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First, you need to check your credit score. This number will be your first introduction to any potential lender, and they’ll use it to glean a picture your overall financial health.
A bad credit score doesn’t necessarily mean you can’t get a mortgage, but it means that the terms of the loan probably won’t be as good as they would be if you had good credit. Bad credit scores mark potential borrowers as higher risk, and the borrowers could be forced to pay higher interest rates and larger down payments to compensate for that extra risk.
Don’t despair if your credit score isn’t where you want it to be. There are steps you can take to improve your credit score now, before you ever apply.
A mortgage is a big loan, and lenders will probably want it to be one of the only ones you’ve applied for recently. Old loans won’t usually disqualify you, as long as you’re making your payments on time. A recent loan or new credit card, on the other hand, could look bad to potential lenders.
That’s in part because loan applications and hard inquiries on your credit can negatively impact your credit score. Those little dents aren’t usually a problem over time, because your score improves as you pay off those loans and as the hard inquiry on your credit falls off, but make sure you give yourself time to rehabilitate that score before applying for a mortgage.
If you currently have lots of debt to your name, lenders won’t be eager to help you add debt to your financial profile. Even if you’re not drowning in debt, try to pay off as much of it as you can. Minimize your credit card bills and pump some money into any long-term loan debt you’re working on erasing. It shows lenders that you’re serious about paying off loans and that you can be trusted to stick to payment plans over a long period of time.
You’ll want to save money for down payments and closing costs, but using any extra cash to pay down debt will help spruce up your financial profile at a crucial point. This will also help improve your credit score, though there can be a delay between the debt payment and the credit score improvement.
This one may seem counterintuitive at first. While you do want to pay off credit card debt, you don’t want to close credit card accounts altogether. When you close a credit card account, you lose that line of credit from your financial profile, and your credit score will usually sink.
The best way to use a credit card is to have as large of a line of credit as possible, use only a fraction of it, and pay off the debt quickly.
As you focus on reducing your existing debt, don’t let any extra debt pile up. Keeping up with your bills won’t help your credit score, but falling behind will hurt it. Showing lenders you can keep the lights on and the water running is an important step in getting them to trust that you can pay to keep a roof over your head, too.
Mortgages come with closing costs and down payments, so you’ll want to save up some cash. In the months before applying for a mortgage, try to bulk up your checking and savings accounts.
While you want to plenty of cash on hand, you want to avoid large deposits before applying for a mortgage. Lenders usually impose restrictions on cash gifts. Those restrictions may include providing an explanatory letter about where the large deposit came from and why. If a potential lender doesn’t know where an unexplained deposit comes from, they might decide to reject the application.
If finding a new job and buying a home are both on your to-do list, pick the home first. Lenders usually prefer applicants to demonstrate their ability to hold down jobs. There’s some leniency when it comes to getting a new position in the same career field, but in general, lenders will expect you to hold down the same job for a couple of years.
You should also try to avoid taking a leave of absence, even if you plan to return to the same job. A maternity absence usually shouldn’t disqualify borrowers from securing a mortgage, but other types of absences may.
Before applying for a mortgage, take a hard look at your budget and figure out how your mortgage will fit into that. Many lenders want borrowers to spend no more than 28 percent of their paycheck on their mortgage. Borrowers might not want to, either.
Your debt-to-income ratio, or the amount of your income that goes toward paying off debt, should max out around 42 percent. If you can shoot for a lower ratio, that’s even better. Whatever your preferred debt level, the more your mortgage eats into that, the less you’ll have to put toward car payments, student loans, etc.
Mortgage applicants are required to provide quite a few supplemental documents. Among them, you can expect to turn over two years’ worth of tax returns, a month’s worth of pay stubs, and documents related to your rental history.
These documents back up your promise to repay the bank for the loan. It’s proof that you actually have the income and financial history that you claim.
Once you’ve done everything else on this list, you’re ready to apply for a mortgage! Just make sure to hold off on any other major purchases, at least until after you’ve closed on your loan. Trust me that buying a brand-new car right before closing is not a good idea.
Applying for a mortgage isn’t easy, but it’s manageable. Once you’re done, you’ve taken a major step toward homeownership. If you have any questions about the application process, don’t hesitate to reach out or leave a comment below!