Whether one is a first-time home buyer or planning to buy a home again being prepared to apply for a mortgage is important as it can save time and money.  Preparation is half of the battle and in this article home buyers can find straightforward steps to use depending on the time available with which they are starting the process.  Starting earlier is always better (meaning having more time) but life does not always go according to plan so there are tips for those who will be applying sooner rather than later as well.

One Year or More Preparation Steps

One year out the interest rate should not even be a consideration.  Interest rates fluctuate on a short-term basis and therefore it should not be a big concern for a home buyer what the interest rate is today when they are not planning on applying for a mortgage a year out or more.  On the other hand, these planning steps can help one obtain a lower interest rate when they are ready by making sure they have enough down payment savings and have increased their credit score.  A higher credit score can mean a lower interest rate!

The interest rate does have an impact on the monthly payment a home buyer can expect to have and also will impact how much in total interest they will pay over the life of the loan.  A lower interest rate is better than a higher one and setting oneself up to get the lowest rate possible is a key preparation step when one has a year or more prior to applying for a mortgage. 

Home buyers need to make sure all their bills are paid on time.  Whether that means paying only the minimum, no payment should be missed at all.  Even just one late payment can drop one’s credit score by 50 to 100 points and the hit is usually higher for those with a higher credit score.  So avoiding late payments is a must!

While negative items (like a late payment) can stay on your credit report for up to 7 years, the older the negative note on the credit report is the less impact it will have on one’s credit score.  Hence the importance of making sure all payments are made on time now rather than waiting until closer to actually applying for a mortgage.  The more in advance one starts preparing for eventually getting that mortgage they better ability they will have to improve their scores.  One or two months of on time payments won’t have as much impact on one’s credit score as compared to a year of on time payments.

In addition to building up a savings pool for the down payment and closing costs, the home buyer should also strive to pay down debt.  Lower overall debt amounts can result in a higher credit score.  The best way to do this is pick the debt with the highest interest rate and pay that down first.  Paying down the highest rate debt first means saving more money in the long run by not having to pay more interest.  After the highest rate debt is paid down, move onto the next highest interest rate debt.

Saving up for a down payment is also important and a down payment is required for many mortgage types.  Additionally having a larger down payment can also result in a lower interest rate offered by the mortgage lender.  Mortgage interest rates also account for the risk of default on the mortgage.  A homeowner who has 20% or more equity in a home because they put down a 20% down payment is less likely to walk away from home payments as compared to the homeowner who put down much less.  Not only that but the more money the home buyer puts down the further they can reduce their overall monthly payment of principal and interest.

6 Months to a Year Preparation Time

With six months to a year one still has some time to make an impact on ones credit score.  As noted above making sure payments are made on time and trying to reduce one’s overall debt can help.  Home buyers should also avoid taking on new additional debt prior to applying for a mortgage.  Lenders will look at a home buyers debt to income (DTI) ratio in order to determine the overall mortgage approval amount.  A too high DTI can result in getting very little to no mortgage amount, higher fees, and higher interest rates.  So reducing one’s debt level can be very helpful.

The very act of applying for debt can reduce one’s credit score since the credit application when pulled is registered on one’s credit report.  Even if one does not end up taking out the additional debt the fact that a home buyer applied for taking on new debt and allowed their credit report/score to be reviewed can result in a decrease in one’s credit score.  The more credit inquiries the greater the reduction in credit score can be.

3 Months of Less Preparation Time

When time is short and one needs to apply for a mortgage now rather than later preparation is still important since it will help save time in the end.  With three months or less time the chances to improve one’s credit score is limited and should not be a big consideration at this point in time.  The borrower should be checking their credit score to see where they would sit with regards to their application.  A lower credit score means higher interest rates.  Too low of a number can result in a denial, so if one has a low score they should chat with lenders ahead of time and find out if with their credit score they could qualify for any loan.

With the limited amount of time if one does not have the necessary savings for a larger down payment they need to understand their rates will be higher.  There are still mortgages available with low down payments so researching the different options and their associated positives and negatives will help the borrower understand what they are getting in terms of the loan.  Lenders can help educate their borrowers as to what down payments are needed and what other fees/expenses might be associated with those mortgages.

What Paperwork is Needed

When it comes to applying for a mortgage having all the paperwork ready to go can save a lot of time for both the home buyer and the lender.  The lender requires the paperwork not only to pre-approve the mortgage but also to give the final clear to close approval. For someone who works a W2 job this means having recent pay stubs ready, last two year W2s, two years tax returns, bank/brokerage statements, debt statements and more ready to provide to the lender/mortgage originator so they can hit the ground running.

For the self-employed individual many of the same documents as noted above are needed like bank/broker account statements, and last two-year tax returns.  In order to show consistent income additional documents such as 1099 forms, income ledgers and more may be needed to provide to the mortgage lender so they can confirm the income to support the mortgage. This is where it is important for the home buyer to communicate early enough with the mortgage lender to figure out which documents are needed.

Final Thoughts

As in life being prepared puts the person wanting to get a mortgage ahead of the game.  Providing documents late when the lender is requesting them now can possibly lead to delayed closing and the seller getting upset and possibly cancelling the deal when buying a home.  One should work with a professional lender so that communication and expectations are clearly set.

About the Author: The above post “How To Get Ready For The Mortgage Application” was written by Paul Sian, Mortgage Loan Originator in Ohio (NMLS#2732987) and Real Estate Agent in Ohio & Kentucky. To inquire about a mortgage please contact me here.