Tips to Strengthen Your Finances Before Applying for a Mortgage


Getting approved for a mortgage loan isn’t as easy as getting a car loan or a credit card. Mortgage lenders don’t approve everyone for financing, and banks have their own set of strict lending guidelines. The underwriter considers your entire financial picture to determine if you’re a good candidate for a loan. And unfortunately, if the bank’s underwriter isn’t confident in your ability to repay funds, you won’t get the loan. So before you step foot inside a bank, you need to strengthen your finances in preparation for a mortgage.

1. Pay down debt

 Some people don’t realize the damaging effect credit card debt can have on a mortgage loan. Even if you make your minimum payments every month on credit cards, student loans or auto loans, lenders calculate your debt-to-income ratio to determine how much you’re able to receive for a property.

 Your total monthly debt payments including your home loan should not exceed 36% to 43% of your gross monthly income. If you have high debts, this limits how much you can borrow. And when a bank limits borrowing capacity, you’re purchasing power decreases and you’ll have to look at cheaper homes.

 To strengthen your finances, pay off as many debts as possible. This can decrease your debt-to-income ratio allowing you to qualify for a bigger mortgage.

2. Get a copy of your credit report

 Getting the best interest rate is key because a low rate saves you money on a monthly basis, and over the life of the loan. Never assume you have good credit. Order a copy of your credit report from or contact the credit bureaus for copies. Check your report for inaccuracies and dispute errors. Erroneous negative information on your credit file can decrease your credit score and prevent qualifying for the most favorable rates.

3. Eliminate unnecessary expenses

 Buying a home is expensive and you’ll need to put cash into the deal. Even if you can swing a mortgage payment, you might not have disposable income to save for a down payment or closing costs. Most loan programs require a down payment, so getting a mortgage might require eliminating unnecessary expenses.

 Brainstorm ways to cut back and save money. Simple adjustments can result in big savings, and these savings add up quickly. For example, clipping coupons and buying generic can shave dollars off your grocery bill. Going on a spending diet and only purchasing necessary items can also result in huge savings. Likewise, consider making sacrifices like skipping your yearly vacation. If you can save $300 a month, that’s $3,600 a year for a down payment.

4. Get a part-time job

 Minimum mortgage down payments average between 3.5% and 5%, and closing costs can run between 2% and 5% of the sale price. In addition to eliminating unnecessary expenses to save money, you can look for a part-time job. The more income you generate on a monthly basis, the quicker you can save enough money to purchase a home. If you work part-time a few hours and earn $125 a week, that’s an additional $500 a month. If you’re also able to save $300 by cutting back on expenses, that’s a total of $800 a month or $9,600 for a home purchase in just 12 months.