How to Spring Clean Your Finances When Preparing for a Mortgage
Every year, when spring finally comes around, the world puts away their cozy blankets, escapes their favorite spot on the couch for Netflix marathons—and decides now’s the time for a fresh start. A new view on life! There’s never been a better time to make the most of things; a spring clean is the first step towards the future you want to manifest.
But what if the future you want to manifest is a new house?
Preparing to apply for a mortgage can feel overwhelming, but with the proper planning ahead of time—it’s just another step towards achieving your next goal. Here are five helpful tips to consider if you’re thinking about spring cleaning your finances for a mortgage.
1. Get to Know Your Budget
We don’t just mean “write down your paychecks and add up the bills.” A detailed monthly household budget can be illuminating, especially when trying to understand the complete picture of your financial health when preparing for a mortgage. Consider tracking all of your monthly debt payments (including one-off monthly costs) for at least six months to get a clearer sense of your expenses and spending habits. Likewise, you’ll also want to track all sources of income such as paychecks, investments, cash savings, birthday money.
Once you have a firm grasp on your finances, you can start mapping out how a mortgage may fit within your budget. If you’d like to calculate your mortgage and payments, you can check out our free mortgage calculator by clicking here to get a head start.
Income is money received from your labor, investments and/or products. In the case of planning for a mortgage, your job’s wages are the most typical example of income.
The formal definition of reserves is “the number of monthly mortgage payments you could make from your savings if you lost your income.” For simplicity’s sake, let’s just think of it as your “savings for mortgage payments.” Technically all of your savings can count as reserves, but in practice, it would be worthwhile to draw a distinction.
A down payment is the upfront money you put towards the purchase of a house. This is oftentimes a percentage of the home’s purchase price, which typically ranges from 5% to 20% of the purchase price. However, thanks to certain mortgage programs like the FHA loan, it’s sometimes possible to put as little as 3.5% down on a house, or if you are active-duty military or a veteran, you may even be able to put zero down using a VA loan.
Pro-tip: Before it’s time for you to make a down payment, make sure you explore every possible avenue of down payment assistance. Grants, down payment assistance loans, assistance revitalization target areas, mortgage credit certificates, individual development accounts, and gift funds are just some of the many different possibilities for making a down payment easier.
Mortgage Term & Interest Rate
These two could have entire articles dedicated to them but put succinctly: a mortgage term is the amount of time you have to pay back the loan amount you borrowed. Generally speaking, two of the most common loan terms are 15 and 30 years.
A mortgage interest rate is what you pay your lender to borrow money. It’s expressed as a percentage of your overall loan amount. Think of it like this—borrowing money is a service, and the interest rate is the cost you pay for the service. You’ll pay a small portion of this cost each time you make a mortgage payment. Depending on the type of loan you take (fixed or adjustable), the interest may stay the same, or it could change over the course of your loan. It’s also important to note that your loan’s interest rate can vary based on your credit score, down payment, and other factors.
While the home price and the interest rate are the two costs people think of first, there may be other costs baked into homebuying. Be mindful to consider how things like closing costs, property taxes, and homeowner’s insurance could add to the cost of your house.
Debt-to-income is your monthly debt payments divided by your gross monthly income. To calculate your debt-to-income, simply
- Add Up All of Your Monthly Costs
- Divide Your Debts by Gross Monthly Income
- Convert that Decimal (example: 0.27) into a Percentage (27%)
This is a quick “peek behind the curtain” to understand some of the moving parts of your mortgage application. As lenders consider your application, they’ll look to see how much additional debt you can take on. A lower debt-to-income typically means a higher chance of approval and a larger loan size. That’s why it’s so important to…
2. Reduce Your Consumer Debt
Do your best to reduce any existing consumer debt that you might have. Credit card debt and auto loans not only eat up money you could be putting towards a house, but they may also cut into how much house you can afford. Paying down your debts may help you improve your debt-to-income and ultimately afford more flexibility when house-hunting!
3. Refinance Your Student Loans
For the same reason you’d want to cut down your existing consumer debt, you’ll want to minimize the impact of any student loans on your finances. If you’ve managed to build on your credit since first taking out your student loans, you may be able to qualify for a lower interest rate on student loan debt.
4. Boost Your Credit Score
Just like any credit card company or auto dealership, mortgage lenders will consider your credit score when it comes time to apply for a mortgage—after all, a credit score is the numerical value for how creditworthy you are.
A good credit score tells the lender you’re more likely to make timely payments on your loan. For that reason, raising your credit score (and maintaining that high rating) should be one of your top priorities. If you have high balances on high-interest credit lines, it may be a good idea to focus on those first.
Additionally, if you have any negative payment history, break out your detective’s cap and double-check for any errors—and if you find one, consider disputing it with the credit bureau in question. Finally, if the negative credit is not an error, try writing a goodwill letter to the creditor requesting the removal of the negative record. You’d be surprised at what an earnest letter can accomplish!
5. Find an Experienced Loan Officer You Trust
All of the above are great first steps when preparing to apply for a mortgage, but the one tip that can make the biggest difference is pairing with an experienced loan officer you can trust.
Luckily, you don’t have to look far—Atlantic Coast Mortgage prides itself on our people-first approach to everything that we do. Our loan officers will be there to answer any questions you might have while guiding you through the home financing process. If you’re ready to take your next steps, or if you have any initial questions you’d like answered, we’re ready to make the difference in your homebuying journey. Reach out today!