8 Steps to Qualifying for Your First Mortgage

This is an excerpt from our eBook, Which Mortgage is Best for You. Download the full eBook now for FREE.

Lenders look at many aspects of your finances when you apply for a mortgage. So you’ll want your finances to be in good shape when the time comes for you to apply. To help first-time homebuyers along, Mountain America Credit Union has put together this handy list of eight steps to help you qualify for your first mortgage.

Follow these first four tips in the months before you apply for a mortgage to improve your chances of qualifying and maximize the amount you can borrow:

1.    Avoid new debt and pay down existing debt.

No lender expects you to have zero debt. But the less money you owe creditors, the better your chance is of qualifying for a mortgage and you will qualify to borrow more because your debt- to-income (DTI) ratio will be lower. Every lender is different, but 36% is a good DTI to shoot for to get approved for your first mortgage. If you have a good or great credit score, some lenders will approve you with a higher DTI, like 41–43%. Paying down debt will also improve your credit score, and a lower DTI can hep you get a better mortgage rate.

If you have debt you can pay off, do it before applying for a mortgage. Even after you're approved, avoid adding additional debt as you go through the mortgage process. Before closing on a house, lenders will re-check your credit report and, if it shows new debt, it may keep you from closing on your dream house.

2.    Save, save, save.

Don't expect to walk into a lender's office and qualify for a mortgage without already having a down payment. Lenders are cautious when it comes to approving home loans. Having a down payment can make your loan less expensive and make it easier to qualify, as can having ample cash reserves in the bank.

Down payment requirements can vary by lender, but many have a minimum limit of around 3.5% of the cost of the house. If you have more saved up, and are able to, it's good to put that money toward your down payment. There are some first-time homebuyer programs that require as little as a $1,000 down payment or that let you use other sources of money toward your down payment—like a monetary gift from an organization or family member.

3.    Stay employed and stay in the same line of work.

You may not be able to control whether you get laid off from a job, but you can control whether you quit or switch fields. Lenders like to see that you’ve been consistently employed in the same field for 12 to 24 months or longer, so do whatever you can to make that happen. Don’t take a yearlong hiatus to “find yourself” or to travel if you want to buy a home soon. And, once you apply, don't suddenly quit your job to become self-employed. Changes in employment and income can delay the mortgage process or stop it completely.

4.    Don’t miss any payments.

On-time loan and credit card payments are the most important factors in your credit score. Not being late is a good way to increase your credit score. If you don't know what your credit score is, find out as soon as possible.Get a copy of your credit report and make sure there aren't any errors or recent late payments that could hurt your chances of qualifying. You may also find an opportunity to improve your credit before applying for a home loan that you didn't know about before seeing your report.

Once you’ve applied and are in the process of being approved, there are several things you need to do to make sure you don’t jeopardize your loan. Follow the next four steps for applying for a mortgage to ensure your application process goes smoothly:

5.    Don’t apply for any other loans or open any credit card accounts.

Applying for a credit card or another loan will lower your credit score for a few months and taking on more debt will reduce how much you can borrow for your home. If you have an itch to get a new car along with your new home, wait until you've closed on your home before you seriously start shopping for your new wheels.

6.    Don’t make any major purchases.

Whether you pay with cash or credit, a major purchase will hurt your loan eligibility by reducing your cash reserves or increasing your debt.

7.    Stick to your payment schedules.

Continue paying all your bills and other scheduled payments on time, since it’s so important for your credit score.

8.    Stay in your job.

During the approval process, it’s still important to stay at your job if you can help it. Don’t move to a different line of work or leave a salaried job to take a commissioned job. Your approval could fall through because your source of income will no longer be considered stable and reliable.

Want to learn more about how lenders decide whether you qualify for a mortgage? Check out our new eBook, Which Mortgage is Best for You. This eBook will show you:

• Important financial questions to ask yourself before buying a home.

• The pros and cons behind the most common mortgage products available today.

• How lenders determine if you qualify for a mortgage.

We hope this article and our eBook provide valuable information to help you make the best home financing decisions.

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