The Do’s and Don’ts Before Applying for a Mortgage 

Maybe you’re dreaming of a suburban ranch house with a big backyard. Or perhaps a sleek urban condo in the heart of the city. Or a townhome that’s within walking distance to work. Everyone’s idea of a “dream home” is a little different, but there’s one thing that’s the same across the board: We all have to apply for a mortgage loan.

You don’t have to have perfect credit to be approved for a mortgage loan. You don’t have to be rich, either. But your credit (and the amount of debt you’re carrying) does have an effect on the kind of mortgage loan you get, and the interest rate you end up with – and that, in turn, can affect your monthly payments.

That’s why, if you’re thinking of buying a home, it makes sense to do a little prep work first. Long before you start applying for a mortgage, you should be taking an inventory of your financial situation – and you should know what will help and what will hurt your ability to get the loan you want at an interest rate you can afford.

I put together this list of things to do (and things NOT to do!) if you think home ownership is on the horizon for you.

DO:

• Check your credit report. Your credit score will affect your chances of qualifying for a loan, and it will also affect the kind of interest rate you get. I suggest you do this as early as possible – even as much as a year before you get serious about buying a home. That may sound extreme, but you want to leave yourself some time to fix any errors or make efforts to improve your credit score. You can get a free credit report from the major credit reporting agencies.
• File a dispute if you find an error. If you find anything that looks wrong – such as an old debt that you’ve paid off, or a purchase that you don’t remember making – now’s the time to fix it. Check our blog for more information about how to dispute a credit card charge.
• Reduce your debt (or increase your income!). In addition to looking at your credit report and your financial information, potential mortgage lenders will also look at your debt-to-income ratio and your ratio of available credit to credit used. If you have debt, take steps now to try and reduce it and improve those numbers.
• Ask for a raise. It doesn’t hurt. There’s nothing wrong with asking for a pay increase if you feel it’s appropriate (but don’t change jobs – more on that later!).
• Gather your tax returns, W-2 forms, and bank statements. When you actually begin the process of applying for a mortgage, your prospective lender will want proof of your income and financial situation. Typically, they ask for documentation for the past 2 years. Getting this stuff together early will save you stress later on.
• Put aside some cash. Now’s the time to start squirreling away extra cash for mortgage -related expenses. In addition to a down payment, you’ll also need funds for things like processing fees, inspections and appraisals, and other things.
• Start shopping around for a mortgage loan officer. Home buying is a process, and you’ll likely be working with your loan officer for a few months. And that means you should choose a trustworthy, helpful, and knowledgeable mortgage loan officer. Ask friends or family members for recommendations, check out your bank, or do some research online.

DON’T:

• Close any credit cards. Closing a credit card you’ve paid off is almost always a bad idea. A credit card with a zero balance boosts your amount of available credit, and it helps with your ratio of available credit to used credit. Basically, lenders want someone who looks responsible – and a borrower with unused, zero-balance credit cards looks much more responsible than one with a wallet full of maxed-out ones.
• Apply for more mortgage than you can afford. You’ll likely be approved for a bigger loan than you need. But just because you’re approved, doesn’t mean you have to accept. Have a firm budget in mind. Know how much you can comfortably afford. Don’t be tempted to buy more house than you can afford, unless you want to end up house poor.
• Make any big purchases. If you’re planning to buy a house in the next year, you should probably hold off on any big expenses. Don’t replace all of your kitchen appliances. Don’t buy a car. Don’t book a three-week trip to Europe. And definitely don’t make any big purchases with your credit cards.
• Open new credit accounts. While it’s good to keep existing credit cards open, you should avoid applying for new credit cards. You’ll end up with a bunch of hard inquiries on your credit report, which can make you look like more of a credit risk in the eyes of a potential mortgage lender.
• Change jobs. If there’s one thing that mortgage lenders like as much as good credit, it’s stability. They like to see that you’ve worked for the same company for a few years. They don’t like to see that you’ve changed jobs every year or two. Unless you receive a once-in-a-lifetime opportunity to do your dream job, complete with a hefty salary boost, you should really stay where you are for the time being. 

The whole process of buying a home and applying for a mortgage can be stressful – but you can avoid some of the stress just by being prepared and by knowing what to expect. And if you start early, you can do a lot to boost your credit score and improve your chances of getting a mortgage with a decent interest rate. And remember, if you need debt advice or have questions about debt, credit, or credit cards, you can always reach out to Debt Guru.  Contact the Debt Guru team today for a free debt relief counseling.