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Thinking of buying a house? Rather than rushing into the process, learn the steps you need to take before getting a mortgage. Having things in order beforehand will give you a better chance of getting your loan approved and will make the home-buying process less of a headache later on.
Build your credit
This is one of the most important things you can do before reaching out to lenders. Having a good credit score shows you’re responsible and worth taking a risk on. On the other hand, a bad score could destroy your chances of getting a loan.
Luckily, there are a few things you can do to improve your score if it is less than stellar. Look over the reports and dispute any errors you find. Do this first; you don’t want something that’s not your fault to be the reason you can’t get a loan.
If possible, you should pay off outstanding debts, or at least get them as low as possible. You should also continue to pay your bills on time—but not just a month before applying. Be consistent; show the lenders you’re capable of following through on commitments and managing your money.
Don’t make any changes
Deviating from your regular spending habits before or after getting a mortgage pre-approval sends a big red flag to lenders. Banks value reliability and will be hesitant to lend to somebody who appears to take out loans haphazardly or who randomly make big purchases. Closing down old credit accounts or depositing large sums of money can also have the same effect.
Even changing jobs can negatively impact your chances. Ideally, your record will show a stable and continuous employment history, going back at least a few years. You don’t need to worry about every little thing, but being able to prove a level of consistency will make you a more attractive candidate for lenders.
Learn what kind of loan best suits your needs
When it comes to loan type, there are quite a few options to choose from. From fixed rate, to adjustable, to government-backed FHA and VA loans, you’ll need to do your research and decide what make the most sense for you. Figure out your priorities and go into the process with some knowledge, don’t just jump in blind.
Gather the information you need
Lenders will likely ask for documentation of income and various other personal documents before considering you for pre-approval. It’s a good idea to gather these beforehand, so you’re not scrambling at the last minute. Lenders commonly ask for:
- Three months of bank statements
- The last two years of tax records
- One month of pay stubs
- Documentation of any outside income sources
- Proof of assets to cover the down payment and closing costs
- Photo ID, generally a driver’s license
- Your social security number
Understand what you can afford
When determining your mortgage amount, lenders mainly look at your debt-to-income ratio. You should know what this is, why it matters, and how it affects the amount of your loan. You should also understand not just the loan amount, but how much you can comfortably afford to pay per month. Do your research and get an idea before you start.
Check in with your partner
If you're taking out a mortgage with another person, spouse or otherwise, it’s important to understand the impact their financial history will have on the loan. Lenders will take into account the finances of everybody involved. If you’re applying with somebody who has a poor credit score or a high debt-to-income ratio, you should take steps to help them improve before starting.
Are you ready to get pre-approved?
Once you’ve gone through the checklist and got everything in order, you can send in your application to get preapproved. Once you're approved, you’ll need to understand a few things:
- Preapprovals don’t last forever. Most will expire after about 90 days, depending on the lender. Going through these steps will help ensure you’re ready beforehand and prevent you from having to go through the process twice
- It’s not a guarantee. Your lender can still decline your loan, even if you’ve been preapproved. If you maintain your good financial standing, this probably won’t happen, but making any changes can cause a lender to decline you when the time comes.
- You haven’t made a commitment. Just because a lender gave you a pre-approval letter, that doesn’t mean you have to take out a loan with them. Still, if you do decide to switch lenders, you’ll have to repeat the process and redo the paperwork.
If you’re like most people and can’t afford to pay cash, getting a mortgage is crucial to being able to buy a house. That’s why it's important to pay attention and avoid anything that prevents you from qualifying. Following these steps will help you get there.