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8 Ways To Prepare Your Finances Before Applying for a Mortgage

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

Are you planning to apply for a mortgage and buy a home in the near future? If so, you can be better prepared for your mortgage application—and increase your chances of getting your home loan approved—by taking a handful of finance-focused steps.

Buying a Home Is a Preeminent Purchase

According to a recent study , housing accounts for nearly 45% of the average American’s total lifetime spending. And for many U.S. consumers, buying a home is the single largest expenditure they’ll ever make. So it should come as no surprise that lenders meticulously evaluate applicants’ finances before approving a mortgage loan.

8 Steps To Take Before Applying for a Mortgage

Rather than worrying about the added scrutiny lenders give your finances when you apply for a home loan, you can lay some groundwork to increase your odds of approval before submitting a mortgage application. Take these eight powerful steps before you apply for a home loan:

1. Establish Your Estimated Budget

Before you start shopping for a home, a good first step in the process is to determine how expensive a residence you can realistically afford to buy. To gauge this, many financial experts recommend following the 28% mortgage rule. This guideline states that your entire monthly mortgage payment, including principal, interest, insurance, and taxes, should not exceed 28% of your household’s monthly gross income.

2. Understand What Lenders Look For

As a prospective homebuyer, you’ll need to understand how mortgage lenders evaluate your creditworthiness. Here are some of the key items lenders use to assess the level of risk they’ll assume in loaning you money for a mortgage:

  • Your employment status and income level
  • Your financial history
  • Your bank account balances and your spending habits
  • Your outstanding debts
  • The assets you hold, such as stocks, bonds, and real estate holdings
  • If you’re currently a tenant, your rental history
  • Whether you’ve experienced any foreclosures or liens in the past
  • The homes you’re interested in purchasing and their pricing/value

3. Review Your Credit Report

Since your credit history and current financial standing play big roles in mortgage lenders’ assessment of your creditworthiness, it can also be helpful to take a close look at your credit report before applying for a loan. This report, available free of charge at annualcreditreport.com, includes a list of all your past and present credit accounts, their credit limits and payment history, along with any credit inquiries lenders have made in your name and any collections actions that have been taken against you. By carefully reviewing these details, you can identify any errors that may appear in your credit report and work to get them resolved before you apply for your mortgage loan. (We also offer additional guidance on checking your credit before starting your home search.)

4. Crank Up Your Credit Score

To make your finances look as healthy as possible before applying for a mortgage, you’ll want to optimize the five leading components of your credit score: your payment history, credit utilization, length of credit history, credit mix, and new lines of credit. Among these factors, one of the most impactful is your credit utilization ratio, which measures the total amount of debt you owe versus the total amount of credit available to you. By paying down any debts on your credit cards and other open lines of credit, plus requesting higher limits on your existing credit cards, you can both lower what you owe and increase the total amount of credit available to you. This offers you an opportunity to quickly lower your credit utilization ratio and, as a result, boost your credit score. Another way to foster a good credit score while you’re preparing to apply for a mortgage loan is to avoid applying for new lines of credit in the year or so leading up to your mortgage application, because these requests trigger ‘hard inquiries’ that can negatively impact your score. (Find additional advice on ways to quickly lift your credit score and insights on how your credit score can impact your ability to secure a loan.)

6. Improve Your Debt-to-Income Ratio

Paying down your debts will also help improve your debt-to-income (DTI) ratio, another important financial factor lenders use to determine your creditworthiness and whether you can afford to take on more debt. The DTI ratio is a percentage that represents the portion of your gross monthly income that’s spent paying off debts each month, and the lower the number is, the better.

7. Step Up Your Savings

While a 20% down payment was once the standard when buying a home, that’s no longer needed in most cases. (Some of today’s mortgage programs require substantially lower down payments, but the percentage of purchase price required up front can vary from lender to lender. If you’d like to secure a mortgage with a low down payment, you’ll want to shop around for a lender that can meet your specific needs.) Ultimately, the more you can put down on your new home, the lower your monthly mortgage payment—and the lower the total amount of interest you’ll pay over the long haul. Even if no down payment is required, you’ll need cash on hand for closing costs, moving expenses, and more. So it’s a good idea to establish a savings goal and start setting aside as much money as possible well before you actually start searching for a home or preparing for a mortgage application.

8. Gather the Necessary Documents

Once you’ve taken steps to optimize your financial standing and prepare for your mortgage application, you’ll want to start gathering the paperwork and other documents your lender may request during the application process. In most cases, this documentation is likely to include:

  • Your photo identification
  • The last two years’ worth of your W-2 forms and tax returns
  • The last month’s worth of your pay stubs
  • The last two months’ worth of statements for your checking, savings, and investment accounts
  • If you’re a tenant, your landlord’s contact info and documentation of your recent rental payments
  • If applicable, paperwork documenting any alimony or child support income

9. Find A Lender You Trust

When you’re ready to get your home buying journey started, start shopping around for attractive mortgage interest rates, choose a lender you trust, and start the process by getting pre-qualified for a mortgage loan. (We offer further guidance on the next steps to take when securing a home mortgage.)

Make Banking and Home Buying Easy With Arthur State Bank

Proudly serving South Carolina since 1933, Arthur State Bank offers accounts and services to meet a variety of financial needs. To help you achieve all your financial goals, the bank offers in-person service as well as a range of convenient digital solutions. To learn how Arthur State Bank can help you with banking needs ranging from checking and savings to retirement accounts, mortgages, other personal loans and more, visit arthurstatebank.com.

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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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