5 Financial Moves to Make Before Applying for a Mortgage
Purchasing a home is one of the most significant financial decisions you’ll ever make. To ensure you’re ready for this big step, preparation is key. Here’s a deeper look at five financial moves to make before applying for a mortgage to help you secure the best terms and make the process as smooth as possible.
1. Check Your Credit Score and Report
Your credit score plays a pivotal role in determining the mortgage interest rates and loan options available to you. Start by reviewing your credit report for any errors or inaccuracies that could negatively impact your score. If you find errors, dispute them immediately. Focus on:
Paying off or significantly reducing high credit card balances.
Avoiding new credit inquiries, such as applying for new loans or credit cards, in the months leading up to your application.
Making all payments on time, as payment history is a major factor in your score.
A higher credit score not only increases your chances of approval but can also save you thousands in interest over the life of your loan.
2. Build Up Your Savings
Buying a home involves more than just the down payment. Many loan programs typically require 5% to 20% of the purchase price as a down payment, but you’ll also need funds for closing costs (which can range from 2% to 5% of the loan amount), moving expenses, and potential repairs or upgrades to your new home. Consider setting up a dedicated savings account to help you consistently grow your funds. Having extra savings also demonstrates financial stability, which can be attractive to lenders.
3. Reduce Your Debt-to-Income Ratio (DTI)
Your debt-to-income ratio is the percentage of your monthly income that goes toward debt payments. Most lenders look for a DTI of 43% or less. A lower ratio signals that you’re managing your debts responsibly and can handle a mortgage payment.
To lower your DTI:
Focus on paying down credit cards, student loans, or other outstanding debts.
Avoid taking on new debts or loans.
Consider increasing your income, if possible, through a side hustle or additional work.
4. Avoid Major Purchases or Financial Changes
Lenders want to see financial stability during the mortgage application process. Making significant purchases, such as a new car or expensive furniture, can increase your credit utilization ratio and lower your credit score. Similarly, changing jobs or taking on a new financial obligation can create red flags for lenders. Maintain a consistent financial profile in the months leading up to your application.
5. Get Pre-Approved for a Mortgage
A mortgage pre-approval is a critical step that offers two key benefits:
It shows sellers that you’re a serious buyer with financing ready to go.
It gives you a clear understanding of how much you can afford, helping you narrow your home search and avoid disappointment.
During the pre-approval process, a lender will evaluate your financial situation, including income, savings, credit score, and debts, to determine your loan eligibility. Keep in mind that a pre-approval isn’t a guarantee, but it’s an essential tool in the home-buying process.
Final Thoughts
Preparing for a mortgage doesn’t have to be overwhelming. By focusing on these five steps, you’ll be better positioned to secure a loan that fits your financial situation and goals. Remember, every buyer’s journey is unique, so don’t hesitate to consult with a trusted mortgage professional for personalized advice.
Your dream home is closer than you think—start preparing today!