4 Financial Tasks to Complete Before Getting a Mortgage
Which ones have you checked off your to-do list?
- It's important to be financially prepared before getting a mortgage.
- Saving an emergency fund can help ensure you'll be able to pay the bills.
- A down payment, good credit score, and reduced debt balance can help you qualify for a loan with favorable terms.
Applying for a mortgage is one of the biggest financial decisions that you will make over the course of your life. Your home loan will probably be the largest debt you ever take on. And it will take you decades to pay off your loan, depending on your chosen term.
You don't want to jump into making such a major financial commitment unless you're 100% sure you're prepared to be successful at getting approved for an affordable loan and paying it off on schedule. To maximize the chances of both those things happening, here are four things you need to do in your financial life before you apply for a home loan.
1. Save an emergency fund
Mortgages come with large monthly payments. Failure to make them can have devastating long-term consequences. You could face foreclosure and see your credit ruined. You don't want that to happen.
That's why it's so crucial to save up an emergency fund to cover three to six months of living expenses before you apply for a mortgage. After you get your home loan, if you lose your job or your hours are cut or you develop expensive medical issues, your emergency fund can help to ensure you don't fall behind on your home payments.
As a bonus, your emergency money will be there to help cover unexpected home repair expenses that arise. While you may be used to a landlord paying for appliance fixes or other repairs if things go wrong, these costs will be your responsibility once you become a homeowner.
2. Save a down payment
Saving up a down payment is crucial before getting a mortgage for a few reasons. First and foremost, most lenders require you to put at least some money down.
Ideally, this will be 20% because otherwise you'll be charged an added fee for private mortgage insurance that protects the lender from losses. But, a minimum of around 3% to 10% is mandated by most lenders. So even if you don't save 20%, saving something will still be crucial.
The more you can put down, the less you'll need to borrow, the lower your interest rate, and the more choices you'll have for who to get your loan from. These are other reasons why it's a good idea to save up a down payment before applying for a loan.
Finally, you don't want to end up with negative equity. That happens if your home loan balance is larger than the current market value of your home. Without a down payment, a small decline in the value of your house could result in this situation and you'd face problems if you needed to sell or refinance your loan.
3. Improve your credit score
Mortgage lenders are more likely to approve well-qualified home buyers and buyers with solid financial qualifications will get the most competitive -- and thus most affordable -- mortgage rates. The key criteria lenders look at when deciding if you're well-qualified or not is your credit score.
This score is determined by your payment history; amount of debt used relative to credit available; age of your credit accounts; types of credit you have; and number of inquiries put on your account when you requested new credit.
You can improve your score by doing things like paying down debt and asking lenders if they'd be willing to remove a late payment or two from your credit record.
4. Pay down high-interest debt
Finally, if you owe money on high-interest debt such as credit cards, it's a good idea to repay as much of it as you can before applying for a mortgage.
There are many reasons to check this task off of your to-do list. It can make qualifying for a loan easier for two reasons. Debt paydown improves your credit score. And you'll have a lower ratio of debt relative to your income, which mortgage lenders also consider when evaluating your financial credentials as well.
Paying down high-interest debt will also make it more affordable to cover your mortgage loan payments since you won't have these additional monthly bills to worry about.
By checking these tasks off your to-do list, you'll ensure you're as ready as possible to become a homeowner and that you can get the best possible rate for a home loan. Your efforts should pay off big time over the many years you'll be repaying what you owe.
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