Need to know how to prepare your finances before taking out a mortgage loan? Preparing your finances before applying for a loan is important, as it gives you the best chance of securing the best possible loan terms.
In this post, Chris Schmidt and our Houston real estate experts at Your Home Sold Guaranteed Realty - Chris Schmidt Team will discuss how to get your finances in order to ensure a smooth application process.
Key Takeaways:
- Getting a complete picture of your financial health will help you form a budget and understand how much you can realistically afford to spend on a home.
- Lenders heavily consider your credit score when evaluating mortgage applications. Aim for a score of at least 620– but a higher score is better if you want the best rates.
- Many home buyers aim for a 20% down payment to avoid the additional expense of private mortgage insurance. However, 10% to 15% is the average down payment amount.
How to Prepare Your Finances Before Taking Out a Mortgage Loan?
Understand Your Financial Health
Start by evaluating your finances, including your total income each month, expenses, savings, credit score, and debts. From lenders’ perspectives, having a lower debt-to-income ratio makes you a less risky borrower.
Getting a complete picture of your financial health will help you form a budget and understand how much you can realistically afford to spend on a home.
Focus on Your Credit Score
Get a credit report from one of the major credit bureaus to check your score. Lenders heavily consider your credit score when evaluating mortgage applications. Aim for a score of at least 620– but a higher score is better if you want the best rates.
If your credit score is too low, take steps to improve it like paying down high-interest debts, avoiding new credit accounts, and making all your payments on time.
Save for a Down Payment
Unless you’re a first-time buyer or qualify for financial assistance, the largest home-buying expense will likely be the down payment. If you haven’t already, start saving up for it.
A good way to save for your down payment is to set up automatic transfers from your checking to your savings account to build your down payment fund consistently. In addition, cut back on non-essential expenses and direct those savings toward your down payment.
The higher the down payment you’re able to make, the better your loan terms will be. Many home buyers aim for a 20% down payment to avoid the additional expense of private mortgage insurance.
However, 10% to 15% is the average down payment amount, while lenders will typically require a minimum of 3% to 5%. If you qualify for down payment assistance, you could pay as low as zero down– contact a lender to learn what your options are.
Build an Emergency Fund
Lenders will evaluate your entire financial situation, and they’ll like to see that you have a financial cushion in place to deal with emergencies and unexpected expenses.
Ideally, having a fund with three to six months of living expenses is a great way to demonstrate your financial stability.
Keep your emergency fund in a separate savings account and contribute to it regularly. When you do purchase a home, you can use the funds towards paying closing costs, regular maintenance expenses, or unexpected repair costs.
Avoid Major Financial Changes
Leading up to your home purchase, it’s important not to make any major changes in your income, employment, or finances. Don’t change jobs, open new credit cards, make large purchases on credit, or close any of your existing accounts.
If your lender sees any of these changes during the mortgage process, they could see you as an unreliable borrower and reconsider your loan application.
Gather Necessary Documentation
Once your finances are in order, take time to gather all necessary documentation in one place. Having everything ready to go can expedite your mortgage application process. Common documents include:
- Income Verification: This might include, pay stubs, W-2 forms, tax returns, and proof of any additional income.
- Bank Statements: Recent statements from all your financial accounts.
- Debt Information: Statements for all current debts and loans.
Get Pre-Approved for a Mortgage
Your first step to taking out a mortgage loan is applying for pre-approval. Pre-approval allows the lender to get an understanding of your finances, which they’ll use to give you an accurate mortgage rate quote.
This gives you a clear budget to work with as you start looking for homes. It also makes your offers look stronger to sellers. Be sure to compare pre-approval offers from multiple lenders to find the best terms and interest rates for your situation.
Learn all about this and more with our comprehensive Mortgage Loan Process Guide
Prepare Your Finances – Find Lenders in Houston with Chris Schmidt
Preparing your finances is essential for a successful home purchase. If you need help figuring out where to start, consider working with a professional realtor. At Your Home Sold Guaranteed Realty - Chris Schmidt Team Chris Schmidt and our team have years of experience working with home buyers in Houston.
With access to 220+ lenders that have hundreds of loan products, these lenders compete for your business. Plus, our familiarity with the local market trends, as well as our legendary customer service, are why we’ve developed a reputation as the best realtor in Houston. In addition, we have connections with all the top lenders in the area and also provide unique buyer guarantees that make it risk-free to purchase a home.
When it comes to securing a mortgage, shopping around and comparing offers from different mortgage lenders can potentially save you thousands of dollars over the life of your loan. By taking the time to evaluate interest rates, fees, and overall costs, you can make an informed decision that aligns with your financial goals.
To learn more about working with our team, give us a call at 713-322-5604. You can also fill out the form on this page or send a message to [javascript protected email address].
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