Purchasing your first home is an exciting milestone, but before you apply for a mortgage, it’s crucial to ensure that your finances are in good shape. A mortgage is one of the biggest financial commitments you’ll ever make, so being prepared can make the process smoother and improve your chances of getting favorable loan terms. Strengthening your financial foundation will not only help you qualify for a mortgage but also allow you to secure better interest rates and manage homeownership costs effectively.

Here’s a comprehensive guide on how to improve your finances before applying for your first mortgage, from boosting your credit score to building savings and managing debt.

1. Improve Your Credit Score

Your credit score plays a pivotal role in determining your mortgage eligibility and the interest rate you’ll receive. Lenders use your credit score to assess how risky it is to lend to you. The higher your credit score, the more likely you are to qualify for a mortgage with a lower interest rate, which can save you thousands of dollars over the life of the loan.

Here’s how you can improve your credit score before applying for a mortgage:

• Check Your Credit Report: Begin by obtaining a free copy of your credit report from all three major credit bureaus (Equifax, Experian, and TransUnion). Review the reports for errors, such as incorrect accounts or late payments, and dispute any inaccuracies.
• Pay Bills on Time: Your payment history accounts for a significant portion of your credit score. Ensure that you pay all your bills—credit cards, loans, utilities—on time each month. Setting up automatic payments or reminders can help you avoid missed payments.
• Reduce Credit Card Balances: Aim to keep your credit card balances low. Lenders look at your credit utilization ratio, which is the percentage of available credit you’re using. Ideally, this ratio should be below 30%. Paying down existing debt can quickly improve your score.
• Avoid Opening New Credit Accounts: While it might be tempting to take out new lines of credit, it’s best to avoid doing so in the months leading up to your mortgage application. Each new credit inquiry can temporarily lower your credit score, and too many inquiries in a short period can signal risk to lenders.

2. Pay Down Debt

Lenders look closely at your debt-to-income (DTI) ratio when deciding how much of a mortgage you can afford. The DTI ratio compares your monthly debt payments to your gross monthly income. A high DTI ratio indicates that you may have difficulty managing additional debt, including a mortgage. To improve your DTI ratio, focus on reducing your outstanding debt before applying for a mortgage.

Here’s how you can pay down debt:

• Tackle High-Interest Debt First: Prioritize paying off high-interest debt, such as credit cards or personal loans. Not only will this reduce your monthly debt obligations, but it will also free up more cash for savings and lower your overall interest payments.
• Make More Than the Minimum Payments: Whenever possible, pay more than the minimum required on your loans or credit cards. This can help you pay off debt faster and reduce the amount of interest you pay over time.
• Consolidate Debt: If you have multiple loans or credit card balances, consider consolidating your debt into one loan with a lower interest rate. This can make your payments more manageable and potentially improve your DTI ratio.

3. Build a Strong Savings Cushion

Before applying for your first mortgage, you’ll need to save for several upfront costs, including the down payment, closing costs, and moving expenses. Additionally, lenders like to see that you have a healthy savings account to cover unexpected expenses, home repairs, and emergencies after you buy your home.

Here’s how to build your savings before purchasing a home:

• Set a Down Payment Goal: The larger your down payment, the less you’ll need to borrow, which can lead to lower monthly payments and potentially better loan terms. While some loans require as little as 3% to 5% down, putting down 20% can help you avoid private mortgage insurance (PMI) and secure a lower interest rate. Set a savings goal based on the price range of homes you’re interested in and work towards reaching that amount.
• Automate Savings: To make saving easier, set up automatic transfers from your checking account to a designated savings account. This way, you’ll consistently contribute to your down payment fund without having to think about it.
• Cut Back on Discretionary Spending: Review your budget and look for areas where you can cut back on non-essential expenses, such as dining out, entertainment, or subscription services. Redirect those funds toward your savings goals.

4. Get Pre-Approved for a Mortgage

Once you’ve improved your credit score, paid down debt, and built up your savings, the next step is to get pre-approved for a mortgage. A mortgage pre-approval is a lender’s offer to loan you a certain amount of money, based on your financial information. Getting pre-approved not only shows sellers that you’re a serious buyer but also gives you a clear understanding of how much home you can afford.

Here’s how to get pre-approved for a mortgage:

• Gather Your Financial Documents: Lenders will require several documents during the pre-approval process, including proof of income (such as pay stubs, W-2s, and tax returns), bank statements, and information about your current debts. Having these documents ready will speed up the process.
• Shop Around for Lenders: Don’t settle for the first lender you find. Different lenders may offer different interest rates and loan terms. Shop around and compare pre-approval offers to find the best deal.
• Know Your Limits: Just because you’re pre-approved for a certain loan amount doesn’t mean you should borrow the maximum. Consider your long-term financial goals and other monthly expenses to determine a mortgage payment that fits comfortably within your budget.

5. Stabilize Your Employment

Lenders prefer borrowers with stable employment histories, as it demonstrates a reliable source of income. If you’re considering a job change or career switch, it’s best to avoid doing so right before applying for a mortgage. A steady employment history, particularly with the same employer, can improve your chances of mortgage approval and potentially lead to better loan terms.

Here’s how to stabilize your employment situation:

• Stay in Your Current Job: If possible, avoid changing jobs in the months leading up to your mortgage application. Lenders prefer to see at least two years of steady employment with the same employer.
• Increase Your Income: If you’re looking to boost your savings or reduce debt, consider taking on a side job or freelance work. However, be aware that lenders typically look at consistent, full-time income, so don’t rely on temporary income sources to qualify for your mortgage.

6. Avoid Major Financial Changes

In the months leading up to your mortgage application, it’s important to keep your financial situation as stable as possible. Major changes, such as buying a new car, taking out a large loan, or maxing out your credit cards, can raise red flags for lenders and hurt your chances of mortgage approval.

Here’s what to avoid:

• Large Purchases: Refrain from making large purchases, such as buying a new car or expensive appliances, before applying for a mortgage. These purchases can increase your debt load and lower your available savings.
• Co-Signing Loans: Avoid co-signing loans for others, as this can increase your debt-to-income ratio and affect your mortgage eligibility.

7. Budget for Homeownership Costs

Finally, it’s essential to prepare your budget for the ongoing costs of homeownership. Beyond your monthly mortgage payment, you’ll need to budget for property taxes, homeowner’s insurance, utilities, maintenance, and repairs.

Here’s how to prepare for these additional costs:

• Estimate Monthly Housing Costs: Use online mortgage calculators to estimate your monthly housing costs, including principal, interest, property taxes, and insurance. Be sure to account for these expenses in your budget.
• Plan for Maintenance and Repairs: Homeownership comes with ongoing maintenance and repair costs. Financial experts recommend setting aside 1% to 3% of your home’s purchase price each year for maintenance. Having a dedicated home maintenance fund can help you cover these costs without dipping into your emergency savings.

Improving your finances before applying for your first mortgage is an essential step in the home-buying process. By focusing on improving your credit score, paying down debt, building savings, and maintaining stable employment, you can increase your chances of securing a mortgage with favorable terms. Additionally, being financially prepared will give you the confidence and peace of mind needed to take on the responsibilities of homeownership. With careful planning and discipline, you’ll be well on your way to making your dream of owning a home a reality.