Prepare Now to Get the Best Deal on a Mortgage

According to Consumer Reports,

For some, a great mortgage may mean getting a low interest rate. For others, a lower down payment may be attractive, even if it means an incrementally higher interest rate.

No matter what a good mortgage means to you, to boost your chances of getting the kind of mortgage you need, start planning now.

“If you wait to focus on your finances until a few weeks before you apply for a mortgage, there’s not a lot you can do to improve your application,” says Jack Pritchard, chief operating officer of the Mortgage Professor website. “But with months to go, there is plenty you can do to strengthen your position.”

Here’s how to make yourself into a better candidate before the bank reviews your application:

Spend less. Keeping your credit card balances as low as possible is a key part of landing the lowest mortgage rate. You don’t want to head into early 2017 with a spending hangover. “Any time your outstanding credit card balances are more than 30 percent of your total credit limit on all your cards, it’s going to pull down your credit score,” advises Joe Parsons, branch manager for Caliber Home Loans in Dublin, Calif. Your credit score will be a major factor in whether you qualify for a mortgage and get the best terms.

If your debt-to-credit limit is already above 30 percent, whittle down your balances over the next few months, Parsons says. That’s where redirecting holiday spending into paying down credit card balances comes into play. Another good idea: Call up each of your card issuers and ask for your credit limit to be raised. As long as you don’t use any of that credit, it will help reduce your overall usage ratio.

Lower your debt-to-income ratio. Lenders will also be laser-focused on how much of your gross monthly income goes to paying off your ongoing debts, which include credit card balances (the minimum payment due), student loans, car payments, child support, and alimony. As a general rule, the upper maximum debt-to-income ratio to get approved for a mortgage is 45 percent. Mortgage-data firm Ellie Mae reports that for conventional mortgages in September, the average debt-to-income ratio for approved new home-purchase mortgages was 34 percent for so-called conventional loans and 42 percent for FHA-insured loans.

If your ratio is too high, you can’t do much to change the income part of the equation. Even if you got a part-time job quickly, lenders typically average your income over the past 24 months. Instead, focus on reducing your debt or see whether you can get an existing loan, such as a car payment, paid off before you apply for a mortgage.