Avoid changing jobs
Employment history and income are two of the biggest factors lenders look at when evaluating a mortgage application. A new job may be a good career move, but if you plan to buy a home in the new year, know that change may be a red flag to some underwriters — especially if you’re moving to a different industry.
A steady job history and few or no gaps in employment over the past two years are ideal, as it helps lenders more easily forecast your future income.
However, there are some job moves that can benefit you in home buying. If you’re moving from a commissioned or hourly job to one that’s salaried with equal or more compensation, it may help your application. Lenders often prefer borrowers to have steady, predictable paychecks.
If you do get a new job while home shopping, let your lender know as soon as possible. It doesn’t mean you won’t qualify for a mortgage — just be prepared to show extra documentation.
Trim Monthly Expenses
Many people use their credit cards to pay monthly expenses to collect miles or cash back rewards. There is nothing wrong with this strategy if you are disciplined enough to pay the bill off every month. However, even if you pay off your credit card every month, you could be dinged for high credit utilization if your credit report is pulled midcycle. If you’re thinking of buying a home this year, consider keeping items you would normally charge to your credit card monthly, like subscription services, to a minimum, or starting paying some expenses through online bill pay from your checking account.
Build a solid credit history
One of the first things a lender will look at is your credit history. Lenders prefer borrowers who have a history of paying off credits cards and other debts on time — because it signals that you’re a responsible borrower and less of a risk. Read our article about building good credit. Especially if you have bad credit, review these steps to remedy that before trying to obtain a mortgage.
If you don’t have credit, securing a home loan may be significantly more challenging and time-consuming, but not impossible. Records of paying rent and utilities on time, as well as student loan debt or cell phone bills, can help show a potential lender that you have a history of managing monthly payments.
Check your credit
You may be doing everything right regarding saving and using credit wisely. But you should still check your credit score. Your credit score can have a significant impact on your ability to buy a home. A low credit score can negatively affect how much money a lender is willing to loan you, as well as your interest rate.
Mistakes can be made, or fraudulent activity can take place. Just a few percentage-point differences in an interest rate can cost you thousands over the life of a loan. You can request a free copy of your credit report from each of three major credit reporting agencies – Equifax®, Experian®, and TransUnion® – once each year at AnnualCreditReport.com or call toll-free 1-877-322-8228. Many credit cards offer credit score monitoring, with your score appearing on monthy statements. Check your credit before you start the home buying process to avoid any surprises later.
Avoid large purchases
Avoid taking on large amounts of debt — whether it’s buying a car or planning a vacation — before buying a house. This is advisable even if you’re already preapproved. Lenders will often look at your financial standing again before a mortgage is finalized.
Your debt-to-income ratio, or how much money you make compared to how much debt you have, can significantly affect how much money a lender is willing to give you. Keeping debts to a minimum can help make the home-buying process go a lot more smoothly.
Clean up your finances with home buying in mind, and stay mindful of your spending all the way through until your loan is finalized.