Spring often inspires a period of cleaning and decluttering our living spaces.
What if you extended this “spring cleaning” to your finances?
What's in this article?
Lenders evaluate mortgage applications based on various factors, including credit history, debt levels, income and savings.
If you plan to buy a home this spring, organize your financial documents, review your credit and pay down debt to prepare for a successful mortgage.
In this step-by-step guide, we’ll explain how to strengthen your finances before the mortgage process.
Review your credit score
Your credit score determines your mortgage eligibility, interest rate and loan terms.
Before you apply for a mortgage, review your credit reports to ensure that all information is accurate, and take steps to improve your score if necessary.
Homebuyers can download a free credit report from each of the three major credit bureaus once a year through AnnualCreditReport.com.
Review your report for inaccuracies, including:
- Incorrect personal information (name, address, SSN)
- Accounts that don’t belong to you
- “Late” payments that were made on time
- Incorrect balances or credit limits
- Duplicate accounts or outdated information
You can dispute any errors with the respective credit bureau if you spot them.
How do I improve my credit score?
The best ways to raise your credit score include:
- Make on-time payments: Payment history accounts for 35% of your credit score. Consistently paying bills on time is one of the best ways to improve or maintain your score.
- Lower your credit utilization: Keep your credit card balances below 30% of your total credit limit. Paying down high balances can improve your score relatively quickly.
- Avoid opening new lines of credit: New credit applications result in “hard inquiries,” which are credit reviews that lenders will request every time you apply for credit. Also known as “hard credit checks” or “hard pulls,” these credit reviews can temporarily lower your credit score.
Start this process early to ensure your score has improved by the time you apply for your mortgage.
Ready To Take Your Next Step?
Pay down debt
Carrying high levels of debt can make it more challenging to qualify for a mortgage.
Significant debt not only impacts your credit utilization but also your debt-to-income ratio (DTI).
Lenders use the DTI to compare your monthly debt payments to your gross monthly income, helping them determine how much additional debt you can comfortably manage.
Debt repayment strategies
Common strategies for quickly reducing debt before applying for a mortgage include:
- The snowball method: Pay off your smallest debt first. Once that debt is repaid, apply the amount to the next smallest debt and so on.
- Avalanche method: First, pay off the debt with the highest interest rate. Once that debt is repaid, move on to the next highest and continue this method until all debts are repaid.
- Debt consolidation: If you have multiple high-interest debts, consolidate them into a lower-interest loan to make payments more manageable.
Buyers also might consider making extra payments or higher payments to reduce debt faster.
Organize your financial documents
Mortgage lenders require documentation to verify your income, employment, assets and overall financial stability.
Organizing these documents in advance will make the mortgage process smoother and show the lender you are a serious, prepared borrower.
Required documentation typically includes:
- W-2s or 1099s for the past two years
- Recent tax returns
- Current pay stubs
- Bank statements
- Proof of other assets, including investment or retirement accounts
- Debt information, such as credit card statements or loan balances
Clearly label and organize your documents for easy access.
Save for your down payment and closing costs
In addition to a down payment, borrowers are responsible for closing costs, moving expenses and an emergency fund to cover unexpected expenses.
As soon as you decide to purchase a home, you should start saving for these costs and regularly contribute to the fund.
The amount you need to save depends on the mortgage you plan to get.
Here’s a quick breakdown of common loan types and their down payment requirements:
- Conventional loan: Requires a down payment of 3% or more, but a 20% down payment eliminates the need to pay private mortgage insurance (PMI).
- FHA loan: Requires 3.5% down if your credit score is 580 or higher.
- VA loan: Available for eligible military members and veterans with 0% down.
Closing costs typically range from 2-5% of the home’s purchase price.
Avoid major financial changes
One of the most important pieces of advice for homebuyers is to avoid making any significant financial changes when preparing to apply for a mortgage.
Major financial changes include:
- Large purchases
- Job changes
- Opening new credit accounts
Lenders want to see consistency and predictability in your financial behavior.
Significant financial changes can lower your credit score, increase your DTI or delay your closing timeline.
Maintain open, honest communication with your lender about any unavoidable life changes that have impacted your finances.
Be sure to provide the additional documentation they may need as quickly as possible to stay on track.
Set a realistic budget
Before you get a mortgage, it’s important to understand what you can comfortably afford based on your financial situation.
Lenders approve mortgages based on several financial factors, but only you can consider your entire lifestyle expenses such as travel, savings goals or childcare.
Set a home price range for yourself that aligns with your actual monthly budget and factors in your down payment and additional homeownership expenses such as:
- Property taxes
- Homeowners insurance
- Maintenance and repairs
- Utilities
- HOA fees
- Emergency fund
Determine a budget that allows you to enjoy homeownership without financial strain.
Get a loan commitment
A fully underwritten loan commitment lets you lock in your interest rate and other terms before finding the home you want to purchase.
Compass Mortgage’s Get Committed® program goes through most of the steps in the loan process to secure a loan commitment so you can resolve any financial requirements ahead of time.
A loan commitment essentially has the power of a cash offer, showing the seller you’re fully approved financially and that your deal isn’t likely to fall through.
Get Committed® with Compass Mortgage
Start an application with us to unlock your personalized loan options.
The experienced loan officers at Compass Mortgage will help put you in the best position to win the home of your dreams.