How to prep financially before applying for a home loan

Whether you're looking to buy a home for the first time or have purchased a house before, it's helpful to understand how you can prepare financially for a mortgage.

Setting yourself up for success before you start the process can help make things go a lot more smoothly and create a lot less stress. Just think of prepping your finances as the first step in achieving your homeownership goals! (Sounds pretty nice that way, huh?)

Let’s dive into some steps you can take at the beginning to help with your home-buying journey!

Let the preparations begin!

 Here are 10 tips for getting started.

1 - Determine what you can afford

You know how your eyes can make you think you can eat more than your stomach can actually handle? Well, the same can be said for house hunting. With so many homes out there, it can be easy to go searching and fall in love with one without knowing what you can actually afford.

To avoid this scenario, first, take a look at how much you spend versus how much you earn. To determine where your money goes, create a budget by reviewing your spending habits over the last three months. Focus on things you must pay for each month — groceries, student loans, car payments, medications, commuting or even internet costs — and exclude things like eating out, concerts and vacations.

To get the percentage of your income, you'll need to put aside for necessary expenses — not including rent — take that number and divide it by how much money you make every month before taxes. Lenders suggest homebuyers cap their expenses and mortgage payments at less than 45% of income. We know math isn’t everyones favroite so check out our affordability calculator tool to help figure out the kind of home you can afford!

Or even better yet, you can always reach out to a Movement loan officer to help think through these considerations.

2 - Set a savings target

Knowing how much you can comfortably offer on a home is the first step in calculating what you'll need to cover the down payment and closing costs. Remember, there are many home financing options for qualified borrowers out there that require low down payments, but the more you can put down at closing, the lower your monthly mortgage will be.

Keep in mind that in most cases, you don’t need to put 20% down. Find out about programs with 3% or no down payment.

Once you decide on a down payment amount you think you can save, calculate how far away you are from hitting that target number. Then, add property taxes, homeowner's insurance, estimated closing costs and other fees. It’s always a good idea to talk to a loan officer to better understand what closing costs might be.

When you apply for a home loan, your lender will provide you with a detailed breakdown of all these figures, including approximate closing costs, in the form of a "loan estimate," but you'll want to get an idea of what that number is now so you can start saving for it.

3 - Consider all the incidentals

On the topic of saving, there are plenty of other expenses related to purchasing a home. Property inspections, pest inspection, moving expenses and appliances and repairs can all add up. You might want to create a separate bank account just for these expenses. Once you know how much you need to save — and have a better idea of how long that will take — you can estimate just how soon you can comfortably start shopping for a home.
 

 

4 - Check your credit

Every year, you can get a free credit report from each of the three main US-based credit bureaus: Experian, Equifax, and TransUnion. Better yet, go to your bank or annualcreditreport.com for a free annual credit report.

Looking up your credit won't give you the complete picture that mortgage lenders use when assessing your creditworthiness, but it gives you a glimpse of whether or not there is anything strange or worrisome on your report. If there's something that shouldn't be there - like a late fee or missed payment - you'll want to take care of it sooner rather than later, as an improved credit score can help you get a better interest rate!

5 - Say no to credit offers

While we're discussing credit, it's a good time to point out how prospective homebuyers might need to hold off on making big purchases or opening new lines of credit. Try to avoid opening mail from credit card companies pitching a new card with great benefits. Skip the cashier offering 10% off a single purchase just by opening a charge account. Opening new lines of credit could impact your mortgage approval process, so just be careful when you’re out shopping.

6 - Improve your debt-to-income ratio (DTI)

Making the extra effort to reduce your debt before starting the home-buying process can always be helpful. Plus, trying to pay down existing debt can also help improve your DTI ratio. And since you’re trying to reduce your current debt anyway, avoid taking on new debt if possible. Taking out new loans or credit cards before applying for a mortgage can affect your approval.

7 - Watch the paper trail

Shuffling money back and forth between your checking, savings and investment accounts is okay most of the time, but when you apply for a mortgage, it can create a paper trail nightmare. Try to curb this practice at least three months before applying.

8 - Pay your taxes*

Be sure that you've made all tax payments due for past tax years. Being on a tax payment plan -- one where you pay off back taxes owed in smaller monthly payments -- adds to your debt burden when you're trying to qualify for a loan and can be frowned upon. Try to pay all your back taxes before starting the home-buying process.

*Not tax advice. Please consult a tax professional.

9 - Ask for help

It's okay to receive cash as a birthday or holiday gift before applying for a mortgage, but if they are large sums, you'll want to disclose that these are not personal loans that you'll be expected to pay back after buying a home. Mortgage guidelines typically allow you to accept gift funds from immediate family members, but documenting the receipt of gift funds can be very specific, so don't have gift funds transferred before speaking with a loan officer. They'll be able to tell you the gifting requirements based on the loan you may be offered.

10 - Maintain stable employment

When applying for a mortgage, your lender will also be taking a look at your job history. It’s often preferable to maintain steady employment with the same employers for two years or more if possible. It’s also important to be careful with career changes. Substantial job changes or changing industries during the loan application process can impact your approval. Just make sure to check with your loan officer before making the switch.

Ready. Set. Go!

Getting your finances in tip-top shape before you shop for a home can help avoid much of the stress associated with the mortgage loan process. If you're a potential homebuyer with questions about home financing, feel free to reach out to a loan officer near you today!