Before You Apply for a Mortgage, Part I

When you’re shopping for and purchasing a home, there are many steps that must be taken in order for you to get the keys to your new place. Understanding and navigating the homebuying process can be overwhelming and stressful, especially for a first-time buyer. By recognizing the who, what, when, where, and why of the steps that can be taken in the years before you purchase a home, you can better ensure that the process moves along as quickly and smoothly as possible, with minimal stress and headaches.

Start Early, well before you apply for a mortgage

The sooner you can begin the planning process, the better! Not planning to move for another couple of years? Don’t wait. Now’s the time to get your finances in order. Schedule an appointment with a financial planner to discuss your situation. He or she can discuss how your employment status, assets, and debts will affect the amount you’re able to borrow. This process will culminate with the creation of a plan that will get your finances in order well in advance of your home purchase.

Why is so much time needed? While it’s not required, meeting with a financial planner this early in the game can address issues that may take time to remedy. While you won’t need to know exactly what size home you might want, it’s a good idea to have a general target. Let’s review how your employment status, assets, and debts can impact your borrowing ability.

Employment Status

Unfortunately, it can be more difficult for self-employed individuals to obtain a residential mortgage. This is because the write-offs that are saving you tax dollars are also reducing the income your lender will consider when approving your loan. When you apply for a residential mortgage loan, your lender will want to see at

Self-Employed Alert

In many cases, self-employed individuals, especially the newly self-employed, may not show much of a profit at all. They may even show a loss. So, this means you’ll want to create a plan early on for how to manage your income. Depending on how much your business brings in, you may choose to A) report all of your income and avoid too many deductions for the next two tax years, B) take as many deductions as possible and bank your self-employed income in a down-payment fund, or C) formulate a custom approach that includes taking a few deductions and banking a certain dollar amount. Your financial planner will be able to best advise you on how to reach your goals.

Job Changes

Planning to change jobs or start your own business? If you plan to buy a home in the next two years, consider carefully how the job change will affect your taxable income. This may not be the best time to start a new business, as most businesses take months, if not years, to earn any income. Want to change jobs? Don’t make a big change right before applying for a mortgage. Employment stability is an important factor that affects mortgage approval. Most lenders want to see at least two years of continuous employment, and though this doesn’t have all to be with one employer

Manage Your Assets

Now’s the time to save money for a down payment. Using that general target price you came up with, use an online calculator to factor in average tax rates and interest rates to come up with a minimum down payment figure. Remember to factor in closing costs as well (they generally run about 2% and 5% of the home purchase price). Use those figures to determine your savings target, and sock away enough each month to slowly meet that goal. Planning a wedding? Many couples are disappointed to find they don’t receive nearly the amount of cash that they anticipated getting as wedding gifts. If you and your partner are using all or most of your funds to pay for an expensive wedding, remember that you won’t “make it back,” and consider scaling back your wedding budget so you can add more to your new house fund. There are plenty of creative ways to save. Also, there are rules regarding using gifts or cash for down payments that you should keep in mind.

Practice Fiscal Responsibility

Be responsible about how you are spending your money. While this is something you should always do, it’s especially important in the months before you apply for a mortgage. Lenders will want to see your statements and will scrutinize them to get a sense of your spending habits and cash flow, so cut down on unnecessary expenses and direct that money toward your down-payment fund and/or paying down debts. Try to hold on to assets such as CDs and other long-term savings vehicles, but remember that if you want to use that money for a down payment, you don’t want it tied up in a CD when you’re ready to buy. As you get closer to your target homebuying date, ensure that any assets you wish to use to purchase your home can be accessed when you need them.

Create a Cash Cushion Before You Apply for a Mortgage

Lenders want to see that you aren’t living paycheck to paycheck and that you have enough cash to cover emergencies that come up and unexpected home repairs that are needed without relying on credit cards. So, try to set aside a certain dollar amount each month that’s earmarked for savings only. You’ll want to balance this savings amount with the amount you put toward paying off credit card debt. In some cases, you might even forgo saving these extra funds in favor of paying down your debts. Your financial planner can help you set reasonable savings goals and create a plan for paying off debts (we’ll cover that in the next post in this series).

Preparation is the Key to Success

Before you apply for a mortgage, remember that buying a home can be overwhelming — but it doesn’t have to be! Be prepared and know what to expect with our Financial Planning Guide to Home-Buying. And stay tuned for the next post in this series, which will discuss how to handle existing debt and boost your credit score.

While there are plenty of steps you can take in the years before you apply for a mortgage, start by finding the right consultative partner. The team at Villa Nova Financing Group is here to help you along the way! Have a question about the mortgage-lending process? Ready to apply for a mortgage? Give us a call! We take a financial planning approach to lending that will put you in the best position to achieve your goals.