7 ways to prepare for a mortgage

The world of mortgages has changed a lot over the last few decades. Securing a mortgage loan used to be simple, even with almost no money down, but interest rates were very high—even reaching a whopping 16 percent in the ‘80s. Today, securing a loan is much more difficult and you’re required to put at least 20 percent down, but interest rates are lower than ever.
Preparing to take on a huge responsibility like a mortgage means more than just improving your credit score. Not only do you want to make yourself an appealing borrower, you want to be mentally prepared to take on a debt that will potentially be part of the next 30 years of your life. That shouldn’t discourage you from buying your dream home, but it’s important to be prepared. 
Here are some tips to ensure you qualify for a loan and that you’re prepared to take on this responsibility.

1. Check your credit report

Your credit report is the first thing lenders will look at, and so should you. While your credit score takes a minor ding when too many credit inquiries happen at once, if you haven’t been tracking it regularly, make sure you review it. Make sure there aren’t any inaccuracies and check to see if there are any debts you can resolve before you apply for a loan.

2. Pay off as much debt as you can

Open lines of credit help you establish your reliability as a borrower, but when you’re ready to apply for a mortgage, you want as little debt as possible. All of those credit card offers you accepted in college need to be trimmed back. Bring down the balances on your credit cards, student debt, and car loans. The less money you owe at the time you apply for a mortgage, the more likely you are to get approved and receive a competitive rate.

3. Hold off on financing large purchases

Similarly, now is definitely not the time to take on any new debt. Your debt-to-income ratio is one of the determining factors in whether or not you will be approved for a loan. Ideally, lenders want to see that your monthly debt payments are below 36 percent of your income. Financing any large purchases or opening new lines of credit will adversely affect your debt-to-income ratio and could make the difference in getting approved. 

4. Pay your bills on time

If you don’t already have a long history of on-time payments, you need to begin establishing that history immediately. Do what you have to do to make sure your payments are not even a day late. Pay online, set up automatic payments, and pay any bills as soon as you get them. Lenders have much stricter policies about late payments, and not only will a history of late payments affect your credit score, you will be considered high risk, even if you’ve never missed a payment entirely.

5. Educate yourself

Take some time to research how debt works, what APRs are, how points affect your rate, the differences between fixed- and adjustable-rate mortgages, and any other information about what dictates interest rates and how the market works. Understanding the economy beyond your mortgage will allow you to make a more informed decision when you choose a lender and understand trends in the lending industry so you’re a more informed customer.

6. Talk to a few lenders

Armed with your market knowledge, shop around for a mortgage. Different banks can offer you different rates, and sometimes a lower rate isn’t necessarily the best mortgage for you. Once you’ve spoken to a few brokers and learned about what they offer If you find a lender that you would like to work with, get the ball rolling. Even if you are not ready to apply for a mortgage yet, developing a relationship with a potential lender can be beneficial. He or she can share some tips on where your credit can be strengthened.

7. Don’t change jobs just yet

If you’re thinking about a job or career change, hold off for now. Seeing a consistent, steady job history makes you a more desirable borrower. But it’s also generally better to have as little friction in your life as possible when you’re about to take on a new mortgage. There will be money moving around, there will new expenses that arise with buying a home, and now is not the best time to make other huge life changes. Once the dust has settled, feel free to make any big changes.