- Evaluate your financial history and credit score, then work to correct any imperfections or mistaken records.
- Practice better spending habits and clean up your bank accounts (all unverified deposits may require additional documentation).
- Work with your mortgage consultant to set yourself up for success even if the unexpected (like your car biting the dust) should happen.
Most homebuyers prepare in advance by saving for a down payment, but the down payment is just one of many financial factors to buying a home and getting a mortgage.
If you’re in the process of saving for your first house, there are other financial variables that may help position you favorably for a home mortgage loan. Here are insights you can use to help you reduce expenses, clean up your finances, and get ready to buy a house.
3-12 months+ away from buying
During this time frame, you’ll want to focus on your long-term financial plan by:
- Checking your credit
- Meeting with a mortgage consultant
- Paying down any debt
- Minimizing unnecessary expenses
- Getting pre-approved
Review your credit report
You’ve probably heard this before — your credit score is important. Whether you’re buying your first condo or upgrading to a new house, lenders will use this score as one way to gauge your creditworthiness. Although it may be possible to get a mortgage even if you have a lower credit score, a lower score can affect your loan terms and may increase your monthly payments. By maintaining the highest credit score possible, you could save a lot of money over the long term.
Paying your bills on time will lead to a higher credit score. So, make it easy on yourself by organizing your payments. Turn on your calendar notifications, set up automatic payments or highlight important dates in your planner to remind yourself when it's time to pay bills. These small changes will help you avoid late payments.
It’s also a good idea to get a copy of your free credit report. Once the report is in your hands, look for errors — a missed payment that was made on time or an account that is mistakenly listed under your name can be corrected by contacting your credit agency.
The three main credit agencies are Experian, Equifax and TransUnion(1). They recommend that you file any credit disputes with them online:
Meet with a mortgage consultant
It can be smart to meet with a mortgage consultant* well before you’re ready to start the home buying process. They can help you assess your finances and determine how you can become a more appealing borrower. In some cases, they may recommend specific debts to focus on; in others, they can share strategies for saving for a down payment or even getting down payment assistance.
In short, having a solid relationship with a mortgage consultant early on can help first-time buyers become better prepared for buying down the road.
Focus on paying down debts
Calculating your debt-to-income ratio is paramount to getting the most favorable terms for your loan.
If you’re able, start to improve your debt-to-income ratio by paying down your long-term “installment” debt, which is made up of monthly expenses you owe, including:
- Student loans
- Personal loans
- Auto loans
And remember, even if you have student loans, applying for a mortgage is not out of the question. If you have enough income to cover your bills and potential mortgage payment, you should be in the clear. In fact, those with a high income and typical monthly debt may have a better debt-to-income ratio than people without loans.
You may wonder, how is it possible to have more debt yet have a better debt-to-income ratio? The key word is ratio. Getting approved for a loan is not about how much total debt you have; it’s based on how much you owe monthly as compared to your monthly income.
Save for a down payment
When you’re applying for a mortgage, every penny counts! Be sure to cut down on unnecessary expenses anywhere you can, including dining out and all those unused subscriptions to streaming services.
Although responsible financial habits will play a large part in saving for your down payment, buyers with generous family members or friends can also consider mortgage gift funds. Do you think your family might assist with your down payment? Begin talking about the monetary help they could contribute. There are also low down payment options and down payment assistance available for certain buyers.
Get pre-approved for a loan
Hands down, the best way to financially prepare for a mortgage is to get pre-approved by a lender. Don’t worry, getting a pre-approval doesn't mean you have to buy anything! It’s simply a way to understand how much you could take out in a loan.
Getting pre-approved can also give you general insights on financial weaknesses that you may be able to fix over time. By building a relationship with your mortgage consultant, you’ll have someone to call if you have questions about your finances in the months prior to your mortgage application.
0-3 months away from buying
The 60-day window before you apply for a loan is critical. During this time, you should focus on:
- Confirming your down payment and financials.
- Keeping your payments and accounts clean.
