The mortgage application checklist for fall homebuyers

Key takeaways

• Start with your credit reports and debt-to-income ratio, because those two factors determine both whether you qualify and what rate you are offered. Most conventional loans require a minimum credit score of 620, and lenders generally look for a debt-to-income ratio of no more than 43%.
• Plan for more cash than just the down payment. Down payments range from zero for VA and USDA loans to 3% to 5% for conventional loans, but closing costs add another 2% to 5% of the loan amount, and some lenders want to see two to six months of mortgage payments in liquid reserves after closing.
• Get pre-approved, not just prequalified, and compare offers from multiple lenders before committing. A pre-approval verifies your credit, income and assets and produces a letter that shows sellers you are financially qualified.

If you plan to buy a home this fall, midsummer is a good time to start preparing. A mortgage pre-approval can take as little as a few days once your paperwork is in order, but the financial groundwork behind it often takes weeks or months. Starting now gives you time to address issues that could delay or derail an application later.

Here are the steps to take this summer to put yourself in the strongest position when you are ready to make an offer.

Your credit score is one of the first things a lender will evaluate, and it directly affects whether you qualify and what interest rate you are offered. Conventional loans generally require a minimum score of 620. FHA loans require a minimum of 580 for a 3.5% down payment. VA loans have no official minimum, though most lenders prefer 620 or higher. USDA loans typically prefer a minimum score of 640 but will accept a score as low as 620 under certain circumstances.

Start by pulling your credit reports from all three bureaus (Equifax, Experian and TransUnion). Review each report for errors, including incorrect account balances, accounts that don't belong to you and late payments that were actually made on time. If you find errors, dispute them directly with the bureau. Corrections can take 30 to 45 days, so starting in summer gives you time to resolve problems before a fall application.

Check your credit score through your bank, credit card company or a free monitoring service. If your score is below 620, focus on paying down revolving balances and making every payment on time between now and when you apply. Paying down revolving balances before you apply is a fast way to improve both your score and the rate you are offered.

Related content:

• What credit score do you need to buy a house?

Before talking to a lender, do your own math. Add up your gross monthly income, then add up your monthly debt payments, including car loans, student loans, minimum credit card payments and any other recurring obligations.

Most lenders check your debt-to-income ratio. It is calculated by dividing total monthly debt payments by gross monthly income. Lenders look for no more than 43% for conventional loans, though some allow up to 50% with strong credit. FHA loans may allow up to 57% with compensating factors. VA and USDA loans typically accept up to 41%.

Consider a hypothetical buyer earning $6,000 a month before taxes, with $800 in existing monthly debt payments. That buyer's current debt-to-income ratio is about 13%. If the lender's maximum is 43%, the buyer could take on total monthly debt of up to $2,580.

Use an online mortgage calculator like the one at Homes.com to estimate monthly payments at different home prices and interest rates. This exercise gives you a realistic price range before you begin shopping.

Related content:

What is the difference between FHA, VA and USDA loans?

If your debt-to-income ratio is close to the limit, use the next two to three months to reduce it. Prioritize paying down credit card balances, which carry the highest interest rates and have the most immediate impact on both your ratio and your credit score.

Avoid opening new credit accounts, co-signing loans or making large purchases on credit between now and closing. Lenders will pull your credit again before finalizing the loan, and new debt or inquiries can change your qualification.

If you have small balances on multiple cards, paying them to zero can produce a noticeable score improvement in 30 to 60 days.

Many first-time buyers focus on the down payment and underestimate the other cash they will need at the closing table. Plan for three categories.

Down payment. The amount depends on the loan type. Conventional loans will ask for 20% down but may be willing to accept a smaller down payment in exchange for charging private mortgage insurance. FHA loans require as low as 3.5%. VA and USDA loans offer zero-down options for eligible borrowers.

