When Should You Apply for a Mortgage?

Before you apply for a mortgage, it helps to get some things lined up. While you may want to jump on home ownership while interest rates are low, getting a mortgage can be challenging if you are unprepared.

If you want to improve your chances of getting a mortgage, especially one with favorable terms, there are some steps you should take. There may not be an easy way to increase your income or the length of your credit history but there are some things you should do before applying.

Know What You Need for FHA Mortgage Lenders

When applying for a mortgage, most FHA mortgage lenders will want a certain number of materials and documentation. This can include a month of pay stubs as well as two years of tax returns. In addition, you should have three months of bank account statements. You will also need documentation to explain any unusual withdrawals or large deposits.

Know What You Can Afford

Some lenders will use what is referred to as the 28/36 rule. This rule means that monthly payments on the mortgage can’t be more than 28% of your gross income and your total revolving debt payments, which include your mortgage, and other debts you have can’t be more than 36% of your income.

While it’s not a strict rule and some lenders may be more or less strict, it can be a good guideline and place to start for figuring out your own personal limits.

Understand Your Home Market

The type of loan you can get may depend on the market you are purchasing in. There can be variances from region to region and state to state so it helps to understand your market.

Work on Improving Your Credit Score

A key factor in determining if you will get approved for a loan and the rate you will pay is your credit score. First, be sure to check your credit score and make sure there aren’t any mistakes. If you have balances that you can pay off, do so since this can raise your score.

However, there isn’t much you can do on short notice. Avoid opening any new accounts or doing anything that requires a credit check in order to keep your score intact.

Pay Off Debt

Lenders don’t want you to have more than a certain amount committed to any revolving loans. One way to lower this ratio is by paying off any loans you may have. While paying off a car loan early won’t save you any money, it can make your financial health look better to a lender.

Have Taxes in Order

A lender will want you to provide two years of federal tax returns and sign a release that allows them to verify this information. You will need to have your taxes filed for the current year and have the documents to give your lender. These documents must match what was sent to the IRS.

Avoid Big Purchases

Even after you receive approval, the lender will monitor your finances through closing. This means you shouldn’t make any big purchases. If you want to buy furniture for the new home, do so after you already have the keys.