- Staying in close touch with your mortgage consultant.
Verify the down payment and financials
A lender has to verify the assets and other components related to the mortgage transaction (including the down payment) for the 60 days prior to loan application. If possible, put your entire down payment into one account ahead of this timeframe.
Take Edina Realty Mortgage Consultant Enda Moore’s (NMLSR ID: 1044631) advice:
“One of the more challenging scenarios is for cash assets to be pending between one account and another at the time of a loan application,” says Enda. “If the two bank accounts don’t ‘talk to’ each other, we have to dive into forensic accounting, which is a hassle for everyone and can involve a lot of extra paperwork. If you’re a buyer who is moving toward closing, you’ll want to avoid that kind of last-minute stress by cleaning up your accounts well in advance of applying for a loan.”
Minimize tech-first financial transfer apps
Another part of cleaning up your bank history includes avoiding large transfers from accounts that lack clear records. Lenders must examine transfers that comprise more than 25% of a buyer’s monthly income. Confusing transactions made electronically via Venmo, Zelle or PayPal may “flag” a lender or make it difficult for them to understand where your money is coming from and going to.
While your friends can still pay you back for brunch on your mobile app, stick to collecting larger payments (like rent or your family phone plan) via old-school checks in the months leading up to the mortgage application.
When in doubt, call your mortgage consultant
Mortgage consultants understand that not everyone has perfect credit or crystal-clear financial records and they also know that the unexpected can happen in the months before you apply for a mortgage.
These professionals stress that it’s important to call your mortgage consultant if you run into a situation that could impact your ability to get approved for a loan. Whether your car dies, you have to take on a bit more credit card debt, or you start a new job, it’s best to keep your mortgage consultant in the loop to minimize the impact of these potential financial changes(2).
Ready to apply for a mortgage?
Put your best foot forward. Consider making simple changes — both short-term and long-term — to get your finances in check before applying for a home mortgage loan.
If you’re ready to make the next step, contact Edina Realty or your agent to begin the home buying process.
(1) Prosperity Home Mortgage, LLC dba Edina Realty Mortgage is not a credit counselor. Information displayed is not credit advice and should not be relied upon or interpreted as such.
(2) Prosperity Home Mortgage, LLC is not a financial or tax advisor and cannot and is not offering tax advice. Please consult a financial advisor or certified public accountant to determine what the tax implications of purchasing real estate may be.
*Edina Realty Mortgage is an affiliate of Edina Realty. See Affiliated Business Arrangement Disclosure Statement
Prosperity Home Mortgage, LLC may operate as Prosperity Home Mortgage, LLC dba Edina Realty Mortgage in Minnesota and Wisconsin. ©2023 Prosperity Home Mortgage, LLC dba Edina Realty Mortgage. (877) 275-1762. 3060 Williams Drive, Suite 600, Fairfax, VA 22031. All first mortgage products are provided by Prosperity Home Mortgage, LLC. Not all mortgage products may be available in all areas. Not all borrowers will qualify. NMLS ID #75164 (For licensing information go to: NMLS Consumer Access at http://www.nmlsconsumeraccess.org/) Licensed by the Department of Financial Protection and Innovation under the California Residential Mortgage Lending Act. Licensed by the Delaware State Bank Commissioner. Georgia Residential Mortgage Licensee. Massachusetts Mortgage Lender and Mortgage Broker MC75164. Licensed by the NJ Department of Banking and Insurance. Licensed Mortgage Banker-NYS Department of Financial Services. Rhode Island Licensed Lender. Rhode Island Licensed Loan Broker. Rhode Island Licensed Third-Party Loan Servicer. Also licensed in AK, AL, AR, AZ, CO, CT, DC, FL, ID, IL, IN, KS, KY, LA, MD, ME, MI, MN, MO, MS, MT, NC, ND, NE, NH, NM, NV, OH, OK, OR, PA, SC, SD, TN, TX, UT, VA, VT, WA, WI, WV and WY.