Secure One Capital

How to Get Ready for a Mortgage Application

Admin • Mar 06, 2020
Mortgage Application — Costa Mesa, CA — Secure One Capital
When you apply for a mortgage, you fill out some relatively basic paperwork and submit a few supporting documents. Before you apply for a mortgage, though, there are some steps that you should take to give your application the best chance of approval. Here's a step-by-step guide on how to get ready for a mortgage application.

Step 1: Start to Save Up for a Down Payment

First, immediately start to save up for a down payment if you haven't begun yet. If you have already set aside savings for a down payment, continue to build up your savings as much as possible. There is a minimum amount you'll need to secure a mortgage, and more is always beneficial.

For a minimum amount, you'll need a down payment that's equal to at least 3.5 or 5 percent of your home's purchase price to secure a mortgage. The smaller percentage is for federally backed mortgages, and the higher 5 percent is for a conventional 30-year mortgage that's not federally insured. 

If you're able to save up 20 percent of your home's purchase price as a down payment, you'll be able to avoid private mortgage insurance. This is an insurance that helps protect the lender but is paid for by the homebuyer — and you never personally see a benefit from the premiums. Should you be able to avoid it, you'll be able to save on your monthly mortgage payments.

Anything above 20 percent that you're able to save up will further reduce how much money you’ll need to borrow. 

Step 2:  Don’t Take Out New Credit

Second, avoid applying for new credit in the lead-up to your mortgage application. This includes new credit card applications, new car loans, new personal loans and any other form of new credit you might consider. You certainly don't want actual new lines of credit on your report when you apply for a mortgage, and even inquiries can have an effect on your application.

At the very least, try not to apply for any new credit in the 12 months prior to your mortgage application. Credit inquiries impact your credit score for one year, so you don't want any inquiries in the past year if you can avoid it.

If you're able to avoid new credit for two years before you apply for a mortgage, that's even better. Credit inquiries will continue to show up on your credit report for two years (even though they only affect your score for one year), and too many in the past two years might raise some questions.

Step 3: Reduce Your Overall Debt

Third, reduce your overall debt as much as you're able to. This may be a tall order while you simultaneously save up a down payment, but there are two important reasons to lower your debt load to manageable levels.

To start with, your credit score will increase as you pay off your outstanding debts. As you lower how much of your available credit you use, your credit score will go up. 

You don't necessarily need a perfect credit score when you apply for a mortgage, but some experts advise that you should generally try to attain a score of 620. If you can get up to 740, you'll qualify for lower interest rates. Mortgage options might be available if your score is below these numbers, but these options usually come with added requirements and are less widely available.

Additionally, your debt-to-income ratio will also go down as you pay off debts. This ratio is simply a measure of how much income goes toward minimum debt payments each month, and lenders won't issue a mortgage if your ratio is too high. 

If you're ready for a mortgage, contact Secure One Capital.

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