Since taking out a mortgage to purchase a home will likely be one of the most significant—if not the most significant—financial investment of your life, it’s important to plan for a mortgage application accordingly. This means making sure that all of your finances are in order and that your credit score is strong before going through the pre-approval process or signing on to any mortgage deal with a lender. What follows are some basic tips to help you with these preparations.
Pay Down Debt
One of the best ways to ensure that you get the best mortgage rate available is by improving your credit score, and one of the best ways to improve your credit score is by paying down credit card debt. By reducing your debt to income ratio, you can increase your credit score by as much as a hundred points, while simultaneously demonstrating to lenders that you are a responsible borrower and a sound investment for the bank. Paying off credit cards may sound like an intimidating task, and for those with a large amount of debt, it can take a while—all the more reason to start planning for a hone loan as far in advance as possible.
Avoid Additional Debt
Once you’ve paid down credit cards and credit lines, it’s also important to avoid accruing any new debt. This may seem like a no-brainer, but it can be very easy to slip back into new debt once old debt is paid off. Individuals feel a newfound sense of wealth and stability once credit cards are paid off, and occasionally use that as an excuse to take out an auto loan or open a store credit card account. This, however, can simply send your debt to income ratio skyward again, which in turn may threaten to lower your credit score and reduce your chances of getting the best loan rate out there.
Save, Save, Save
Of course, anyone who is looking to take out a mortgage should be sure they have enough money saved for a down payment. Yet it’s always a good idea to set aside more than you think you’ll need, as there will inevitably be some unexpected expenses incurred along the way to purchasing your home. For example, you may find your “dream home,” only to discover that the sellers are requesting a few thousand dollars more in a down payment, and will not budge in negotiations. Or you might find a house that seems right for you, but which will require a number of home repairs right away.
Finally, it’s important to keep apprised of the information on your official credit reports. Occasionally, these reports include erroneous information that may be driving down your credit score—and you don’t want to discover this problem when you’re sitting in the mortgage lender’s office. Make sure to request your official FICO scores prior to filling out a mortgage application, and be sure to comb through the documents to ensure that all of the information is correct.
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