Start saving for your down payment ASAP. Most private lenders require a 20% down payment to secure a mortgage. That means you’ll need over $45,000 for the typical home sold in America today. The requirements for a loan backed by the Federal Housing Authority can be lower, but 20% is still a good rule of thumb since the higher your down payment the lower your monthly mortgage payments and the more equity you start with. Aim to have your down payment in cash when you start your search or at least a plan to get there. Keep in mind that some lenders also require you have funds on reserve after closing, so your down payment should not wipe out every penny you’ve got. A typical ask might be 12 months worth of mortgage payments, how much of that needs to be in cash varies by lender.
Check your credit score six to 12 months in advance. Your FICO score can determine whether you qualify for a mortgage and what interest rate you’ll pay. It’s now easy to pull your score for free. These days you’ll need around a 620 for a lender to consider you at all and a 780 to get the lowest rates. You’ll want to check early because improving your credit will take time. If you have no credit history, for example, lenders like to see at least six months of consistent credit payments before considering you for a mortgage. Recovering from a credit mishap can take even longer, since derogatory marks stay on your credit report for seven years. If you don’t qualify for a competitive rate consider waiting to buy until you’ve improved your credit situation since a better rate can save you thousands of dollars over the life of a loan. How to improve your score will vary, sites like Credit Karma provide personalized tips.
Get pre-qualified by a lender three to six months ahead. The pre-qualification process will tell you roughly how much money a lender will give you. (Note that your lender may pre-qualify you for a larger loan than you are comfortable paying off. No matter how much you qualify for stick to a budget that suits your needs.) Most lenders will make pre-qualification estimates based on information you provide about your income and assets through an online portal, and sometimes a credit check. Unless you are self employed you typically aren’t required to provide documentation at this point. However, it is a good idea to start gathering the necessary paper work early so you can act quickly when you find the right home. This is especially true in markets where inventory is tight, which is the case in many places today. Requests vary by lender but a typical loan application will include something like: two years of tax returns, two years of W-2s, one month of pay stubs and two months of bank and investment statements.