How Do I Get Myself Ready To Apply For A Mortgage?

One of life’s biggest milestones is buying a home. It’s the moment many strive for and still is part of the “American Dream.”  For sure, though, the home buying process is not for the faint of heart, especially getting over the hurdle of applying for a mortgage. Knowing how to navigate what is a world of its own requires preparation.

But there’s a method to mitigating the madness. To put your best foot forward when applying for a mortgage, consider the experts’ advice.

Know your credit score

When you’re looking for a lender to give you a mortgage, a top factor is your credit score. 

Boosting your credit score is a priority. Don’t wait until the last minute to do it.

“Credit preparation should start at least six months before applying,” says Erik Wright, CEO and owner of Buy My Home Nashville. 

What should be on the to-do list? Get your credit reports and contest any errors. Keep utilization rates below 30% on all cards. Payment history contributes 35% to your credit score. Pay all bills on time. “My clients who do these things have their scores rise by 50-100 points,” says Wright.

Saini helped a first-time homebuyer with a credit score of 680 improve it to 720 within six months by paying down debt and correcting errors on their report. They got a mortgage with a 3.5% interest rate instead of 4.2%, saving them over $30,000.

Lower your debt-to-income ratio

Banks like to see a DTI of less than 36%, but some can tolerate as high as 43%. Paying off smaller debts, such as credit cards or auto loans, can make a big difference in your DTI.

“One of my clients cut their DTI by paying off a $ 5,000 credit card balance, which allowed them to get a lower interest rate,” says Saini.

Save for a larger down payment

Aim for a down payment of at least 20% to avoid private mortgage insurance (PMI), which can add hundreds of dollars to your monthly payment.

“In my experience, buyers who save aggressively for a larger down payment reduce their loan amount and demonstrate financial discipline to lenders, increasing their chances of approval,” says Saini.

Gather your paperwork

You’ll be amazed and maybe annoyed at how much paperwork you must show a lender. The sooner you do a deep dive into gathering what’s required, the better. Expect a lender to want documents like current pay stubs, tax returns, bank statements, and investment account information.

“Incomplete or outdated paperwork delays 40% of my clients' applications. Create a special folder and replenish it every month with new statements,” says Wright.

Stabilize your income and employment

Lenders ask for your employment history. They prefer borrowers with at least two years of consistent employment in the same field. “Avoid changing jobs before applying unless it gives you a good raise,” says Anna Yen, a chartered financial analyst with MoneyLion.

Recent big career changes can be a red flag for a lender who wants to be confident that you have job security.

Avoid mortgage-killing mistakes

The biggest mistake Jason Ball, a certified financial planner, says he sees is opening new credit accounts before or during the application process. “That ‘pre-approved’ credit card offer—skip it. Even small credit inquiries can ding your score,” he says.

He adds to the no-no list when making big purchases. “Lenders check your finances right before closing—buying a car, a new TV or furniture could derail your approval at the last minute.”

As exhausting as it can be when you’re shopping for a mortgage, don’t accept the initial offer. “Shop around and compare rates among several lenders to ensure you get the best rate. Even a difference of 0.25% in interest rates can save you tens of thousands of dollars over the loan term,” says Saini.

Then, too, you don’t want to make the mistake of not being thorough in researching lenders. Compare rates, but also things like whether they seek certain clientele, be it military, high net worth, or small business owners, for example.

Choose the right mortgage type

Fixed and variable-rate mortgages are available. A fixed-rate mortgage offers stability; you know how your payment will be for the life of the mortgage, whereas an adjustable-rate mortgage starts with a lower EMI (equated monthly installment) but increases over time. 

“A 30-year mortgage can have lower EMIs, but the rate of interest can be higher than that of a 15-year mortgage,” points out Yen.

Ask your financial advisor about which is best for you.

The takeaway

A few smart moves can boost your mortgage approval odds, secure a lower interest rate, and keep the process smooth.

Yen says, "preparing for a mortgage is a significant financial step. If you do it right, you can save thousands of dollars over the life of your loan.”