Most home buyers prepare in advance by saving for a down payment, but the down payment is only one financial factor of many that buyers need to have in order before getting a mortgage. If you’re in the process of saving, you may want to consider the other financial decisions you could make to best position yourself for a home mortgage loan.
Here are insights you can use to help you pare down unnecessary expenses, clean up your financials and get ready to buy a house.
- 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 lender to set yourself up for success even if the unexpected (like your car biting the dust) should happen.
3-12+ months out: Check your credit history and get your finances in order
When preparing for a mortgage, there are two time frames to consider — the first is your long-term financial plan. You’ll want to:
- Check your credit.
- Consult with a lender to determine the best strategy to qualify for a home loan mortgage (i.e., pay off debt or save for the required cash to close).
- Pay down any debt.
- Minimize unnecessary expenses.
- Get 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 house , lenders will use this to gauge your creditworthiness. Although it’s possible to get a mortgage even if you have a low credit score, a lower score can affect your loan terms and could 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 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. They recommend that you file any credit disputes with them online:
Check your debt-to-income ratio to see if you can lower it
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 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 sizeable 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! Try incorporating these money saving tricks in your routine:
- Write down your grocery list, and stick to it!
- Have more date nights in rather than at restaurants or movie theaters.
- Skip the café. Make your daily coffee at home.
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-approval can also give you general insights on financial weaknesses that you may be able to fix over time. By building a relationship with your lender, you’ll have someone to call if you have questions about your finances in the months prior to your mortgage application.
Less than 3 months out: Create a clean paper trail and keep expenses to a minimum
The second time frame to consider when preparing for a mortgage is the 60-day window before application. During this time, you should:
- Confirm the numbers.
- Keep your payments and accounts clean.
- Seek professional insights.
Verifying 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 loan officer Enda Moore’s 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 percent 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 collection) via old-school checks in the months leading up to the mortgage application.
When in doubt, call your lender
Loan officers 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 experts stress that it’s important to call your lender 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 loan officer in the loop to minimize the impact of these potential financial changes.
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 the Edina Realty customer care team to get in touch with an expert today.
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