When my husband and I got our mortgage last year I was a big ball of nerves. While we had a lot of the “right” things in place I was still extremely anxious to get the go-ahead from the bank.
To my surprise all of the back-end work we had done made the process fairly straightforward. (Despite the fact the bank wouldn’t count my self-employment income.)
We ended up getting the mortgage at a great interest rate and without much hassle.
Here’s what I learned on how to prepare your finances to get a mortgage.
Start Working on Your Credit Now
The only reason that we were able to get such a low interest rate on our mortgage was because my husband has excellent credit. He’s very uptight about always making payments ahead of time and keeping his debt extremely low. This is fantastic since payment history is the largest calculation when it comes to credit scores.
Having a decent credit score will be one of the largest factors the bank considers when it comes to your mortgage approval.
So you’re probably wondering what the minimum credit score you’d need to get approved is….
According to Mortgage Reports the FHA has dropped credit score requirements down 60 points from last year making the minimum required credit score only 580. That, however, does NOT automatically mean you’re going to get approved for a mortgage with a credit score that low. And even if you did you’d be paying a fairly high interest rate.
If your credit score is low you should give yourself a year or so to work on improving it before applying for a mortgage.
Here’s what your credit score is made up of:
- Payment History: 35%
- The Amount You Owe 30%
- Length of Credit History 15%
- Types of Credit 10%
- New Credit 10%
If you’re working on improving your credit score the two most important things you can do are 1) pay your bills on time and 2) reduce the amount of debt you owe. If you have a high debt to credit utilization you’re not going to get approved for a mortgage.
Also do not open any new credit until after you get you mortgage.
Pay Down Your Debt
To qualify for a mortgage your debt to income ratio really matters. If you’re new to that term it means the amount of debt you have plus your monthly housing costs in comparison to the amount of income you bring in.
You can check out this debt to income ratio calculator from Zillow to see if you’re likely to qualify for a mortgage.
If you’re not in the clear you need to make a plan to pay down your current debts. (Which is a smart thing to do regardless.)
Save for a Down Payment
To qualify for a mortgage you generally need somewhere between a 5-20% down payment in order to get a conventional loan. I highly suggest that you shoot for at least twenty percent.
If you fail to come up with a twenty percent down payment you’ll not only have a larger principal balance on the mortgage but you’ll also be stuck paying PMI. PMI is private mortgage insurance that covers the bank in the event you default on the loan.
Save as much as you can to go toward the down payment of your home. Having twenty percent can save you thousands of dollars in unwanted PMI costs.
If you have a good credit score, steady income and low debt then you’re in good shape when it comes to getting approved for a mortgage. In this case your next step is going to be the pre-approval process.
If you’re ready to start house shopping and plan on buying soon it’s a good idea to go ahead and get preapproved so that you know exactly what you’re working with.
Find a Home Within Your Budget
This is the hardest part! Since you’re already preapproved you know what budget you have to stay within. Don’t get into too big of a rush if you don’t have to.
Look at around at houses, know what you want but at the same time keep an open mind.
Are you preparing to get a mortgage?