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How To Prepare for a Mortgage: 8 Steps Before You Apply

Young Happy Couple Giving Documents To Their Insurance Agent During A Meeting In The Office.

If you’re wondering what to know before applying for a mortgage, start by analyzing your budget, credit, debt, savings, and overall financial stability. Preparing before you apply can help you understand what you can afford, identify issues, and gather the information a lender may need.

What to review What to do before applying Why it matters
Housing budget Estimate a comfortable housing loan payment, including principal, interest, property taxes, homeowners insurance, and other expected housing costs. A realistic budget can help you avoid shopping above a sustainable home price range.
Credit Review your credit reports, correct errors, make payments on time, and avoid unnecessary new credit. Credit history and scores may affect mortgage eligibility, loan options, and borrowing costs.
Existing debt Review monthly debt payments, pay down high-impact balances when practical, and calculate your DTI. Lenders consider monthly debt obligations when evaluating your ability to manage a mortgage payment.
Savings Build funds for a down payment, closing costs, moving expenses, and reserves. Buying a home often requires more cash than the down payment alone.
Financial stability Avoid large credit purchases, major financial changes, and unnecessary changes to employment or income. Significant changes can affect information lenders use during underwriting.
Documents Organize income, employment, asset, identification, and debt records. Having documents ready can make the application process more efficient.
Mortgage options Review loan types, potential costs, and qualification requirements with a lender. Comparing options can help you identify affordable mortgage financing that fits your situation and goals.
Next step Discuss your budget, financing options, and general qualification considerations with a lender. A lender can help you understand your options before you begin making serious offers.

 

1. Set a Realistic Home-Buying Budget

Start with a monthly mortgage payment that fits your budget rather than the maximum home price you may qualify for. Account for principal and interest, property taxes, homeowners insurance, potential mortgage insurance, homeowners association (HOA) fees, and ongoing maintenance costs.

The amount you qualify to borrow and the amount you’re comfortable spending each month aren’t always the same. Consider your other expenses and financial goals when choosing a price range. Arthur State Bank’s mortgage calculator can help you compare potential payments based on loan amount, term, and interest rate.

2. Review Your Credit Before Applying

Check your credit reports for errors, unfamiliar accounts, late payments, collections, or other inaccurate information before you apply. You can request free reports through AnnualCreditReport.com and dispute errors you find.

Understanding the impact your credit score has on your mortgage application can also help you prepare.  Your credit score may affect eligibility and borrowing costs, but there isn’t a score that qualifies every borrower for every mortgage. A score of 620 is commonly associated with some conventional guidelines, while other loan programs and lender requirements may differ.

You can also strengthen your credit profile by making payments on time, keeping credit card balances manageable, and limiting unnecessary applications for new credit. Credit utilization, or the amount of revolving credit you’re using compared with your available credit, can affect your credit score, so paying down balances may help.

3. Lower High-Impact Debt Without Draining Your Savings

If you’re considering paying off a credit card before applying for a mortgage, prioritize the card with the highest interest or highest balance when it makes sense for your finances. Don’t drain your emergency savings, down payment funds, or closing-cost savings to reach a zero balance.

Before using a new loan or account to pay off existing debt, consider discussing the potential impact with a lender.

Understand Your Debt-to-Income Ratio

Your debt-to-income ratio (DTI) compares your total monthly debt payments with your gross monthly income. As a general budgeting guideline, keeping your expected housing payment and other monthly debt obligations to about 36% of gross monthly income or less may make the overall payment more manageable. There isn’t one DTI that guarantees approval. Acceptable ratios can vary by loan type, lender requirements, and your overall financial profile.

4. Build Savings for More Than the Down Payment

You don’t necessarily need a 20% down payment to buy a home. Some programs allow substantially lower down payments depending on your eligibility, the loan program, and lender terms.

There isn’t one dollar amount everyone should save before applying for a mortgage. Your target depends on the home price, down-payment requirements, expected closing costs, and the reserves you want to keep after closing. Your savings may need to cover:

  • Down payment: Your contribution toward the purchase price.
  • Closing costs and prepaid expenses: Costs associated with completing the loan and certain expenses paid in advance.
  • Moving costs: Expenses related to relocating.
  • Initial repairs or furnishings: Immediate home needs after closing.
  • Emergency reserves: Funds reserved for unexpected expenses.

Arthur State Bank offers mortgage loan options with different down payment and eligibility requirements, including programs for eligible first-time homebuyers and certain professionals and community heroes.

