Applying for your first mortgage can be a complex process, but understanding the steps involved can help you feel more prepared. Lenders review various aspects of your financial situation when you apply, so it’s important to get your finances in order before you begin. To help first-time homebuyers, Mountain America Credit Union has put together this list of eight essential steps to increase your chances of qualifying for a mortgage.
Follow these first four tips in the months leading up to your application to boost your odds of approval and maximize your borrowing potential:
1. Pay Down Debt and Avoid New Debt
While having some debt is normal, reducing the amount you owe can improve your chances of getting approved and potentially lower your interest rate. Your debt-to-income (DTI) ratio is a key factor, with 36% being a common target for mortgage approval. If you have a good credit score, some lenders may approve you with a DTI as high as 41-43%. Paying off debt can also improve your credit score, making it easier to secure a better rate.
Avoid taking on new debt after you apply, as lenders will re-check your credit before closing. Any new debt could jeopardize your approval.
2. Save for a Down Payment
Lenders expect you to have some money saved for a down payment. The more you save, the easier it will be to qualify and the lower your mortgage will be. Many lenders require a down payment of at least 3.5%, though first-time homebuyer programs may allow you to qualify with as little as $1,000 or by using gifts from family or organizations.
In addition to your down payment, having extra savings for cash reserves can strengthen your application and show the lender you can handle unexpected expenses.
3. Stay Employed and Avoid Job Changes
Lenders like to see a stable employment history, ideally within the same field, for at least 12 to 24 months. Avoid quitting or switching jobs, especially to self-employment, before or during the mortgage process. A change in employment could delay or even derail your mortgage approval.
4. Make All Payments On Time
Your credit score is directly impacted by your payment history. On-time payments on credit cards, loans, and bills are crucial to maintaining a good credit score. If you’re unsure of your credit score, check your report early to address any errors or late payments that could hurt your chances of qualifying.
Once you’ve applied for the mortgage, continue to make all payments on time to avoid jeopardizing your approval.
Once you’ve taken these steps, follow these next four guidelines to ensure a smooth mortgage application process:
5. Avoid Applying for New Credit
Don’t apply for new credit cards or loans during the mortgage process. Each application results in a hard inquiry on your credit report, which can temporarily lower your score and affect your ability to secure the loan. Avoid taking on new debt, even if you’re tempted to buy a car or make other big purchases before closing on your home.
6. Delay Major Purchases
Making large purchases—whether on credit or with cash—can negatively impact your mortgage eligibility. Such purchases reduce your cash reserves or increase your debt, both of which may harm your ability to qualify for a mortgage.
7. Stick to Your Payment Schedule
Continue paying all your bills and scheduled payments on time throughout the mortgage approval process. On-time payments will keep your credit score healthy and show the lender that you’re financially responsible.
8. Stay in Your Job
If possible, avoid changing jobs during the mortgage approval process. Lenders prefer a steady, reliable income. Moving to a job with a lower salary, or switching from a salaried to a commission-based position, could raise concerns about the stability of your income and could affect your loan approval.
Learn More About Qualifying for a Mortgage
Want to dive deeper into the mortgage process? Check out our eBook, Which Mortgage is Best for You? This guide covers:
- Key financial questions to ask yourself before buying a home
- The pros and cons of common mortgage options
- How lenders determine whether you qualify for a mortgage