricing tiers

Interest rate is a primary concern but shouldn’t be your only consideration. Lenders commonly price loans using a grid of credit score columns and loan to value (LTV) rows (amongst other factors). A change in either credit score or LTV can put you in a different tier.

Reducing LTV by five points alone—by, for instance, increasing your down payment by an additional $5,000—can put you into a lower-cost tier. That can slash payment and private mortgage insurance (PMI) expense considerably. Don’t neglect to ask your mortgage loan officer how much difference a small shift in down payment, credit or home price does to the grid and annual percentage rate (APR).

Mistake 3: Leaving out the whole monthly housing cost

Principal and interest are just half of the equation. Homeowners insurance, property tax, homeowners’ association (HOA) fees, and any potential private mortgage insurance (PMI) all add additional expenses on top of your loan.

Most first-time homebuyers don't pay attention to how these additional fees can vary. A subdivision may have $200 a month HOA charge while the one a block away has none. A county line can raise property-tax costs 20%. Even insurance is different: Older roofs or coastal codes often push premiums through the roof.

Begin with last year's tax notice, an insurance quote and a review of HOA fees. Next, plug all these amounts into Alliant’s mortgage calculator to project the actual payment and avoid any large budget surprises.

Mistake 4: Underestimating cash to close

Closing costs typically range from 2%–5% of the purchase price, including appraisal fees, title insurance, transfer taxes and prepaid interest. Buyers who budget only for a down payment can find themselves scrambling for additional funds days before closing.

Plan on a conservative 3% for closing costs. Any big cash to close surprises will be a lot less likely when these funds are set aside in advance. If liquidity is tight, consider substituting with small seller credits or lender paid closing costs (trade a nominally higher interest rate for bank covered fees). Just be careful to weigh how such decisions will impact LTV, PMI premiums and long term interest.

Mistake 5: Shaking up finances during underwriting

The loan file you submit is just an initial snapshot; lenders will re-verify income and re-run credit at closing. New credit, significant unexplained deposits or a career change will initiate a second review or worse, sink approval altogether. Keep credit card balances stable, delay major purchases and if you’re receiving gift money, make sure it’s well-documented with a signed gift letter to have a clear paper trail of where the funds came from. Stability, and not rapid spontaneity, is your friend between funding and application.

Mistake 6: Comparing only one loan structure

Each budget and calendar are different. To get the best mix of payment, interest cost and flexibility, compare fixed- and adjustable rates on Alliant’s calculator then at least three terms with your lender:

• 30 year fixed: Fixed payment, lowest monthly payment, most total interest.
• 15 or 20 year fixed: Higher monthly payment, less total interest, rapid equity build up.
• Adjustable-rate (ARM): Lower initial rate for 5–10 years; ideal for buyers who'll refinance or relocate during that time.

Add these tipping points: Zero-point versus point-buy-down, monthly PMI versus single premium, and whether a higher rate may include lender credits to pay for closing fees. A five-minute apples-to-apples normally reveals thousands of dollars buried in headline-rate ads.

Safeguards checklist: Keys to a smooth closing

Before you reach the finish line, a few easy habits will keep you from stumbling into last-minute surprises, roadblocks or loan jitters.

• Test funds and buffers: Hold back your down payment, put 3% into a closing cost savings fund, and keep two months’ worth of cash reserves.
• Freeze credit activity: Avoid new account openings, piling up credit cards with purchases or career changes until after your loan is settled.
• Mark down the total cost: Utilize mortgage calculators and factor in taxes, insurance and PMI when making calculations prior to falling in love with a home.
• Act fast: Lender inquiries are time-sensitive—procrastinating to provide information or documentation can risk your closing date or interest rate.
• Final budget gut check: Utilize not only your prequalification but also make sure the monthly payment continues to be in your comfort zone in case of rate or term changes.

Stick to these guardrails, and you could eliminate most of the surprises that trip up buyers at the closing table. If you’re ready to get started, contact an Alliant mortgage home loan officer of your choice with any questions about getting prequalified or any other information.