Get Mortgage Ready in Five Steps
So, you’ve been scrolling through Zillow, favoriting houses you want to tour. But before you contact a realtor to request a showing, there’s a big question you need to ask yourself. Are your finances mortgage ready?
Whether you’re looking for your first home or your next home, you’ll need to review your finances and your homebuying timeline. Here are five steps you can take now to ensure you’re mortgage ready when the time comes to get pre-approved and start putting in offers.
Step 1: Create a plan to save.
If you are serious about buying a home, figuring out a way to save money is essential and it all starts with creating a savings plan.
Your plan begins with a detailed budget because it’s the most effective tool for achieving financial goals. It will allow you to track and control every dollar you earn every month.
Once all your essential living costs are taken care of, the biggest thing is to pay yourself next. You can do this and grow your savings by putting money aside on a consistent schedule—even if it’s a small amount—like every month or every paycheck.
Next, you’ll need to identify your expenses. Be mindful of spending leaks like dining out, coffee or snack purchases, entertainment, late fees, etc. Subtract your total monthly expenses from your total monthly income.
It’s a good practice to move any surplus to a separate savings account. On the other hand, if you have a shortage of cash at the end of the month, you may need to get creative. Look for ways to cut expenses, plug spending leaks, and maybe even explore ways to temporarily increase your income (overtime, a second job, or a side-hustle).
Step 2: Review your credit report.
Lenders begin the application process with a review of your credit report, so you need to know where you are starting. Access your credit report to ensure your creditors are sharing accurate information about your credit accounts. You can get a free copy of your credit report at annualcreditreport.com.
Dispute any errors you find directly with the credit bureaus. Allow time for your report to be updated after the credit bureaus resolve your dispute (at least 30 days). Satisfy unpaid collections and charge-offs or negotiate with creditors for a less-than-owed payoff and then follow up to be sure your creditor updates. To see your credit score, consider taking advantage of credit card company offers to provide your score for free.
TIP: If you have never had credit before, you will need to find a lender that uses an alternative scoring model that considers your history of paying your rent, utilities, and insurance in a timely fashion.
Step 3: Bring your debts current, pay your bills on time and reduce your balances.
Payment history is one of the primary factors in credit scoring, so start making timely payments on all your accounts. Look for any late payments that may be dragging your score down that were reported in error.
Next, pay close attention to your balances on your revolving accounts (credit cards or lines of credit). How much you charge compared to your extended limit affects your credit score negatively (credit utilization ratio). Reduce your balances or pay them off whenever possible. To avoid lower scores, keep balances low (below 30% of your limit) throughout the application process, and don’t take on any new credit.
Step 4: Save money for upfront costs and down payment.
You will need money to cover upfront costs when you start the home buying process. Lenders typically collect an application fee or an appraisal fee when you begin the process. Plus, once you find the right home and decide to write an offer to purchase, the seller will likely require an earnest money deposit (amount varies).
Finally, as you approach your closing date, you will need to provide funds for the down payment and closing costs, which will depend on varying factors like your mortgage type, purchase price, loan amount, and so forth. You should communicate regularly with your lender, so you know ahead of the closing date exactly how much you will need to bring to closing.
Step 5: Gather your income documentation.
Before meeting with a lender, make sure to have all your required documentation ready. Save time you could be out at open houses by gathering your most recent 30 days of pay stubs, bank statements, and the past two years of federal tax returns. Most lenders will require a two-year employment history (in the same line of work) for each borrower. However, some lenders may make exceptions for recent graduates new to their line of work. Self-employed borrowers may need to provide a profit-and-loss statement and two years of tax returns, instead of pay stubs.
Summary
While the mortgage application process may seem daunting, creating a savings plan, taking inventory of your finances and being prepared ahead of time will help you breeze through the process. And the more you know, the better prepared you will be when you meet your lender for the first time. Once you’ve followed these steps, do your research to find a lender that’s right for you. A good lender will answer your questions throughout the homebuying process and help you determine important figures such as how much you can borrow vs. how much you can comfortably afford.