What To Do Before Applying For A Mortgage

It’s beneficial to get your affairs in order before applying for a mortgage. Whether you’re a first-time home buyer or are re-entering the housing market, the mortgage application process looks similar. We have some suggestions on what to do before applying for a mortgage to prepare for this next step in your homeownership journey.

Here’s What To Do Before Applying For A Mortgage

What do you have to do to get a mortgage? While not required, it can be helpful to get organized and research your options early in the home-buying process. We’ve outlined some things you can do to streamline the financing process when buying your home:

Review Your Credit Report

You need to review your credit report.

During the application process, lenders will check your credit report and credit score.

Your credit report details your credit history, including credit accounts, payment history and account balances. Meanwhile, your credit score is a three-digit number that rates your creditworthiness. It’s calculated based on information within your credit report.

Credit reporting mistakes, such as payments being incorrectly reported as late, can negatively impact your credit score. It’s wise to check your credit report to ensure it’s accurate and to address any errors you find ASAP.

Prioritize Paying Off Debt

It can be beneficial to reduce or pay off your outstanding debt.

Here’s why: Lenders will check your debt-to-income ratio (DTI) to ensure you can afford your mortgage payments.

Your DTI is a percentage that compares how much of your pre-tax monthly income is allocated toward recurring debts, like credit cards and student loans. Lenders typically require applicants to have a DTI at or below 43%.

Paying off credit card debt can lower your DTI. One way to pay off credit card debt is by consolidating multiple debts into a single new loan, a process known as debt consolidation.

Other approaches to debt payoff include following the avalanche method or snowball method. 

What’s Your Goal? 

Buy A Home

Discover mortgage options that fit your unique financial needs.

Refinance

Refinance your mortgage to have more money for what matters.

Tap Into Equity

Use your home’s equity and unlock cash to achieve your goals.

Debt Avalanche Method

The strategy prioritizes paying off debt with the highest interest rate first by making extra payments and then working your way down from there, resulting in interest savings.

Debt Snowball Method

This debt payoff strategy involves making extra payments on debt with the smallest balance and working your way up to debts with the highest balances. This strategy may help you stay motivated.

Make On-Time Payments

As you prepare for the mortgage process, always pay your credit card and loan payments on or before the due dates. On-time payments can help you maintain or improve your credit score.

Your payment history, which includes whether you pay your bills on time, accounts for a significant portion of your credit score. Late payments can affect the terms and rate of your loan and may impact approval.

Save For A Down Payment And Closing Costs

Another way to prepare is to save for a down payment and closing costs before applying for a mortgage. A down payment is an upfront payment you make when buying a home. Typically, it’s a percentage of a property’s purchase price.

The size of the down payment will determine how much you need to borrow and the interest rate you qualify for your loan. Making a sizable down payment can reduce the amount you need to borrow, resulting in a lower monthly mortgage payment and, potentially, a lower interest rate.

A 20% down payment isn’t required. However, most lenders require conventional mortgage borrowers to pay private mortgage insurance (PMI) if they make a down payment of less than 20%. PMI protects lenders in the event the borrower defaults on the loan.

You should also prepare for closing costs, which typically range from 3% – 6% of a home’s purchase price. Closing costs increase your out-of-pocket expenses for a mortgage.

Create A House Budget

While not a required item on our checklist, having a clear housing budget can aid you as you search for your ideal home.

A home affordability calculator can help you calculate your budget. You can determine how much home you can afford based on your income, credit score, monthly debt, down payment and location.

After establishing your housing budget, you can calculate the monthly mortgage payment you can afford. When calculating your housing budget, remember to factor in non-housing expenses, like car payments and student loans.

Experts suggest spending no more than 28% of your pretax income on monthly housing payments. For example, if your monthly pretax income is $5,000, the maximum amount you should spend on housing payments is $1,400.

Establishing a monthly mortgage payment that you can afford can help you avoid financial difficulties after closing on your home.

