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The Nitty Gritty

Get Mortgage Ready in Five Steps

By doing some prep work, you can make your dream of homeownership a reality. Follow these five steps you can take now to get mortgage ready:

Step 1: Create a plan to save.
If you are serious about buying a home, figuring out a way to save money is essential and it all starts with taking the time to create a plan. Your plan begins with a detailed budget, because it’s the most effective tool for achieving financial goals. It will allow you to track and control every dollar you earn every month. Start by paying yourself first. One of the best ways to grow your savings is to put aside money consistently—even if it’s a small amount. Next is identifying your expenses. Be mindful of spending leaks like dining out, soda or snack purchases, entertainment, late fees, etc. Subtract your total monthly expenses from your total monthly income. It’s a good practice to move any surplus to a separate savings account. On the other hand, if you have a shortage of cash at the end of the month, you may need to get creative. Look for ways to cut expenses, plug spending leaks, and maybe even explore ways to temporarily increase your income (overtime, a second job, or a side-hustle).

Step 2: Review your credit report.
Lenders begin the application process with a review of your credit report, so you need to know where you are starting. Access your credit report to ensure your creditors are sharing accurate information about your credit accounts. You can get a free copy of your credit report at annualcreditreport.com. Dispute any errors you find directly with the credit bureaus. Allow time for your report to be updated after the credit bureaus resolve your dispute (at least 30 days). Satisfy unpaid collections and charge-offs or negotiate with creditors for a less-than-owed payoff and then follow up to be sure your creditor updates. To see your credit score, consider taking advantage of credit card company offers to provide your score for free.

TIP: If you have never had credit before, you will need to find a lender that uses an alternative scoring model that takes into account your history of paying your rent, utilities, and insurance in a timely fashion.

Step 3: Bring your debts current, pay your bills on time and reduce your balances.
Payment history is one of the primary factors in credit scoring, so start making timely payments on all of your accounts. Look for any late payments that may be dragging your score down that were reported in error. Next, pay close attention to your balances on your revolving accounts (credit cards or lines of credit). How much you charge compared to your extended limit affects your credit score negatively (credit utilization ratio). Reduce your balances or pay them off whenever possible. To avoid lower scores, keep balances low (below 30% of your limit) throughout the application process, and don’t take on any new credit.

Step 4: Save money for upfront costs and down payment.
You will need money to cover upfront costs when you start the home buying process. Lenders typically collect an application fee or an appraisal fee when you begin the process. Plus, once you find the right home and decide to write an offer to purchase, the seller will likely require an earnest money deposit (amount varies). Finally, as you approach your closing date, you will need to provide funds for the down payment and closing costs, which will depend on varying factors like your mortgage type, purchase price, loan amount, and so forth. We recommend you communicate regularly with your lender, so you know ahead of the closing date exactly how much you will need to bring to closing.

Step 5: Gather your income documentation.
Before meeting with a lender, gather your most recent 30 days of pay stubs, bank statements, and the past two years of federal tax returns. Most lenders will require a two-year employment history (in the same line of work) for each borrower. However, some lenders may make exceptions for recent graduates new to their line of work. Self-employed borrowers may need to provide a profit-and-loss statement and two years of tax returns, instead of pay-stubs.

While the mortgage application process may seem daunting, being prepared ahead of time will help you breeze through the process. And the more you know, the better prepared you will be when you meet your lender for the first time.