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8 mistakes to avoid when applying for a home loan

8 mistakes to avoid when applying for a home loan

There’s something oddly satisfying about owning a place one can return to at the end of the day, and this feeling drives people to set out to buy a home. But buying a home is a major financial decision, so one needs to plan it well in advance. Home loans are effective ways to arrange money for this purpose without facing a financial crunch. However, when taking home loans, one should avoid some common mistakes.

Maintaining a poor credit score
Credit scores are basically a reflection of how punctually a person has been repaying their debts, primarily credit card bills. If one repeatedly delays credit card payments, their credit score will likely fall with time. Lenders feel borrowers with low credit scores will not repay the amount, making them more likely to reject such loan requests. So, maintaining one’s credit score is essential to get a home loan approved. One should track their billing cycles closely and consistently pay off debts on time. It is also important to avoid having a high credit utilization rate, which indicates how much of one’s available credit one ends up using every month. High credit utilization can also adversely affect an individual’s chances of securing a home loan.

Changing jobs too frequently
If a borrower switches jobs very frequently, lenders may be reluctant to approve their home loan because they see such behavior as a sign of financial instability. That’s why many lending agencies require borrowers to have been employed at an organization for at least 12 to 18 months at the time of home loan application. So, before taking a home loan, one should be steady at a job for at least a year and avoid changing jobs too often.

Not reading documents before signing
Signing documents directly without going through them first is a big mistake. By doing so, one misses important clauses, particularly the ones related to cross-selling. This clause allows lenders to cross-sell without consulting the borrower first. For example, a person may have to open a complimentary bank account or buy property insurance even if they do not really need any of these. To avoid such repercussions, one should make it a point to read documents and their clauses beforehand and ask the concerned person questions.

Skipping the home inspection
While an FHA appraisal is important to check whether the home one has bought is eligible for a home loan, individuals also need to go through a home inspection. Many choose to skip this step once they receive the FHA appraisal, which is a mistake. A home inspection is crucial to find out if there are any underlying problems with the home and get them corrected beforehand if needed. If the problem cannot be solved, one still has enough time to start looking for another home. Skipping the inspection and going ahead with the home and home loan can cause serious issues later on.

Opening new credit lines or closing old ones
If one opens a new account just before applying for a home loan, their credit score, which may already be low because the account is newly opened, may go further down if the lender carries out a hard credit pull. Also, lenders consider the average duration for which one has held different bank accounts when calculating the credit score, so this average automatically dips if one has a recently opened account. So, individuals should avoid opening new credit lines if planning to go for a home loan any time soon. One should also avoid closing old credit lines because they help increase the average duration for which one has held bank accounts.

Not being transparent in the application
Sometimes, borrowers deliberately omit certain information they believe can affect their chances of getting approved for a home loan. This is a grave mistake because lenders usually perform thorough investigations to test a borrower’s eligibility. If a lender finds out that the borrower has hidden certain information, they may never trust the borrower’s credibility. In other words, the borrower’s chances of getting approved for the loan are close to null. So, one should always be as transparent as possible when filling out the home loan application.

Not being pre-approved for the home loan
Being pre-approved significantly increases one’s probability of securing a home loan. Basically, getting pre-approval from the bank requires the borrower to have a good credit report and provide certain basic details. So, one should always try to get a home loan pre-approval from the bank before actually applying for a home loan.

Going for a short repayment term
Many people make the mistake of going for a short repayment term because it tends to have a lower interest rate. However, they pay hefty EMIs in the bargain, which causes a financial crunch in the long run. So, it is better to go for longer repayment tenures with slightly higher interest rates and pay the amount flexibly with lower EMI amounts. This way, one can easily balance the loan repayment with current expenses. Before deciding, one should check the repayment terms and interest rates thoroughly to avoid being disappointed later.

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