Research Home Loan Options

There are many types of home loans, so it’s essential to review your mortgage options to choose the right kind of mortgage for your situation. Here are some home loans to consider:

Conventional Loans

Conventional loans aren’t insured or guaranteed by the government. Conventional loans include conforming loans, which meet the guidelines of Fannie Mae and Freddie Mac, and nonconforming loans, which don’t. These mortgages can offer more flexibility than government-backed loans in terms of home types, loan amounts and loan terms.

VA Loans

The Department of Veterans Affairs backs VA loans. These mortgages are available to eligible active-duty service members, veterans and their surviving spouses. VA loans typically require no down payment and have lower interest rates and reduced monthly payments.

FHA Loans

FHA loans, which are insured and backed by the Federal Housing Administration, are intended for borrowers with lower credit scores. They allow for down payments as low as 3.5%. FHA loan borrowers are required to pay an upfront mortgage insurance premium (UFMIP) and an annual mortgage insurance premium (MIP).

USDA Loans

USDA loans are available to buyers in USDA-eligible rural areas who meet the income requirements. USDA loans don’t require a down payment or private mortgage insurance. Borrowers must pay a one-time, upfront guarantee fee and an annual funding fee, which is financed into the loan.

Adjustable-Rate Mortgages

Unlike a fixed-rate home loan, which offers a fixed rate and fixed monthly payments throughout the loan’s life, an adjustable-rate mortgage (ARM) has a rate that fluctuates with market conditions. While an ARM’s fixed introductory rate is typically lower than the rate on a fixed-rate loan, it can increase after the introductory period.

Compare Lenders

Next, you’ll need to find a lender. As you research, consider a lender’s:

Don’t pick the first lender you find. Shop around. Lenders offer different terms and fees and have varying underwriting standards. Shopping around allows you to compare options.

A good lender can also discuss potential home-buyer assistance programs. These programs are typically available to first-time home buyers, low- to moderate-income borrowers and borrowers in specific geographic regions.

Ask lenders to explain program availability and benefits. You may be eligible for down payment assistance or a reduced interest rate, which could make buying a home more affordable.

Apply For Initial Approval

Finally, you’ll want to apply for preapproval with your preferred lender or lenders. A mortgage preapproval helps you determine how much you can spend on a home based on your finances and creditworthiness.

You’ll need the following documents for mortgage preapproval:

Here’s What To Avoid Before Applying For A Mortgage Loan

Now that you know what to do before applying for a mortgage, let‘s review what not to do:

Open A New Credit Account

You should avoid applying for a new credit account or line of credit until you finish the home financing process. Adding a new line of credit or installment loan can impact your credit score and increase your DTI, which can affect your home loan terms or hinder mortgage approval.

Close An Existing Credit Account

You should avoid closing an existing credit account. Closing an older account can impact your credit score by decreasing the average age of your credit accounts. When applying for a mortgage, it’s wise to keep existing credit accounts open, even those with a $0 balance.

Switch Jobs

A job change can impact mortgage approval. Lenders want to see that you have consistent income and that you can afford your mortgage payments. Changing jobs can be risky.

If you get a new job after applying for a mortgage, your lender will need to conduct a thorough review of your finances again. You’ll need to demonstrate that you still earn enough money to afford all your recurring debts, including your monthly mortgage payment.

FAQ Related To What To Do Before Applying For A Mortgage

Review answers to commonly asked questions to better understand what to do before applying for a mortgage:

The Bottom Line

Now you know what to do before applying for a mortgage. It’s possible to apply for a home loan without thorough research or detailed planning. However, taking extra care to get your affairs in order before applying for initial approval can increase your chances of qualifying for a mortgage.

Natasha Etzel

Natasha Etzel is a financial writer with over a decade of experience. She has covered various financial topics, including mortgages, personal loans, home equity loans, debt consolidation, and refinancing. She writes for financial companies, including mortgage lenders, and various publications, including NerdWallet, Newsweek, The Motley Fool, and more.

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