Buying a home is one of the biggest purchases you’ll ever make.
1. Optimize your credit
Credit scores and credit activity have a major impact on mortgage approvals. Several missed payments, frequent lateness and other derogatory credit information can stop mortgage approvals. Pay your bills on time, lower your debts and stay on top of your credit report. Cleaning up your credit history beforehand and fixing errors on your credit report are key to keeping up a good credit score.
2. Assess your current debt
You don’t need a zero balance on your credit cards to qualify for a mortgage loan. However, the less you owe your creditors, the better. Your debts determine if you can get a mortgage, as well as how much you can acquire from a bank. Banks evaluate your debt-to-income ratio before approving the mortgage. If you have a high debt ratio because you’re carrying a lot of credit card debt, they can turn down your request or offer a lower mortgage. This is because your entire monthly debt payments — including the mortgage – shouldn’t exceed 45% of your gross monthly income. However, paying down your consumer debt before completing an application lowers your debt-to-income ratio and can help you acquire a better mortgage rate.
3. Gather documents
You’ll need to provide paystubs with 30 days of year-to-date income listed, so it doesn’t hurt to start collecting those. If you’re self-employed or have variable income, expect the underwriting process to be a bit more involved. For example, you’ll have to submit copies of your past two years of tax returns. Everyone should be prepared to have a copy of their driver’s license, copies of their two most recent bank statements and a few other items.
4. Get pre-approved
Getting pre-approved for a mortgage loan before looking at houses is emotionally and financially responsible. On one hand, you know what you can spend before bidding on properties. And on the other hand, you avoid falling in love with a house you can’t afford. Pre-approvals include everything from how much you can afford, to the interest rate you’ll pay on the loan. You’ll also be able to find out if you qualify for special mortgage programs like those through the Department of Veteran’s Affairs (VA), the Federal Housing Agency (FHA) or the USDA Rural Development (RD).
Throughout the process:
5. Stay at your job
Sticking with your employer while going through the home buying process is crucial. Any changes to your employment or income status can stop or greatly delay the process. Banks approve your home loan based on the information provided in your application. Taking a lower-paying job or quitting your job to become self-employed changes your finances so your banker must reevaluate to see if you still qualify for the loan.
6. Keep some savings in reserve
Mortgage bankers don’t want you to deplete your savings on the down payment and closing costs. They want you to have a reserve so you can take care of unexpected expenses without missing a house payment. It’s better to have an emergency fund than not, even if it means you’ll have to make higher house payments because of mortgage insurance.
7. Be patient during underwriting
Keep your finances as boring and steady as possible between the time you apply for a mortgage and the time you close on the loan. That sounds simple in theory, but it’s sometimes difficult in practice, especially for first-time homebuyers. What it means is this: Don’t charge up your credit cards or apply for new credit while the mortgage is going through the underwriting process.
When you apply for a mortgage, the bank looks at your credit report and credit score. Then, shortly before closing, the bank surveys your credit again. If there’s a substantial change (you maxed out your credit cards to buy furniture and appliances, or you got a loan to buy a car), the lender might have to delay your mortgage closing or in drastic cases, you could have to apply all over again.
In the end, we want you to be able to live comfortably in your new home. Remember that it’s always smarter to live within your means than to have to stretch to make your initial monthly payments. You can always move up to a more expensive house after your income rises.