The Home Buyer’s Guide to Getting Mortgage Ready
Don’t wait until you’re ready to move to start preparing financially to buy a home.
If you’re like the vast majority of home buyers, you will choose to finance your purchase with a mortgage loan. By preparing in advance, you can avoid the common delays and roadblocks many buyers face when applying for a mortgage.
New mortgage guidelines went into effect a few years ago, raising the standards for mortgage applicants. The requirements may seem overwhelming, especially if you’re a first-time buyer. But we’ve outlined three simple steps to get you started on your path to approval.
It’s never too early to start preparing to buy a home. Follow these three steps to begin laying the foundation for your future home purchase today!
STEP 1: CHECK YOUR CREDIT SCORE
Your credit score is one of the first things a lender will check to see if you qualify for a loan. It’s a good idea to review your credit report and score yourself before you’re ready to apply for a mortgage. If you have a low score, you will need time to raise it. And sometimes fraudulent activity or erroneous information will appear on your report, which can take months to correct.
There are five factors that impact your credit score: history of payments (35%), debts (30%), credit length (15%), new inquiries (10%), and diversity (10%).
Credit scores range from 300 to 900. A higher credit score will help you qualify for a lower mortgage interest rate, which will save you money.
The three major credit bureaus are Equifax, Experian and Transunion. You can contact them to request a copy of your credit report. The bureaus may charge a fee to access your actual credit score.
Increase Your Credit Score
There’s no quick fix for a low credit score, but the following steps will help you increase it over time.
- Make Payments on Time
At 35 percent, your payment history accounts for the largest portion of your credit score. Therefore, it’s crucial to get caught up on any late payments and make all of your future payments on time.
- Avoid Applying for New Credit You Don’t Need
New accounts will lower your average account age, which could negatively impact your length of credit history. Also, each time you apply for credit, it can result in a small decrease in your credit score.
The exception to this rule? If you don’t have any credit cards—or any credit accounts at all—you should open an account to establish a credit history. Just be sure to use it responsibly and pay it off in full each month.
If you need to shop for a new credit account, for example, a car loan, be sure to complete your loan applications within a short period of time. The credit bureaus attempt to distinguish between a search for a single loan and applications to open several new lines of credit by the window of time during which inquiries occur.
- Pay Down Credit Cards
When you pay off your credit cards and other revolving credit, you lower your amounts owed, or credit utilization ratio (ratio of account balances to credit limits). Some experts recommend starting with your highest-interest debt and paying it off first. Others suggest paying off your lowest balance first and then rolling that payment into your next-lowest balance to create momentum.
Whichever method you choose, the first step is to make a list of all of your credit card balances and then start tackling them one by one. Make the minimum payments on all of your cards except one. Pay as much as possible on that card until it’s paid in full, then cross it off your list and move on to the next card.
|Debt||Interest Rate||Total Payoff||Minimum Payment|
|Credit Card 1||12.5%||$460||$18.40|
|Credit Card 2||18.9%||$1,012||$40.48|
|Credit Card 3||3.11%||$6,300||$252|
- Avoid Closing Old Accounts
Closing an old account will not remove it from your credit report. In fact, it can hurt your score, as it can raise your credit utilization ratio—since you’ll have less available credit—and decrease your average length of credit history.
Similarly, paying off a collection account will not remove it from your report. It remains on your credit report for seven years, however, the negative impact on your score will decrease over time.
- Correct Errors on Your Report
Mistakes or fraudulent activity can negatively impact your credit score. That’s why it’s a good idea to check your credit report at least once per year.
While it may seem like a lot of effort to raise your credit score, your hard work will pay off in the long run. Not only will it help you qualify for a mortgage, a high credit score can help you secure a lower interest rate on car loans and credit cards, as well. You may even qualify for lower rates on insurance premiums.
STEP 2: SAVE UP FOR A DOWN PAYMENT AND CLOSING COSTS
The next step in preparing for your home purchase is to save up for a down payment and closing costs.
When you purchase a home, you typically pay for a portion of it in cash (down payment) and take out a loan to cover the remaining balance (mortgage).
The minimum amount you’ll need for your down payment depends on the purchase price of the home. If you’re self-employed or have a low credit score, your down payment requirements may be higher.
Generally speaking, the higher your down payment, the more money you will save on interest and fees. For example, if your down payment is low you may be required to purchase mortgage loan insurance.5
If you’re a current homeowner, you may have equity in your home that you can use toward your down payment on a new home. We can help you estimate your expected return after you sell your current home and pay back your existing mortgage. Contact us for a free evaluation!
Closing costs should also be factored into your savings plan. These typically include legal fees and other administrative fees associated with the purchase of your home. Closing costs vary but we can help you estimate what they will be.
If you don’t have the funds to pay these outright at closing, you can often add a portion to your mortgage balance and pay it over time or ask the seller to prepay a portion,
STEP 3: ESTIMATE YOUR HOME PURCHASING POWER
Once you have the required credit score, savings for a down payment and a list of all your outstanding debt obligations via your credit report, you can assess whether you are ready and able to purchase a home.
It’s important to have a sense of how much you can reasonably afford—and how much you’ll be able to borrow—to see if homeownership is within reach.
Can I Afford to Buy My Dream Home?
To find out how much home you can afford contact your lender to get prequalified. They can give you your maximum loan amount then you can decide what feels right for your budget. Once you have a sense of your purchasing power, it’s time to find out which types of homes you can afford. The best way to determine this is to contact one of our professional agents. We help homeowners like you every day and can send you a comprehensive list of homes within your budget that meet your specific needs.
If there are homes within your price range and target area that meet your criteria—congratulations! It’s time to begin your home search.
If not, you may need to continue saving up for a larger down payment … or adjust your search parameters to find homes that do fit within your budget. We can help you determine the right course for you.
START LAYING YOUR FOUNDATION TODAY
It’s never too early to start preparing financially for a home purchase. These steps will set you on the path toward homeownership … and a secure financial future!
And if you are ready to buy now but still aren’t sure if you meet the minimum requirements, don’t get discouraged. We can connect you with one of our trusted mortgage providers.
Want to find out if you’re ready to buy a house? Give us a call! We’ll help you review your options and determine the ideal time to begin your new home search.
The above references an opinion and is for informational purposes only. It is not intended to be financial advice. Consult a financial professional for advice regarding your individual needs.