10 Steps Before Applying for a Mortgage

Written by marjory pilley
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10 Steps Before Applying for a Mortgage
Before you buy a new home, certain steps need to be taken. (house image by hans slegers from Fotolia.com)

Purchasing a home by taking out a mortgage is usually the biggest financial transaction a person will make. Among other things, before you apply for a mortgage you'll need to present your circumstances favourably to the lender. Showing that you repay obligations in a timely fashion, save your money and have a steady work history will help your application for the loan.

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Review Your Credit Report

Obtain a copy of your credit report and review it for errors. You are entitled to a free credit report from each of the three main credit agencies (Equifax, TransUnion and Experian) every year. Follow the credit agency's instructions to dispute any errors.

Repay Outstanding Credit

Consistently make payments each month on outstanding credit and keep balances low. Responsible behaviour contributes to your overall character assessment by the mortgage lender.

Maintain the Number of Credit Card Accounts

Do not open new credit card accounts or close out old ones prior to applying for a mortgage, because this signals unusual behaviour that will require an explanation.

Save for a Down Payment

Save money for a down payment. The larger the down payment, the less you will need to borrow. The ability to save is viewed favourably by a lender.

Stabilise Income

Try not to change jobs just before you apply for a mortgage. Employment stability is one of the factors affecting a mortgage approval.

Monitor Interest Rates

Interest rates constantly fluctuate. If interest rates dip really low and you plan to apply for a mortgage soon, ask the lender about locking in the lower rate for a fee. The interest rate will affect how much you pay each month and how much the lender will let you borrow.

Save Additional Funds

Save additional funds for other expenses you will incur with a home purchase, including closing costs, points, repairs and upgrades.

Determine the Debt-to-Income Ratio

Calculate your debt-to-income (DTI) ratio, one of the criteria for a mortgage loan. The lender will calculate a front-end DTI ratio by dividing monthly housing expenses by monthly income. Typically, this amount should be less than 28%. The back-end DTI ratio divides all monthly expenses (including car payments, credit card payments, alimony, etc.) by monthly income. This ratio should be less than 36%.

Research Lenders

Research the products and services offered by lenders. Some lenders offer special programs for first-time home buyers. The Federal National Mortgage Association (FNMA) offers special financing for some homes that need renovation.

Gather Paperwork

Gather documents to substantiate the information on your loan application. Pay stubs, bank statements, a list of credit cards with payment amounts and tax returns are some of the items you will need to provide.

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