Five Steps to Prepare for a Mortgage

Preparing for home ownership can feel overwhelming – especially if you are doing it for the first time. The process involves managing your entire financial situation, collecting paperwork and working with mortgage loan officers to get pre-approved for a home loan.

But as with any big purchase in life, a little preparation can lead to the best results. When you are organized and have a plan, you can take on the process with confidence. Before you start the home shopping process, organize by taking these five steps.

Check Your Credit Reports and Credit Score

When you apply for a home loan, your credit report and credit score are among the biggest considerations. If you haven’t checked your credit reports recently, they could have errors or mistakes on them, which in turn could reduce your credit score.

Before you start the home shopping process, order a copy of your credit report from all three major credit bureaus: Experian, Equifax, and TransUnion. You can get a free copy of your credit report weekly at https://www.annualcreditreport.com/. Review these reports for accuracy and to identity any problems with the reporting and get them corrected before you begin shopping for mortgages.

In addition, online banking and credit cards may offer free access to credit score models. These scores are great for educational purposes and can help you understand your overall credit picture. However, please note that a different scoring model may be used for during the loan process. With your credit reports and credit scores, you can start getting your financial health in order.

Lower Your Debt-to-Income Ratio

Your debt-to-income ratio is one of the metrics a lender will consider when evaluating your home loan application. This ratio measures the amount of debt payments you have compared to your monthly gross income. The higher the ratio, the more of your income you are spending on your debt.

To improve your financial health and prepare for a home loan, make a plan to pay down high interest debt from credit cards or other loans, while continuing to make on-time payments on the rest of your obligations. Debt paydown methods like the “avalanche method” and the “snowball method” can help you knock down debt and demonstrate responsible credit usage to a future lender.

Determine Your Budget

The next step is to determine how much of a home you can afford. Although you may want your home to feature several options – like wood flooring or a fireplace – you may have to compromise to find the right house in your price range.

As a general rule, you can estimate your budget, multiply your annual gross income by 2.5. The resulting number is roughly the amount of home you may be able to afford. But before you go shopping in that range, be sure to also consider your current expenses, as well as other expenses you will experience as a homeowner, including home insurance and maintenance costs.

Save Aggressively

It’s never too early to start saving for a down payment. How much you have to put down and cover closing costs can give you an advantage in bidding on and potentially getting a competitive rate on your mortgage.

While a mortgage loan officer can help you determine how much to save for, a down payment of 20% or more of the purchase price can help you save money by avoiding private mortgage insurance. Putting down more upfront can potentially help you lower your monthly mortgage payment.

Talk to an Mortgage Loan Officer

As you improve your credit, determine your budget and begin saving for your down payment, you’ll need somebody to help you put it all together and prepare you for a mortgage. This is where it’s important to talk to a mortgage loan officer about your goals.

A mortgage loan officer acts as your advocate in getting a home loan. With a conversation, they can help you better understand your circumstances, see what programs you may qualify for, and give you tips on how to best prepare yourself to qualify for a mortgage – all without a hit on your credit report. No matter where you are in the process, it’s never too early to start talking to a mortgage loan officer.

While preparing for your mortgage can feel like a lot, getting the work done early may help you find success as you go through the process. Sharing the work with a knowledgeable mortgage loan officer can help you navigate the process and get closer to your next home. Contact the friendly mortgage loan officers of SESLOC Credit Union today and get started on finding a home loan that’s right for your situation.