If you are thinking about purchasing a home soon, there are certain financial steps that you will want to take in advance. This is not just about making sure you can afford your home; it is also about making the best impression on lenders when you are applying for mortgages. This increases your chances of being approved expediently for an affordable home loan. Let’s look at those steps now.
1. Pay off as many debts as possible.
One of the main markers of financial health which lenders look at is your income to debt ratio. Obviously, you want this ratio to be as favorable as possible. That means that if there are any debts which you can pay off before you start sending out your mortgage applications, you should do so. It will help to vastly improve your ratio and make a good impression.
2. Make sure you are up-to-date with all your bill payments.
On that same token, you should also look at your regular monthly bills. Are you up-to-date on all your bill payments right now, or have you slipped behind on some of your expenses? If you are behind on your bills, that can damage your credit and also make a poor impression. Think about it. If you were mortgage lender, would you feel confident in granting a loan to someone who cannot pay their existing regular bills on time?
3. Get a free pre-approval from a mortgage professional.
Doing this a couple of months BEFORE you are planning on getting a home loan allows them to help you get your credit score up as high as possible and make suggestions about which debts should be paid off to get you in the BEST position to purchase a home.
I recommend that you just get one of the reports to start with. That way, if you need to act to improve your credit rating, you can do so. You can then order another free report from a different bureau to check to see if your report is improving.
What if your credit is high enough that you can get approved, but still not ideal? You have a couple of options. You could choose to move forward, or you could delay while you work on improving your rating. Choosing the latter may be a hassle, but it may add up to a lot of money saved in terms of interest over time. You will need to decide for yourself whether that is worth it.
4. Keep your credit utilization ratio low.
Your credit utilization ratio is a measure of how much of your allotted credit you are using in comparison to the limit you are allowed. Your credit score and your credit utilization ratio share a direct connection to each other. In fact, about 30% of your credit score is based on your utilization.
30% is a number you want to memorize for another reason as well. Your credit utilization ratio should be equal to or less than 30% always if you can manage it. Higher than that, and it can have a negative impact on your credit score. Lenders may also look at the ratio directly and draw conclusions about you based on your utilization.
5. Make sure that your partner’s credit score is also solid.
If someone else will be signing on this mortgage with you (like a spouse or partner), you should take their credit rating into consideration as well—because the lender will. Even if your rating is excellent, you may still not get the approval or the loan terms you are looking for if your spouse’s rating is low.
It may be worth it to wait to apply for a mortgage until your partner’s credit score is back up to par. Even though the delay may be inconvenient, you’ll receive better offers if both you and your partner like a sound investment to the lender.
6. Avoid cosigning on loans.
Speaking of cosigning on loans, one thing you should avoid doing prior to applying for a mortgage is cosigning on loans with anyone you cannot absolutely trust to keep up with their payments. Even though your desire to help is well-intentioned, there are a lot of things that can go wrong. You do not want a chance of qualifying for great mortgage to go to waste because of someone else’s mistakes.
7. If you have large deposits to make into your bank account, do so at least a few months before you start applying for mortgages.
Another common mistake before applying for mortgage is to suddenly put a lot of money into your bank account. This often happens when a homebuyer is given a gift by a relative or friend to help them fund their down payment.
The reason this is a problem is because it does nothing to persuade the lender that you are financially viable. If it is obvious that someone else has essentially taken care of your down payment, it makes you look like someone who needs to rely on others to meet financial needs.
So, if you do accept money from someone else to help you out with your down payment or other expenses, try and get the money transferred to your account at least several months before you go out and apply for a home loan. That way you can document at least a few months with no unusual transfers of money in or out. Obviously, the more time you can provide for this, the better.
8. Ensure that you are in a stable job.
Finally, one last thing which is crucial before applying for a mortgage is to make sure that you have a stable source of income. While you can apply for a mortgage between jobs, you will find it much easier once you are set up in a long-term position somewhere. This will make you look more viable, and it will also help to reassure you that you have financial stability you need to take this huge step in your life.
You now know some important financial considerations to deal with in the weeks and months leading up to applying for a mortgage. Still need help? Contact HPI Financial at 650-741-9797.