In any kind of real estate market, buying a house is a major financial undertaking. And in a fast-paced seller’s market like much of East Tennessee is experiencing, it’s all the more important for homebuyers to optimize their financial position and get ready for mortgage approval early in the game.
Dreaming of owning your own home but not sure where to start? Here are seven quick tips for getting your financial ducks in a row:
- Determine an Estimated Budget
The first step to getting ready for the mortgage process is to get a rough idea of how much house you’ll be able to afford.
Maybe you’ve heard of the “28/36 rule” – it says you should spend no more than 28% of your income on your mortgage and no more than 36% on your mortgage plus other debt. You’ll also have to consider upfront costs, like your down payment, and recurring costs, like homeowners insurance.
But there’s no need to break out the pencil and paper – check out our Mortgage Qualifier Calculator.
- Know What Lenders Want to See
Your next step is to gain an understanding of what lenders typically look at when they assess your finances during the home loan approval process.
Fundamentally, mortgage lenders want to know whether you’ll be able to pay back your home loan on time. To assess your creditworthiness, they’ll likely consider:
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- Your credit history
- Your bank account balances and activity
- Your other assets (like stocks and bonds)
- Your debts (including auto loans, student loans, and credit card balances)
- Your employment and income history
- Your history as a tenant (if you’re renting)
- Your public records (if you’ve had any foreclosures or liens)
Additionally, your lender will want to know about the homes you’re interested in and their list prices.
- Take a Hard Look at Your Credit
Since your credit history is a vital factor for mortgage lenders, it’s a smart idea for you to request your full credit report and review it thoroughly.
You’re entitled to one free credit report every 12 months from each of the major credit bureaus (Experian, Equifax, and TransUnion). To get your free reports, go to AnnualCreditReport.com. Go through those documents and check for any discrepancies that could be dragging down your score or are possible signs of fraud.
After you’ve checked for errors, turn your attention to any delinquent accounts and get them settled ASAP.
- Optimize Your Credit Utilization Rate
Once you’ve taken care of any errors or delinquencies on your report, it’s time to give your credit an overall boost – starting with credit utilization.
Aside from paying your bills on time and in full, keeping your revolving debt in check is the best thing you can do for a healthy score. It is recommended by many to get your credit utilization under 30%. This means, for example, that if your credit card limit is $10,000, you should keep your balance under $3,000.
Good debt management can also improve your debt-to-income ratio – and most lenders like to see DTIs under 43%.
- Prioritize Savings and Watch Your Accounts
While your credit is a major focus for mortgage lenders, you definitely shouldn’t ignore your savings accounts and payment habits during this process, either.
You may have heard you need a 20% down payment to buy a house. That’s not usually the case anymore, but most mortgages will involve a down payment and closing costs. Plus, you’ll need cash on hand for moving expenses, new furnishings, and repairs. So, saving as much as possible is important.
You should also document any large transactions – especially if you receive cash gifts or lend anyone money.
- Get Your Paperwork Together
Once you’ve optimized your credit and banking situations as best you can, you’ll want to gather the documents that your lender will ask you for.
What you’ll need to show will vary depending on your lender and what stage of the process you’re at. But it doesn’t hurt to prepare:
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- Your photo ID
- Your W-2 forms and tax returns (two years’ worth)
- Your paystubs (30 days’ worth)
- Your checking, savings, and investment account statements (two months’ worth)
- Your landlord’s contact info and proof of rental payments (if applicable)
- Your alimony or child support documents (if you wish to rely on this income for the determinations of creditworthiness)
Also, if you’re applying for a VA loan, be prepared to furnish your service and discharge records.
- Reach Out to a Trusted Lender
When you’re ready to move forward, seek out a trusted lender who knows the local area and can help you explore all your loan options.
Citizens Bank has been helping East Tennesseans to find their first and forever homes since 1934. We’re proud to offer VA and USDA loans in addition to a range of conventional fixed-rate and adjustable-rate mortgage options to suit every budget.
Want to take the next step? Get in touch today!