Homebuyers

Hope to Become a Homeowner? The Dos and Don’ts of Applying for a Mortgage

Applying for a new home loan—whether it’s a mortgage or a refinance—can feel like quite the big deal. After all, where you live is on the line—along with a lot of money.

But there are plenty of things you can do (and a few big things to avoid) to make your mortgage application process go as smoothly as possible. For starters, being prepared can pay off.

“Ideally, you want to get your finances in the best shape possible before you apply. [This will help] you not only have the best chance of approval, but get the best terms you can,” said Adam Hamilton, CEO of home finance software firm REI Hub. “Have a plan to do things like eliminate as much debt as possible [and] pause big expenses.”

What homebuyers should do when applying for a home loan

One of the most important things that homebuyers and homeowners trying to refinance their loans can do is to have all the documents that your lender is going to need. This means you’re ready and can get your lender what they ask for quickly.

These include W-2s, your last two years of tax returns, paystubs from the last 30 days, and investment account statements. Consider saving all these documents in a folder on your computer so that they’re easy to find.

“When your potential lender asks for documentation, get it to them. When you have to sign documents, get them signed right away,” said Melanie Musson, a home finance expert with Clearsurance. “The more you delay doing the tasks you need to do, the longer the process will take—which could prevent you from closing on time.”

In the weeks leading up to that mortgage application (and during the process itself), always make credit card, auto loan, and other payments on time. This is key, because late payments can impact your credit score. A lower score can make it more difficult to get a lower mortgage rate—or even qualify for a loan.

If part of your down payment is a gift, document it. Have the gift giver write a letter that details the exact amount of the gift, their contact info, their relationship to you, and the expectation that the gift will not need to be repaid. They may also need to provide proof that they have the money to give or transfer.

Hamilton also recommends getting a mortgage pre-qualification before getting too far into the loan application process.

“It helps you better understand what you can actually afford in a home,” he said. “It helps tip the scales in your favor when competing with other buyers as you can prove to the seller that you will in fact be approved for a loan. And it can help the actual loan approval process be completed a little bit faster.”

What homebuyers shouldn’t do when applying for a home loan

There are plenty of no-no’s to keep in mind when applying for a mortgage or refinance. Most of them involve your credit.

“Don’t mess with your credit,” said Musson. “Don’t take out [an additional] loan, apply for a credit card, or cancel a credit card. Any changes are red flags for lenders.”

This goes for big purchases, too. Avoid buying that sofa you’ve been eyeing for your new home. And now isn’t the time to upgrade smartphones (or vehicles), either.

The additional debt or credit lines created by these types of purchases can mess with your debt-to-income ratio (DTI), giving lenders pause when considering your loan application. Lenders look at how much debt you have when deciding how large of a loan you may be eligible to receive.

Similarly, don’t let any bank accounts go negative or close them out. It’s best to keep your finances business-as-usual when applying for a mortgage.

And just as you shouldn’t make any major changes to your debt or credit levels while buying a new home, don’t change your income either.

Don’t switch jobs or reduce hours during this time, as it makes your financial situation look a lot more unreliable. If you’ve just started a new job, give it at least three to six months before refinancing or buying a home.

However, Musson noted that it’s important not to stress out when applying for a home loan.

“It may feel like a million things could go wrong, but you’re more likely to end up with a positive experience than a negative one,” she said. “So, breathe deeply and relax.”