Ready to Buy a Home? Here's What to Do Before You Apply for a Mortgage
When you're ready to say goodbye to steady rent increases and hello to a stable housing payment, you may think applying for a mortgage should top your to-do list. But to qualify for the lowest interest rate and most favorable repayment terms, there are at least three actions you should take before you apply for a home loan.
1. Check Your Credit
Mortgage lenders require assurance that you'll repay the loan as agreed. They gain confidence in your ability to follow through on your financial commitment by checking your credit reports. If your credit history is peppered with missed payments, high balances, collection activity, or worse, the chances of approval will diminish. And if you're approved for the loan, it might be at an interest rate higher than you expected.
Request copies of your credit reports from each of the major credit reporting bureaus: Equifax, Experian, and TransUnion. Review them for accuracy before you apply for a mortgage loan, as negative information may incorrectly appear on your report. In 2019, consumers complained to the Consumer Finance Protection Bureau about credit reports more than any other personal consumer reports. The top complaint was "incorrect information on the report."
Follow each agency's dispute procedures to have errors removed from your report.
If negative information on your report is accurate, there are two steps you should take to improve your credit before submitting a loan application. First, clear up any past due accounts and start making all your payments on time. Delinquent accounts from service providers, such as utility companies and wireless companies, can also appear on your report. So don't miss any required payments that you owe to anyone. Second, pay down as much credit card and loan debt as possible. These two actions alone contribute to more than half of your credit score calculation.
2. Pay Down Debt
Multiple high-balance credit cards and loans can stand between you and a mortgage loan with a low interest rate. While it's not necessary that you be debt-free at the time of application, reducing the amount of debt you owe compared to your income can increase your loan options.
As part of the mortgage approval process, lenders use a debt-to-income (DTI) calculation to determine if your income can handle the additional loan debt. The figure compares your gross annual or monthly income to your total or monthly debt obligations. A DTI of less than 36% is best, but some lenders will approve borrowers who have a higher DTI.
If adding a home loan to your current debt obligations will cause you to exceed the maximum DTI threshold set by a particular lender, your loan could be denied or approved for less than the amount needed to buy your dream home. Approvals may also come with less than desirable interest rates or require a hefty down payment.
Improve your DTI by paying down debt or increasing your household income.
3. Rethink a Job or Career Move
Job stability is another measurement of your ability to repay a mortgage loan. Recent unemployment or job changes can decrease your chances for loan approval. If there was a good reason for a recent job move, such as a better paying opportunity or career advancement, simply explain your circumstances to your loan officer. Many lenders prefer to see a stable employment history of at least two years with the same employer or in the same field.
Buying a home is a major financial milestone. Set yourself up for success by strengthening your financial position before you apply for a mortgage. Doing so could save you thousands of dollars over the life of the loan and allow you to afford your dream home.
Credit Union of Colorado offers a variety of low-interest rate home loan options to fit your budget. When you're ready, apply for a mortgage loan pre-approval so you'll know how much home you can afford before you attend your first open house.
Article by: Tracy Scott