7 Things to Do Before Applying for a Mortgage Loan in Washington

There are hundreds of articles online that walk you through the different steps in the mortgage approval process. But far fewer explain the steps home buyers should take before applying for a mortgage loan, to increase their chance for success.

What to Do Before Applying for a Mortgage

In some ways, the preliminary steps are even more important than the ones you encounter after applying for a home loan. This is especially true when it comes to budgeting and saving.

With that in mind, let’s explore some of the things you might want to do before applying for a mortgage loan in Washington.

1. Assess your overall financial health.

A mortgage loan is a major commitment that requires financial stability and awareness. So before you apply for a home loan, spend some time analyzing your current financial situation.

At a minimum, you’ll want to review your monthly income, recurring expenses, and any other forms of debt you have. Think about your long-term savings strategy as well, including any retirement plans you might have.

This homework becomes even more important if your new mortgage payments will increase the size of your monthly housing costs. In that scenario, you want to have a clear picture of where you stand in terms of income, debts and overall expenses.

2. Build a solid emergency fund.

Many Americans get caught off guard, financially speaking, when they encounter unexpected expenses or emergencies. A recent survey found that 57% of Americans could not afford a $1,000 emergency expense. This in turn can lead to financial hardship, stress and worry.

You can shield yourself from such problems by maintaining a solid emergency fund. An emergency fund is a savings account or pool of money set aside to cover unexpected expenses or financial emergencies (medical bills, car repairs, job loss, etc.). Financial experts often recommend saving three to six months’ worth of living expenses in an emergency fund.

If you already have an emergency fund, you might be tempted to dip into it for your down payment, closing costs, or purchase-related expenses. But that should be a last resort. The ideal scenario is to buy a home with your emergency fund intact, or to start building one after you’ve completed the purchase.

3. Check your credit score, and improve it if necessary.

Before applying for a mortgage loan in Washington, you might want to review your credit history and score. This is a common checkpoint during the mortgage underwriting process, so it’s worth looking into ahead of time as well.

Most consumers actually have three credit reports, one produced by each of the credit reporting bureaus in the United States. Because of this, you could have three different credit scores as well.

Your ability to qualify for a loan will partly depend on your credit score. Also, having a higher score might help you secure a lower mortgage rate, which could save you a lot of money over time.

You can obtain your credit reports through the government-regulated website AnnualCreditReport.com. You’re entitled to receive one free report per year, from all three of the reporting agencies.

You might have to pay a small price to obtain your credit score, but it’s well worth doing so. After all, your score is the metric that can influence your ability to qualify for a mortgage loan.

4. Consider reducing your debts, if necessary.

If you have a manageable level of debt right now, it shouldn’t interfere with your ability to qualify for a mortgage loan in Washington. But if your current debts are soaking up more than 50% of your gross monthly income, it could block the path to mortgage financing.

When you apply for a home loan, the bank or mortgage lender will review your current debt level in relation to your income. This is aptly referred to as the debt-to-income ratio, or DTI. If your DTI ratio is too high, it might make it harder to qualify for a mortgage loan.

5. Start saving for your down payment and closing costs.

Start saving for a down payment well in advance, to ensure you have the necessary funds. You’ll also need to have enough money on hand to cover your closing costs, which can add up to thousands of dollars here in the state of Washington.

The size of your down payment will vary depending on the type of loan you use and other factors. For a conventional or non-government-backed mortgage loan, you’ll probably have to put down at least 3%. The FHA loan program requires 3.5% down, while VA loans allow for 100% financing.

If you’ll need to borrow a significant amount of money — perhaps to finance the purchase of a high-end luxury home — you might have to make a bigger down payment. For example, down payments of up to 20% are sometimes required for jumbo mortgages that exceed the government-imposed “conforming” size limit.

This is one of the most important steps to take before applying for a mortgage loan, and the sooner you start the better. It can take time to save up the kinds of funds needed to buy a home in Washington.

6. Gather your financial documents, or at least determine how.

When you apply for a home loan in Washington, you’ll be asked to provide financial documents relating to your income, assets and debt. You can give yourself a head start by rounding up these documents early, or at least determining how and where to obtain them.

Regardless of the type of mortgage loan you plan to use, you will probably have to provide pay stubs, tax returns, bank statements, and investment account statements (if applicable).

7. Avoid major financial changes before applying for a loan.

The “status quo” is usually the best-case scenario when a person is applying for a mortgage loan. The goal is to keep your financial and employment situation stable and steady, as much as possible. Significant changes in these areas could impact your ability to qualify for a mortgage loan.

For example, if you were to take on a lot of new debt shortly before applying for a loan, it would increase your debt-to-income ratio. This in turn might make it harder to qualify for a mortgage loan in Washington. Similarly, a major purchase would reduce the amount of cash you have to put toward your closing costs and down payment.

These types of changes don’t always disqualify a person refinancing. But they can. At the very least, they may require additional paperwork “hurdles,” such as a letter of explanation for the underwriter.

By keeping your financial situation as stable as possible, you can increase your chance for mortgage approval and funding. And that’s the ultimate goal!