Buying a house is a major endeavor. To ensure the process goes as smoothly as possible, here are a few things you need to do to prepare to apply for a mortgage.
If you’re at the stage of your life where you’re considering buying a home, you’ll need to secure a mortgage to make your payments affordable and reasonable over the next few decades. A mortgage is a considerable loan and perhaps the biggest financial hurdle you’ll ever undertake, and due to the size and complexities of applying for one, you’ll need to prepare your financial situation and take a few key steps leading up to the application itself.
1. Monitor Your Credit Score
Likely the most important determining factor for lenders is a potential borrower’s credit score and history. A lower credit score can impact the amount a lender is willing to give you in addition to the interest rate you’ll pay over the duration of the home loan. Checking your credit score with the three major credit bureaus (TransUnion, Equifax, and Experian) before applying is highly recommended.
2. Check for Errors in Your Credit Reports
In addition to checking your score and taking steps to improve it, you’ll want to check for any errors or discrepancies in these reports and check for signs of failed payments, incorrect transactions, and signs of potential identity theft.
3. Settle Any Debts or Delinquent Accounts
If you’re sitting on a large amount of debt from credit cards, vehicle loans, or student loans, you may have a more difficult time applying for a home mortgage. Before you set aside money for a down payment, consider reallocating those assets toward reducing your debt and delinquent accounts.
4. Reduce Your Debt-to-Income Ratio
One thing lenders look for in a borrower are their monthly gross income and ability to make a mortgage payment reliably and consistently. Loan risk professionals consider debt-to-income ratios a crucial factor in whether your loan is approved or not, so trying to reduce that number to 43% or less should be a priority.
5. Don’t Apply for More Credit for at Least One Year
Applying for increased lines of credit, new credit cards, vehicle, personal, or student loans can have a negative impact on your credit score. To avoid a disappointing result during the mortgage application process, don’t apply for any new forms of credit while you’re saving for a down payment.
6. Save, Save, Save
Once you start thinking about the home-buying process, you’ll want to begin saving your extra income toward the down payment. A larger down payment may help reduce your interest rates and improve your chances for qualification, so working toward a larger lump payment at the beginning will only help.
7. Get Pre-Approved
If you have your financial house in order, you can help streamline the home-buying process by getting pre-approved for a mortgage loan and lock in your interest rate. This shows home sellers that you’re serious, qualified, and ready to close on a home, making you more attractive as a potential buyer.