Dos and Don'ts before Applying for a Mortgage

Buying a house is a big step, and you should prepare yourself well before you start house hunting. Advance preparation saves you money, time, and sanity in the home-buying process. Here are some dos and don'ts for the months leading up to buying a house.

1. Check your Credit Reports. Once a year you can get free copies of your credit reports from the three main U.S. credit bureaus (TransUnion, Equifax, and Experian) by going to AnnualCreditReport.com. Look for mistakes on your credit reports like account information belonging to someone with the same name. Sometimes these mistakes happen within families, particularly when more than one family member shares the same name.

2. Gather Necessary Paperwork. This is a huge time saver when you apply for a mortgage. Find the following and put them aside in a special folder for mortgage paperwork:

• W-2 income statements
• Two to five recent pay stubs
• Tax returns for the previous two years
• Latest credit card statements for all credit cards
• Divorce or child support documentation
• Latest statements from banks and investment accounts

3. Determine how much you can afford. Don't automatically go with the maximum payment you qualify for, because this can stretch your budget too much. The best way to figure out how much house you can afford is to talk to a real estate agent and be honest about your current earnings and obligations. Consider how the deductibility of mortgage interest on your income taxes affects how much you can afford.

4. Research the market. Check interest rates and rate trends. Consider worst case scenarios with adjustable rate mortgages, and determine costs of 15- and 30-year fixed rate mortgages. Learn housing prices in the neighborhoods you're interested in and their trends over the past couple of years.

5. Don't make big life changes. If possible, don't change jobs in the months leading up to applying for a mortgage, and don't take on any other new debt. Lenders like consistency in their applicants.

6. Don't miss any payments. Missed payments due to forgetfulness can damage your credit score just when you need it to be at its best. Set up email and text reminders if necessary so that you don't miss any bill, credit card, or loan payments.

7. Don't make any major purchases. Now is not a good time to buy another car or sink a lot of money into a fancy home entertainment center. Save up as much cash as possible, because buying a house always results in extra costs, such as deposits for getting utilities hooked up. You don't want to be caught short of cash in those situations.

8. Don't cancel your old credit cards. While it's great to pay them off, it's not a good idea to cancel them. Part of your credit score is based on the length of time you've held accounts, and part of it is based on how much credit you have access to compared to how much credit you're actually using. Canceling cards harms both of these aspects of your credit score.

Careful preparation before applying for a mortgage can make moving into your dream home go much more smoothly.

Sources:

http://www.mortgage-match.us/bad_credit/advice8.html
http://www.talktalk.co.uk/money/features-new/mortgages-eight-steps-to-take-before-applying-for-a-mortgage.html
http://www.lender411.com/featured-article-5-financial-steps-to-take-before-you-apply-for-a-mortgage/
http://www.bankrate.com/finance/financial-literacy/3-steps-to-take-before-buying-a-home-2.aspx