5 Helpful Things You Can Do Before Applying for a Mortgage
Applying for a mortgage is a big step, so you’ll want to go into the process as prepared as possible. We have five helpful tips for things you can do before applying for your home loan. Read them over to see what you can do to get your finances in the best shape possible before starting the process of becoming a homeowner.
How to prepare before applying for a mortgage
1. Check your credit report.
If you think you’re going to enter the mortgage market sooner rather than later, one helpful thing you can do is to check your credit report for errors. Put simply, 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 access the lowest interest rates 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 thing you can do is put your focus on paying 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. 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, which means putting as much energy into paying down your debts as possible. 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 up 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 up for a down payment. Many first-time homebuyers wonder how much they have to have saved up, and the truth is, that it’s possible to buy a home for as little as 3% to 5% of the purchase price.
That said, in this case, the more you can save up, the better. Not only will putting down a bigger down payment make your offer stronger, but it will also help decrease your monthly payments. If you are able to put at least 20% down, you won’t have to pay private mortgage insurance, which is an added fee that is meant to protect the lender against default.
It can be helpful to set aside a dedicated bank account specifically for this purpose. 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.
After you’ve taken the time to save up a lump sum of money for your down payment, it’s a good idea to talk to a lender. Above all, 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.
In addition, this is a good time to ask any questions that you may have about the mortgage process. If you’ve never been through the process before and you’re unsure how everything works, be sure to get your questions answered before applying for a mortgage.
5. Shop around.
Finally, when you’re ready to take the first step in the mortgage process, it’s a good idea to shop around. In this case, different lenders will offer you different rates and have different fee structures. Shopping around gives you the opportunity to find the best loan for you.
When talking to lenders, it’s a good idea to make sure that you give the same information to each one. That way, when you’re given a quote, you can be sure that you are making an apples-to-apples comparison between lenders.
In total, it’s a good idea to get at least three quotes from lenders before deciding who you will go with for your loan. However, that said, you’ll also want to make sure that you get them around the same time. Generally, multiple inquiries are counted as one as long as they are made within the same window of time. Typically, this window extends between 14-30 days. If you get too many credit pulls outside of the window, it could reduce your credit score.