5. Avoid Major Financial Changes Before You Apply

Keep your finances as stable as possible before and during the mortgage process. Avoid financing a vehicle or large furniture purchase, making unusually large purchases that substantially reduce available cash, or making unnecessary changes to your employment or compensation structure.

Continue paying existing accounts on time. Lenders may review your credit and employment again before closing, so significant changes to debt, cash, employment, or income can affect underwriting even after you apply.

6. Gather Your Mortgage Application Documents

The exact documents a lender requests will vary, but preparing a basic application packet can save time. Common requests include:

  • Government-issued identification
  • Recent pay stubs or other proof of income
  • W-2s and/or tax returns when requested
  • Bank and investment account statements
  • Documentation for other income sources
  • Information about debts and recurring obligations
  • Employment information
  • Explanations or records for unusual deposits or financial circumstances when requested

Having these documents ready can help you respond promptly when a lender requests additional information.

7. Understand What Mortgage Lenders Will Evaluate

Mortgage lenders look at your overall financial picture, not just one number or document. They may review your income and employment stability, credit history, current debts, available assets, and details about the property and loan. Before applying, know that lenders weigh several parts of your financial profile and that loan programs and qualification standards can vary.

8. Talk With a Mortgage Lender Before You Start Making Offers

One of the most useful things to do before applying for a mortgage loan is talking with a lender. A mortgage lender can explain available loan options, potential qualification requirements, payment scenarios, and financial issues that may be worth addressing before you apply.

A lender can also walk you through the next steps for prequalification or preapproval, depending on the process. That conversation can give you a clearer understanding of your financing before you begin making serious offers.

Ready to take the next step toward homeownership? Contact an Arthur State Bank mortgage lender to review your options and prepare for the application process.

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AnnualCreditReport.com is the only source for free credit reports authorized by the federal government. Every 12 months, you can get a free copy of your credit report from each agency.

Your credit report has your credit history for all of your credit accounts as well as any credit inquiries and public record court information such as collections. In addition, the report provides personally identifiable information such as your name, address, and employment.

Be sure to carefully review all three reports to identify any problem areas that you may need to clean up prior to applying for a mortgage. If there is any incorrect information, follow the reporting agency’s rules to correct it or add a notation to the report to explain the situation.

Your FICO Score is a score combines data from several areas include payment history, the amount owed, length of credit history, new accounts. Many lenders use this score as a guide. This score is not provided as part of the free annual credit report.

Learn more about how your credit score impacts your ability to secure a loan.

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Couple looking over finances

Primary considerations for setting your housing budget require an assessment of your income, debt and current savings for the down payment on the home. The following are generally recommended guidelines; however, you should meet with an Arthur State Bank lender to get personalized mortgage information.

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Couple meeting with lender

The pre-qualification/pre-approval letter is included with any offer you make on a house to inform the seller that you have met with a mortgage lender and you are prepared to make an offer. The letter states that based on certain assumptions, the bank is prepared to lend you up to a specified amount of money for a home mortgage.

When choosing a loan officer, we recommend going local to work with someone who understands your community’s real estate market. This blog on first-time home purchases includes questions to ask your lender that may be helpful when preparing for your meeting.

Helpful Resources:

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Realtor shaking hands with a client

When a house is sold, the seller typically pays real estate commission to both the listing agent and the selling agent. It is extremely beneficial for the buyer to use their own real estate agent. Loan officers can often recommend selling agents in the area; ask your officer about realtor referrals when discussing your loan.

A good realtor will know the local market and can help you find an ideal home based on your budget, location and desired features. During your search, understand that you will most likely need to compromise on some items, so it’s important to identify your critical needs versus your wants.

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Couple searching online for a home

Additionally, when you start with the house search and work backwards, homes can often go off the market while you’re completing steps 1-4. While browsing homes immediately can be tempting, we recommend following these steps in order so that, once you find your dream home, you’ll be well-positioned to take action immediately.

When you find the home you want and you think you are ready to put an offer on it, you will want to make sure you have all the information you need to make a solid offer.

  • Evaluate the neighborhood.
  • Drive by the house at different times of the day.
  • Examine how other houses in the neighborhood are maintained.
  • Consider any potential traffic or other disruptive noise.
  • Is there ample parking for you and visitors?
  • Read the details in any Homeowner Association agreements (HOA fees and rules).

