Mortgage application is perhaps one of the most significant financial decisions you will ever make during your lifetime. Such a major long-term commitment requires careful planning and preparation. 

It is not a decision to be given in haste considering the fact that there are many steps that ought to be followed before the application even begins. It takes experts from the industry to agree that people should jump into the mortgage process only if they are fully ready and provisioned. 

Otherwise, it can lead to unobvious and incorrigible discomforts, delays, or even denial. Creditors evaluate possible debtors extensively to determine their ability to pay back the loan. On the part of the borrower, the best working option entails having their financials in order and tackling whatever shortcomings they might have in the qualifications department.

This article’s goal is to provide you with insights regarding the 5 things before applying mortgage you unquestionably should fulfill prior to seeking a mortgage. Performing these necessary procedures will lead you closer to meeting the qualification criteria for the appropriate mortgage and becoming a homeowner.

The application process becomes easier with industrious upfront planning. The 5 things before applying mortgage to be discussed are key financial milestones and points that should be done and will make you an excellent borrower.

The pre-mortgage map consists of Credit review, debt ratio calculations, arrival, document collection, and cash reserves. Using this method of checking off these elements now, sets the foundation on which long-term mortgage success will be based on.

Review Your Credit Report and Score

As one of the primary considerations that lenders base their decision on when evaluating your mortgage application, your credit score can determine how much you will have to pay for borrowing money. Higher credit scores are generally perceived by lenders to mean lower risk whereby they will usually result in a better interest rate and ternerms.

Before making a mortgage application, ask for a free credit report from all three major credit bureaus – Equifax, Experian and TransUnion and look for any glaring errors that may serve to wrongly decrease your credit score.

In case you do, follow the dispute process given by the credit bureau to have them removed. Furthermore, indicate any amounts that are still overdue or if you have any collections accounts to clear. As it is not necessary to have a perfect credit score to be eligible for a mortgage, the higher score is always better.

As a general rule, aim at achieving a credit score of at least 620 to have eligibility in most of the conventional loans whereby some lenders may consider lower scores based on good compensating factors. In continuation to our countdown of 5 things to do before going for mortgage, we have discussed checking your credit score as the primordial essential.

Calculate Your Debt-to-Income Ratio

Another important things that include on 5 things before applying mortgage lenders focus on is your debt-to-income ratio (DTI).This ratio compares your total monthly debt payments to your gross monthly income.Mortgage lenders use DTI as an indicator of how much new mortgage payment you can reasonably afford given your existing financial obligations.

To calculate your current DTI, add up your total recurring monthly debt payments (including things like credit card minimums, auto loans, student loans, etc.) and divide that number by your gross monthly income before taxes.

Ideally, lenders prefer a DTI of 36% or lower for conventional mortgages, though some government-backed loan programs (FHA, USDA, etc.) allow higher ratios if you meet other requirements.If your DTI is higher than that benchmark, focus on paying down revolving debt balances and avoiding any new debt in the months leading up to your mortgage application.

A lower DTI not only demonstrates to lenders that you’re managing debt responsibly but also improves your chances of getting approved and qualifying for better rates.

Determine Your Home Buying Budget

While lenders will calculate the maximum mortgage amount they’re willing to lend you based on your income, debts, and credit profile, it’s smart to proactively determine your own comfortable budget range before beginning your home search.

The last thing you want is to get pre-approved for an amount that ends up stretching your finances too thin each month.So start by writing out a proposed household budget that includes estimated housing costs like mortgage principal, interest, taxes, insurance, HOA fees, etc. 

Make sure you’re comfortable with the remaining funds for non-housing spending each month.Additionally, most financial experts recommend keeping your housing costs (including mortgage payment, taxes, insurance, HOA) below 28% of your gross monthly income.

So you can use that as a quick initial benchmark to calculate your maximum purchase price range as one of the essential 5 things before applying mortgage.

Gather All Required Documentation

The mortgage application process requires submitting a great deal of paperwork to verify your income, employment, assets, and other qualifying criteria. Do not wait until you’re mid-application to start gathering this documentation.Instead, prepare well in advance to avoid unnecessary delays.

Common documentation required includes:

• W-2s and 1099s from the past two years
• Recent pay stubs (typically 30 days) showing year-to-date income
• Copy of driver’s license or other government-issued IDRecent bank statements (2-3 months) for all checking/savings accounts
• Statements for all investment/retirement accounts
• Documentation for any additional income sources like alimony, Social Security, rental property, etc.
• Copy of divorce decree or child support order if applicable
• Gift letter for any monetary gifts to be used as down payment

Lenders may request additional documents as well.The key is to have everything organized and ready to go so that you can provide any required documentation promptly during the application process.

Save For a Down Payment And Closing Costs

Last but certainly not least on 5 things before applying mortgage, you want to build up enough cash savings to cover the required down payment and closing costs associated with your mortgage.The amount you’ll need can vary significantly depending on your situation.

Down payment: While some loan programs do offer zero-down mortgage options, most conventional mortgages require a minimum of 3-5% down payment.You can choose to put down more to lower your monthly mortgage payment and interest costs.

But as a general rule of thumb, aim to save 20% of your future home’s purchase price for a solid down payment.

For example, a $300,000 home would require at least $60,000 for 20% down.Closing costs: These are the various fees (lender fees, title fees, prepaid items like property taxes and insurance, etc.) you must pay to finalize your mortgage and legally transfer ownership of the property to you.

Closing costs typically range from 2-5% of the total loan amount.On that same $300,000 home, you’d likely pay somewhere between $6,000-$15,000 in closing costs.If 20% down and closing costs feel unreachable right now, prioritize saving up at least the minimum down payment required plus enough to cover estimated closing costs.

You can look into low-down-payment loan programs as well.But avoid depleting all your cash reserves – you’ll want to keep a cushion for moving expenses and an emergency fund.

In Conclusion

Following these 5 things before applying mortgage – reviewing your credit, calculating DTI, determining an appropriate budget, gathering paperwork, and saving cash – will greatly improve your chances of getting approved for a favourable mortgage.

While it does take time and preparation for the 5 things before applying mortgage, being diligent in the pre-application stage lays the groundwork for a smoother, less-stressful mortgage process.So take the initiative now to get your finances in peak shape before sending in that application.

Frequently Asked Questions: 

 What is a good credit score for a mortgage application? 

A credit score of at least 620 is generally recommended to have eligibility for most conventional loans. However, some lenders may consider lower scores if you have good compensating factors. 

What is the ideal debt-to-income ratio (DTI) for a mortgage? 

Lenders usually prefer a DTI of 36% or lower for conventional mortgages. Some government-backed loans like FHA and USDA may allow higher DTIs if you meet other requirements. 

How much should my housing costs be as a percentage of my income? 

Most financial experts recommend keeping your housing costs (including mortgage payment, taxes, insurance, HOA fees) below 28% of your gross monthly income. 

What documents do I need for a mortgage application? 

Common documents required include W-2s, pay stubs, bank statements, investment account statements, tax returns, ID, and documentation for additional income sources. Lenders may request more depending on your situation. 

How much down payment do I need for a mortgage? 

While some loan programs offer zero-down options, most conventional mortgages require a minimum of 3-5% down payment. Saving 20% of the home’s purchase price is recommended for a solid down payment. 

What are closing costs and how much should I expect? 

Closing costs are fees associated with finalising your mortgage and transferring ownership. They typically range from 2-5% of the total loan amount and include lender fees, title fees, prepaid items like property taxes, and insurance.