5 Things You Can Do Before Applying for a Mortgage

Applying for a mortgage is a big step, so you want to go into the process as prepared as possible. Why? Because the more prepared you are and the better you look as a candidate, the more likely you’ll get approved for a home loan. On top of that, being prepared can help you secure a better interest rate and have a smoother, stress-free experience.

Here are five things you can do to get your finances in the best shape possible before starting the process of buying a home.

How to prepare before applying for a mortgage

1. Check your credit report

The first thing to do is check your credit report. When you apply for a mortgage, your lender will pull a copy of your credit report. You want your score to be as high as possible in order to get the lowest interest rate and increase your chances of getting approved.

According to the Consumer Finance Protection Bureau (CFPB), everyone is entitled to one copy of their credit report from each of the three credit bureaus per year. You can access a copy of your report by going to AnnualCreditReport.com.

Once you receive a copy of your credit report, be sure to check it over for any errors. If you find anything out of the ordinary, call the credit bureau immediately to try and get it sorted out before applying for a mortgage.

2. Pay down your debts

Another step you can take when preparing to apply for a mortgage is to pay off any debts. When deciding whether or not you can afford to take on a home loan, lenders look at something known as your debt-to-income ratio (DTI). As the name suggests, your debt-to-income ratio is a measure of how much of your total income is currently going toward debt payments.

Ideally, you want this ratio to be as low as possible. Many lenders want to see a DTI of 43 percent or less, meaning 43 percent of your income goes toward debts. If you do have debt, think about setting aside a portion of your monthly budget to go towards debt payments.

While your main goal should be ensuring that you make your payments on time, it’s always a good idea to pay as far above the minimum payment as possible.

3. Save for a down payment

Once you’ve got your debt under control, your next financial goal before applying for a mortgage should be to save money for a down payment. Many first-time homebuyers wonder how much they need, and the truth is — it’s possible to buy a home for as little as 3% of the purchase price. And there are some types of home loans that don’t require any down payment at all.

That said, the more you can save up, the better. Not only will putting down a bigger down payment make your offer stronger, it will also help decrease your monthly payments and could get you a lower rate. If you are able to put at least 20% down, you won’t have to pay private mortgage insurance (PMI). This is an added fee meant to protect the lender against default that will be added to your monthly payments.

It can be helpful to set aside a dedicated bank account specifically for saving for a home. You can also consider setting up automatic payments to it. By having your money separated from your general checking and savings accounts, you’ll be less likely to spend it on extraneous expenses.

4. Talk to a lender

Once you’ve checked your credit, paid down your debts, and saved a lump sum of money for your down payment, you’re ready to talk to a lender. A lender can look at the specifics of your financial situation and give you a better idea of whether or not you’re in the right place to qualify for a loan.

This is also a good time to ask any questions you may have about the mortgage process. Ask away, if you’ve never been through the process and are unsure how everything works. A good lender will take the time to explain everything and walk you through the process.

5. Shop around

Finally, when you’re ready to take that first step in the mortgage process, it’s a good idea to shop around. Different lenders will offer different rates and have different fee structures. Shopping around gives you the opportunity to find the best loan for you.

When talking to lenders, make sure you give each one the same information. That way, when you’re given a quote, you’re comparing apples-to-apples.

It’s recommended to get at least three quotes before deciding which lender you’ll go with for your loan — and make sure you get them around the same time. When it comes to pulling your credit score, multiple inquiries are counted as one as long as they are made within the same window of time. Typically, this window is 14-30 days. If you get too many credit pulls outside of the window, it could reduce your credit score.

Taking the time to prepare before applying for a mortgage is a smart investment that can save you time, money, and stress in the long run.