What to do before applying for a mortgage

man operating laptop on top of table

Secure a mortgage loan faster by checking off the items on this list

Applying for a home loan is an exciting time for first-time homebuyers. Depending on your financial situation, you may be wondering when is the right time to submit an application for a home loan. 

Becoming a homeowner is a major financial endeavor, requiring buyers to commit to monthly mortgage payments over the course of 15 to 30 years. Mortgage lenders want to be sure that you’re able to make your monthly payments consistently and on time. 

In order to do this accurately, they evaluate a variety of factors concerning your financial standing such as your credit score, gross income, and outstanding debt. It’s in the buyer’s best interest that all of these factors are accounted for and shown in the best light before presenting them to a loan officer.

What you’ll learn

In this article you’ll discover the 7 steps you need to take before applying for a mortgage loan to increase your chances of getting approved. 

Check your credit score

Whether or not you get approved for a mortgage loan depends heavily on your credit score. The higher your score, the more likely you are to get approved. A high credit score (740 or above) also betters the odds of you locking in a lower interest rate on that loan. Learn how to improve your credit score from Flyhomes experts here.

Check your credit report with all three of the major credit bureaus (Equifax, Experian, and TransUnion) before getting started on your mortgage application. 

While checking your credit report, you want to look at more than just your score. Take note of any errors or discrepancies that you don’t recognize, as they may be signs of identity theft. Unfortunately, these errors can go unnoticed and are sometimes only discovered when you look at your full credit report. It can take time to dispute fraudulent claims or repair signs of failed monthly payments, so make sure you check your credit score at least six months before submitting a mortgage application. 

man in gray hoodie holding black smartphone
Nobody has a perfect credit score, but taking some time in the months before you apply for a mortgage to raise yours will help you secure the best rates

Reduce your debt-to-income ratio

After you’ve taken stock of your credit score and any areas of improvement on your report, you want to reduce your debt-to-income ratio as much as possible. Your debt-to-income ratio is the difference between how much money you pay out toward your debt and how much you take in every month. Loan risk professionals consider a ratio above 43% to be high risk. Mortgage lenders typically prefer a debt-to-income ratio below 36% which means that your debt payments shouldn’t be more than 36% of what you make each month. 

A low debt-to-income ratio communicates to lenders that your monthly gross income is sufficient to cover consistent mortgage payments. If you happen to be sitting on a large amount of debt from student loans, car notes, or credit cards, your debt-to-income ratio is likely to be high. In this case, you want to pay off as much of your debt as possible before setting money aside for a down payment. 

Create a home savings account

After your credit score and debt-to-income ratio are in order, you can focus on putting money aside for your home purchase. In addition to a down payment, you also want to allocate funds towards closing costs and cash reserves. It’s a good idea to create a savings account exclusively for your home-related expenses, especially since the dollar amount is usually high.

Down payments are typically 20% of the total home value, with the exception of FHA loans which require a down payment of just 3.5%. Closing costs range from 3-6% of the price of the home. Cash reserve requirements will vary depending on the lender, but having enough to cover at least two months of monthly housing expenses is a good start.

Maintain steady employment

Switching jobs before applying to a mortgage loan is usually not a good idea. Unless you’re moving into a role that pays significantly higher than your last one, hold off on changing jobs until after you’ve been approved. 

Mortgage lenders require at least two years of work history to establish reliable income. Changing positions during the application process  or right before will likely hurt your chances of getting approved. This is especially true if you happen to move from a higher-paying job to a lower-paying one, or if you switch careers. 

Gather all necessary paperwork

When applying for a mortgage, you’ll need to present your lender with a list of documents that verify your ability to make monthly payments. In order to successfully complete your application, you’ll need all of the following:

Income verification

Nowadays, income is received in a variety of ways. Many people are self-employed, work abroad, or live off of previous settlements. For these reasons, lenders accept different kinds of income verification documents. In the application process, you’ll have to present at least one of the following: 

  • W-2 forms from the last 1-2 years for each applicant
  • Pay stubs from the last 30 days with the employer’s signature
  • Income tax returns for the past two years to three years
  • Alimony or child support documents proving you will continue to receive such payments for at least 3 years after the date of the mortgage application
  • Contracts and letters from current clients showcasing 2 years of steady self-employment income for freelancers and independent contractors

It’s worth noting that presenting more than one income verification document may improve your chances at getting a better mortgage rate. 