Make sure to do a preliminary check of house details:

  • Check the water:
  • Does it have good pressure?
  • How long does it take to get the water hot?
  • Is it well water or city water?
  • Turn light switches on and off.
  • Open and close doors and windows to make sure they work properly.
  • Review previous utility bill expenses.
  • Consider the property tax bill.

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Family meeting with realtor at new house

When writing an offer contract, be sure to pay attention to all of the details.

Offer Price:

Your agent should do a market analysis that pulls data on recently sold comparable houses. The best comparisons will come from the same neighborhood.

If you are asking for the seller to pay some of the closing costs, remember that this cost plus the sales commission determines the net amount you are offering the seller for the house.

Work with your agent on your negotiation strategy. There are many things to consider, such as how badly you want this particular house, whether it is a buyer’s or seller’s market and an assessment of the seller’s motivation to get the property sold.

There isn’t one best strategy.

Be sure to document in writing everything you want included with the house, such as appliances, etc. Your agent should guide you through the contract step-by-step.

Contingencies:

  • Home inspection.
  • Mortgage.
  • Final walk through (24 hours prior to closing).

Proposed closing date. Typically, this is 30-45 days from an accepted offer.

A good-faith deposit is required for the offer. This is typically between 1-10% of the purchase price of the house. The deposit is kept in escrow until closing and the money is applied to the purchase price of the house at closing. If the house does not close due to one of the contingency clauses, the buyer receives their money back. However, if the buyer decides not to close on the property, the seller may get the deposit money.

Attach your pre-approval letter to the offer.

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Two people in professional meeting

The clock starts ticking for everything documented in the contract, including mortgage application, inspections and closing date.

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Woman advising other woman on mortgage application

You will need to decide which mortgage to select prior to the application.

Plan for the following potential fees:

  • Application fee (many banks and mortgage companies charge an application fee; however, there is not an application fee at Arthur State Bank).
  • Credit check.
  • Appraisal (may be paid at closing).
  • Loan origination fee (paid at closing).

Once you have approval for your loan, make sure you don’t change anything that will impact the status of your mortgage. Banks do a final check on credit and jobs just prior to closing, so now is not the time to change jobs or make another purchase on credit such as a car or furniture.

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Home inspector going over findings with home owner

Depending on the size of the house, an inspection can cost on average between $300 to $1000.

Many real estate contracts specify how problems uncovered in the inspection will be resolved, up to a certain dollar amount. Should necessary repairs exceed that amount, the buyer has the option to cancel the contract without penalty and receive their deposit money back. Another option is for the buyer and seller to renegotiate who will pay for additional repairs.

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Woman happily holding keys to her new home
  • Homeowner’s insurance is required by the lender prior to closing on the loan.
  • Turn on utilities in your name, effective the closing date.
  • Change your address with the U.S. Postal Service.
    • Make moving arrangements.

Three days prior to closing:

  • You should receive your final Closing Disclosure from the closing agency. The final Closing Disclosure shows a column for the seller and a column for the buyer. All closing charges and credits for both the seller and the buyer are documented in the closing statement.
  • Review the closing statement for accuracy prior to coming to closing.
  • The final amount in the buyer’s column shows you the amount of money you need to pay at closing.

The closing office will provide specific payment instructions. Closing funds have become recent targets for cybercriminals. If you are asked to use a wire transfer, call the office and ask to speak to someone you have been working with to double-check the instructions.

Closing day:

In South Carolina, the closing will usually take place at the attorney’s office. Everyone signing for the mortgage must be present to sign the closing paperwork. Make sure you bring the following:

  • Cashier’s check or proof of payment for wire transfer.
  • Driver’s license.
  • Checkbook, just in case there are any additional items that were not on the closing statement.

Be sure to understand this information:

  • How and when you will pay:
  • Your mortgage.
  • Your property taxes.
  • Your homeowner’s insurance.
  • Any HOA dues.
  • Who to call with any questions.

The best practice is to go through the homebuyer’s roadmap in this sequence. However, if you jumped ahead early in your journey, just circle back to address the steps you missed.

Arthur State Bank’s loan officers are closely tapped into local real estate markets and experts at helping clients get what they need on terms that work for them. We also offer mortgage specials for first-time homebuyers.

To start planning your journey to your dream home, try out our mortgage calculator. If you’re ready to talk to a loan officer, contact Arthur State Bank to request personalized mortgage information today. Don’t forget to ask about our first-time homebuyer offer.

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