Preparing, financially, for a place to call home involves more than saving for a down payment or new living room furniture. Since your overall financial status helps determine your eligibility for a home loan, we recommend getting your finances in best shape before you apply for mortgage. Follow these tips to improving your overall financial status, and you’ll be saying home sweet home in no time.
The best way to ensure a mortgage approval is in your near future is to start a “mortgage fitness program” at least six months in advance of applying for your home loan. This includes maintaining stable employment, managing your debts, paying down credit accounts, accumulating assets, and evaluating your credit reports.
Maintain stable employment.
Lenders prefer applicants have a minimum of 2-3 years of consistent work history, preferably with the same employer. Preferably your salary should increase or remain stable over that time period.
Even if you’re a recent college graduate who has less than two years of work experience, you can still apply for a mortgage. Most lenders do not expect the same level of workplace continuity from a recent graduate as they would a more senior applicant. Just be ready with that diploma in hand. A lender will want to confirm your recent graduation.
Manage your debts.
A home mortgage lender evaluates your previous payment history in determining your credit worthiness for a loan. To demonstrate your responsible use of credit to your lender, pay all of your accounts by their due dates and try to maintain a low credit utilization ratio (the ratio of your used credit to your available credit.)
There are plenty of online tools that can help you lower your credit utilization ratio. For example, try NerdWallet’s calculator to help you figure out your credit utilization ratio.
Pay down credit accounts.
When determining how large a home loan you qualify for, a mortgage lender evaluates your debt-to-income ratio (DTI). The typical DTI limit established by lenders is 43%, which means your monthly mortgage and other debt obligations should not be more than 43% of your gross monthly income.
Your particular lender may require a figure lower (or could allow higher) depending on the loan programs available. Any money you can apply to pay down your recurring monthly accounts will positively influence your DTI ratio. Learn more about your DTI ratio here.
Liquid assets that a mortgage lender can verify indicate your financial stability. In addition to checking and savings accounts, other types of liquid assets include the vested portion of retirement accounts, bonds, mutual funds, etc. You should be prepared to put down at least 3% or up to 20% of the purchase price depending on the type of mortgage product you’re seeking.
Evaluate and correct your credit report and request your FICO score.
To get the best mortgage rate possible, you need to put up the numbers – your credit score numbers. Obtain a report pulled by all three major credit-reporting bureaus — Equifax, Experian and TransUnion. You’re entitled to a FREE annual credit report but there may be an additional fee to obtain your actual credit score(s). This should give you all the information you need.
One of the ways you can get a copy of your free credit report is through Annual Credit Report. By law, every 12 months you are allowed to get one free copy from each of the three national consumer credit reporting agencies.
If you see any errors in the reports, be sure to reach out to each bureau to correct them. You should also draft a letter of explanation to mortgage lenders that fully explains the reason for any legitimate negative items on your credit report. Past temporary financial setbacks such as a job loss or an illness can often justify a collection or a period of late or missed payments.