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Mortgage application

5 Things to Do Before Getting a Mortgage

Nov 17, 2019 by Maurie Backman
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If you’re looking to buy a new home, chances are you won’t be purchasing it outright. Rather, you’ll need to take out a mortgage and pay it off over time.

If you make these key moves before applying for that home loan, you’ll be more likely to not only get approved, but snag a competitive interest rate that makes homeownership more affordable.

1. Have the right documentation

Your mortgage application process will be smoother if you have the right paperwork on hand from the get-go. To this end, gather a few recent pay stubs, as you’ll need that information to prove your income level. You’ll also need a copy of your most recent tax return and bank statements to show that you have money available to pay your mortgage if you lose your job.

2. Check your credit report

Each of the three major credit bureaus maintains a report summarizing your credit history and activity. You’re entitled to a free copy of that report every year, and it pays to review it thoroughly before getting a mortgage.

If you spot errors that work against you, it could hurt your chances of getting approved for a home loan. Correct those mistakes and you’ll be more likely to get the financing you want.

What sort of error might your credit report contain? It’s possible for a debt incurred by someone with the same name as you to get associated with your file. That could then serve as a black mark on your credit history, so it’s something you’d want to get fixed.

3. Pay off some existing debt

One factor mortgage lenders look at when deciding whether to approve applicants is their debt-to-income ratio. This measures your total outstanding debt relative to your earnings. The lower it is, the higher your chances of getting approved for a mortgage. If you pay off a large chunk of your debt, you'll lower that ratio and improve your odds.

Paying off debt could also help boost your credit score. Your credit utilization ratio is a big factor in calculating a credit score. This is the extent to which you're using your available credit. By paying off debt, you'll drive your utilization down, thereby bringing up your score. And since a high credit score sends the message that you're a trustworthy borrower, it could help you secure a mortgage.

4. Avoid taking on new debt

Just as paying off some existing debt will improve your debt-to-income ratio and credit score, taking on new debt could have the opposite effect. That ratio will climb and your score may or may not take a hit, depending on how much new debt you acquire.

Generally speaking, you’re better off waiting to finance new purchases until after your mortgage is already in place.

5. Understand how much you can really afford to spend

Many new homebuyers make the mistake of taking on too much housing debt and regretting it after the fact. Remember, the mortgage amount you’re approved for isn’t necessarily the amount you should actually borrow. If a bank offers a $180,000 mortgage but you can only afford to make payments on a loan worth $150,000, stick to that lower number.

Ideally, your predictable housing expenses shouldn't exceed 30% of your income. That includes your mortgage payments, property taxes, and homeowners' insurance. Keep this threshold in mind when you sign your mortgage and commit to its monthly payment.

The more strategic you are going into your mortgage application, the more likely you are to get approved for a home loan with a reasonable interest rate. It may take some time to check these important items off your list, but it’s a worthwhile investment.

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