Statements of assets and debts

Bank statements highlighting all assets and debts are used to determine how much money you have and how much you owe. Loan officers will typically ask for two to three months’ worth of bank statements in order to calculate your debt-to-income ratio. 

They also use your bank statements to assess whether or not you will be able to cover your down payment, closing costs, and maintain sufficient cash reserves after the final sale. 

If your family is helping you pay a down payment with a cash gift, you’ll need to provide documentation that the source of the gift doesn’t expect to be paid back.  

Credit history

You won’t have to present your loan officer with a physical or digital copy of your credit history. Instead, you’ll need to grant your lender permission to access your credit report. 

Although you won’t necessarily have to submit anything in this stage, your credit history is likely the most important document in determining whether or not you will get approved. 

If you happen to have any late payments, collections, or other unfavorable marks on your credit report, don’t be discouraged. Most people don’t have a perfect credit score. Your lender may ask for a letter explaining some of the more glaring dings on your score. You can still get approved for a mortgage loan even without a high score

Proof of identity

Generally, a government-issued ID such as a driver’s license or state identification card will do just fine for proof of identity. You may be surprised to find out you don’t need to prove citizenship to get a mortgage loan. 

Undocumented immigrants are allowed to purchase property. This is because there is no citizenship requirement for real estate sales in the US. A lender may, however, request to see a copy of your green card, employment authorization, or approved visa before moving forward with your application. 

Rental history

Lenders also want to be certain you’ve been able to make rental payments for at least a year. You’ll need to present your loan officer with rental payment history via bank statements or checks, as well as your landlord’s contact information.

Additional documentation verifying your financial standing

Depending on your financial situation, your lender may request additional documents. If you’re divorced, your loan officer might ask to see a copy of your divorce decree in order to verify any child support or alimony payments that will be going into or coming out of your bank accounts. 

If you’ve previously foreclosed on a home, that documentation must also be provided. (Usually, buyers have to wait seven years before being eligible for a new mortgage). If you’ve ever declared bankruptcy your lender will need to see proof that those debts have been cleared and no longer require repayment. 

two men in suit sitting on sofa
Don’t jump at the first mortgage offer. Different lenders will have different rates and costs, and if you prepared properly, you should have a choice of a few different offers

Create a targeted list of mortgage lenders

Lenders set their own mortgage rates based on all documentation mentioned above. That’s why it’s a good idea to apply to different mortgage lenders at the same time. The more mortgage loan offers you speak to, the better your chances of landing the best deal on a home loan.

That being said, you don’t want to apply to just any and all mortgage lenders. When a lender makes a hard inquiry into your credit report, it temporarily lowers your score. Too many hard inquiries over an extended period of time could hurt your overall score, making it more difficult for you to get approved for a mortgage loan, should you have to apply a second time around.  

It’s best for buyers to apply to multiple mortgage loans within the same 14-day period. Applying for several mortgage loans within a 14-day period counts as just one hard inquiry. 

Get pre-approved and lock in your interest rate

The last step in the process is submitting your application and hopefully getting pre-approved. Better yet, you may even be qualified for pre-underwriting with Flyhomes Mortgage. At this point in the process your mortgage loan applications are complete. However, you should still have an open mind. Ideally you have more than one offer to consider. 

When comparing your choices, resist the urge to go with the mortgage lender that offers you the highest loan amount. Although you’re excited to buy a home and move into your new space, you want to make sure that after you get pre-approved, you’re paying close attention to interest rates and closing costs. 

Some mortgage loans offer a larger dollar amount, but come with higher interest rates and closing costs. Consult with a trusted advisor on the matter before making a final decision. You may be in a position to negotiate. 

Wrapping up

Applying to a mortgage can seem like an overwhelming process at first, but once you understand all that is required and organize your documentation accordingly, the process can go quite smoothly. 

The main thing to keep in mind as you venture into home ownership and mortgage applications is to provide as much favorable financial documentation as possible. You never want to inflate the truth, much less provide false documentation. But you do want to present your financial life as stable, reliable, and consistent. Keep that thought at the forefront and you’re sure to be approved for your mortgage loan sooner. 

About the author Vivian Tejada is a freelance writer and small business strategist based out of Providence, RI. She specializes in writing SEO blogs, property descriptions and website content for real estate companies. She’s also an avid traveler, location-independent and enjoys trying out new restaurants.

Start your Flyhomes real estate experience.

Buy my home

Sell my home

Buy and sell