Here’s How to Prepare for a Mortgage



Buying a home of your own is a big deal. A home is probably the most expensive purchase you’ll ever make, and that’s not just because of the high prices many homes are going for these days. Owning a home also means being on the hook for repairs, upkeep, renovations, and just generally keeping your living space, well, livable.

You have to be in good financial shape to buy a home, and you have to stay in good shape in order to manage the financial responsibility of maintaining a home. You should start preparing to get a mortgage before you even start house hunting. Work on paying off debt, repairing your credit, and saving money. Do your research so you know what kinds of loans are available. Once you start the home buying process, things can move fast, so you need to be ready before you begin.

Pay Off Debt

Before you apply for a mortgage, you want to pay off as much of your debt as you can. Whether it’s credit card debt, student loans, or car loans, if you have too much debt, it can make it hard to qualify for a loan.

What counts as “too much” debt? Lenders like to see a debt-to-income ratio (DTI) of 36 to 43 percent. That means they want your monthly debt repayment obligations to take up no more than 36 to 43 percent of your monthly income. 

You don’t have to pay off all your debt in order to get a mortgage, but if you have a DTI of more than 43 percent, many lenders may not be willing to give you a loan unless you have a very high credit score and significant assets. The lower your DTI, the more money you’ll usually be allowed to borrow, so the stronger your purchasing power.

Repair Your Credit

Of course, your credit may not need any repairing, but it’s a good idea to at least pull your credit reports regularly in the lead-up to applying for a mortgage. You can get a free copy of your credit report from each of the three major bureaus from Annual Credit Report. If you want to get a mortgage soon, you might want to pull all three credit reports at once. If you want to spend some time preparing, stagger your credit reports so that you’re not getting them all at once.

You need to check your credit report for any derogatory information, and clear up any black marks. Dispute negative items that have been reported in error. Clear up collections items by calling the collections agencies and asking to settle the debt or pay it in full. Your account should reflect changes within 30 to 60 days after collections have been settled or paid in full. 

Save Money 

You’ll need to save up a lot of money to buy a house. If you want to get a conventional loan without private mortgage insurance (PMI), you’ll need a down payment of 15 to 20 percent. However, if you’re willing to pay PMI or you qualify for certain government-backed loans, you can buy a house with three to five percent down and, for certain loan programs, no down payment at all.

You’ll need more than a down payment. You’ll need several hundred to a thousand dollars for home inspections, and you’ll need about one to three percent of the sales price to put down as an earnest money deposit. You’ll need to save up money for closing costs – typically two to five percent of the loan amount, although you can ask the seller to contribute to closing costs, too. On top of money for your down payment and closing costs, plan to have three to six months’ worth of living expenses in case your financial situation changes or, more likely, your roof starts leaking or your water heater bursts the week after closing.

Do Your Research

Don’t just walk into the bank and expect the loan officer to tell you all your options. You need to know your loan options before you talk to a loan officer. You also need to know what you’re looking for in a loan. Maybe you want to pay your loan off quickly, so a 15-year mortgage would be right for you. Maybe you care more about having a more manageable monthly payment, so you want to look into getting a 30-year mortgage.

Maybe you need to make as small a downpayment as possible – if so, you need to know about government backed loans you might qualify for, like FHA loans, USDA loans, and VA loans. Maybe you want to avoid private mortgage insurance – if so, a conventional loan with a larger down payment might be for you.

It can take a long time to get your finances in order to get a mortgage, especially if you have bad credit or need to save for a down payment. A mortgage is going to be one of the biggest responsibilities you’ll ever have, so it’s worth taking your time to get ready for.

By HomeLight Homes

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