Buying a house in Montana is a significant endeavor, especially in Bozeman. Between the fluctuating housing market and the nuances of the mortgage process, there are a lot of factors to keep track of in order to secure the house of your dreams.
If you’re at the stage of your life where you’re considering buying a home, you’ll need to secure a mortgage to make your payments affordable and reasonable over the next few decades. A mortgage is a considerable loan and perhaps the biggest financial hurdle you’ll ever undertake, and due to the size and complexities of applying for one, you’ll need to prepare your financial situation and take a few key steps leading up to the application itself.
At Bank of Bozeman, we want to provide you with resources to help the mortgage process to go as smoothly as possible. To help you prepare for your mortgage application, we curated a list of seven steps to complete before you apply. Read on to learn more. If you have any questions or would like to speak to one of our Bozeman lenders, contact us with your thoughts; we’re here to help!
1. Obtain, Check, & Improve Your Credit Score
The credit score and history of a potential borrower are two of the most important factors that Bozeman lenders—or any lenders—consider. A low credit score can impact the amount a lender is willing to give you for your home loan and the interest rate you’ll pay over the duration of your home loan. Check and obtain your credit score from one or all the three major credit bureaus (TransUnion, Equifax, and Experian) before applying for a mortgage.
After obtaining your credit score, you’ll want to check for any errors or discrepancies in these reports. Look for signs of failed payments, incorrect transactions, and signs of potential identity theft.
In addition to obtaining and checking your credit score, you’ll want to take steps to improve it. Here are a few ways you can improve your credit score:
- Don’t Apply for More Credit for at Least One Year: Applying for increased lines of credit, new credit cards, vehicle, personal, or student loans can have a negative impact on your credit score. To avoid a disappointing result during the mortgage application process, don’t apply for any new forms of credit while you’re saving for a down payment.
- Pay Bills on Time: Ensure you pay your bills, including credit card bills, loans, and utilities, on time. Timely payments have a significant positive impact on your credit score. Utilize payment reminders or automatic payments to ensure you never miss a due date.
- Limit Credit Applications: Each time you apply for new credit, it can result in a “hard inquiry” on your credit report, which can slightly lower your score. Limit unnecessary credit applications.
- Reduce Credit Card Balances: Aim to keep your credit card balances low, ideally below 30% of your credit limit. High credit card utilization can negatively affect your score.
- Keep Old Accounts Open: Length of credit history matters. Keeping old, well-managed accounts open can help establish a longer credit history.
- Diversify Credit Mix: Having a mix of different types of credit (credit cards, loans, etc.) can have a positive impact on your score, but only if you manage them responsibly.
- Negotiate with Creditors: If you’re struggling with payments, consider negotiating with your creditors to work out a payment.
2. Settle Any Debts or Delinquent Accounts
If you’re sitting on a large amount of debt from credit cards, vehicle loans, or student loans, you may have a more difficult time applying for a home mortgage. Before you set aside money for a down payment, consider reallocating those assets toward reducing your debt and delinquent accounts. Start by paying off any high-interest debts, as lowering your overall debit can also help improve your credit score.
3. Reduce Your Debt-to-Income Ratio
Two things lenders look for in a borrower are their monthly gross income and the ability to make a mortgage payment reliably and consistently. Loan risk professionals consider debt-to-income ratios a crucial factor in whether your loan is approved or not. A debt-to-income (DTI) ratio is a metric that compares an individual’s or household’s total monthly debt payments to their gross monthly income, and it is usually expressed as a percentage. Lenders generally prefer lower DTI ratios, so prioritize reducing your DTI to anything less than or equal to 43%.
4. Gather Necessary Documentation
Pulling together any necessary documentation can help ensure a fast, streamlined, and successful mortgage loan application process. Lenders require documentation to verify your financial stability and identity, so gather any necessary financial records, proof of assets, etc. For a full list of documents needed, visit our Montana Mortgage Loans Documents Checklist.
5. Save, Save, Save
Once you start thinking about the home-buying process, you’ll want to begin saving your extra income toward the down payment. A larger down payment may help reduce your interest rates and improve your chances for qualification, so working toward a larger lump payment at the beginning will only help. Start by determining how much you can comfortably afford to pay each month for your mortgage, including principal, interest, property taxes, homeowner’s insurance, and potentially private mortgage insurance (PMI). Then, embark on your saving journey!
6. Avoid Major Financial Changes
Avoiding significant financial changes before applying for a mortgage loan is crucial due to their potential impact on your financial stability and loan eligibility. Major changes like opening new credit accounts, changing jobs, making larger purchases, or taking on debt can lead to lower credit scores, affect your debt-to-income ratio, and raise concerns about financial consistency in the eyes of lenders. Such changes could lead to delays, additional documentation requests, or even loan denial, as your mortgage application is evaluated based on your financial situation at the time of application. Favorable interest rates might also be affected, leading to higher monthly payments over the loan’s duration. Maintaining financial stability and consulting with experts before making significant financial decisions can help ensure a smoother mortgage application process and better loan terms.
7. Get Pre-Approved
If you have your financial factors in order, you can help streamline the home-buying process by getting pre-approved for a mortgage loan and lock in your interest rate. Getting pre-approved shows home sellers that you’re serious, qualified, and ready to close on a home, making you more attractive as a potential buyer.