Closing costs. These typically run 2% to 5% of the loan amount and include fees for the appraisal, title search, title insurance, loan origination, inspections and escrow deposits. On a $350,000 home, that could be $7,000 to $17,500. Some closing costs can be offset by grants, forgivable loans or lender credits. State and local housing finance agencies often offer programs for first-time buyers, and some federal loan programs allow closing costs to be rolled into the mortgage.

Reserves. Some lenders want to see that you have enough liquid savings to cover two to six months of mortgage payments after closing. Even if your lender does not require reserves, having a cushion protects you from financial stress in the first months of homeownership.

If you are short on cash for a down payment, look into down payment assistance programs through your state or local housing finance agency. Many programs are available to buyers who have not owned a home in the past three years, not just first-time buyers.

Lenders verify your income, employment, assets and debts. Having the paperwork organized before you apply speeds up the process and reduces the chance of delays.

A well-built mortgage document folder should include clear front and back images of your driver's license or government-issued ID, W-2 statements from the last two years, federal tax returns from the last two years, pay stubs covering at least the last month of income and bank statements from the last two months.

If you meet the definition of a first-time homebuyer, include proof of on-time rental payments for the last 12 months and your landlord's contact information. If you are self-employed, lenders typically require two years of tax returns and profit and loss statements.

Include any applicable agreements if you pay or receive child support or alimony. If you are using gift funds for the down payment, get a gift letter from the donor stating that the money is a gift and does not need to be repaid.

Store everything digitally in a single folder so you can submit it quickly when a lender requests it.

These two terms are often used interchangeably, but they are not the same thing.

A pre-qualification is based entirely on self-reported information. The lender does not verify whether any of it is accurate. The result is an estimate of what you might be able to borrow, but it carries little weight with sellers or their agents.

If you are planning to make offers this fall, a pre-approval is what you want. In competitive markets, many sellers will not consider an offer without one.

A pre-approval verifies your credit, income and assets. The lender checks your information and issues a letter stating how much you are approved to borrow, subject to conditions. A pre-approval letter shows sellers you are a serious, financially qualified buyer.

Mortgage companies provide pre-approvals at no cost and no obligation. Take advantage of that.

Compare not just interest rates but also loan estimates, which break down closing costs, fees and terms side by side. Small differences in origination fees or discount points can add up to thousands of dollars over the life of the loan.

Not every mortgage works the same way. Understanding the basic types will help you have a more productive conversation with lenders.

Conventional loans are the most common. They typically require a credit score of at least 620 and a down payment of 3% to 5%. Private mortgage insurance, or PMI, is required if you put down less than 20%.

FHA loans are insured by the Federal Housing Administration and are designed for buyers with lower credit scores or smaller savings. Down payments can be as low as 3.5% with a credit score of 580. The FHA also insures loans for applicants with scores of 500 to 579, though a 10% down payment is required. FHA loans come with upfront and monthly mortgage insurance premiums.

VA loans are available to eligible veterans and active-duty service members. They require no down payment and no private mortgage insurance.

USDA loans allow eligible buyers to purchase a home in qualifying rural and suburban areas with no down payment. About 97% of the land in the country qualifies, including many suburban communities, according to the USDA's eligibility map.

Each loan type has trade-offs in terms of fees, insurance, property requirements and processing time. A lender can help you determine which option fits your financial situation.

Once you are pre-approved, the work is not over. Lenders will verify your credit and financial status again before closing. Changes that can jeopardize a pre-approval include a drop in credit score, an increase in your debt-to-income ratio or a change in employment type.

Between pre-approval and closing, avoid opening new credit cards, financing furniture or appliances, co-signing loans, changing jobs without consulting your lender or making large, unexplained deposits into your bank account. Any of these can trigger questions during underwriting and delay or derail your closing.

Most mortgage pre-approvals are valid for about 90 days. If you get pre-approved in August, that gives you through October or November to find a home and go under contract. If your pre-approval expires before you find a property, your lender will need to refresh the application with updated documents and a new credit check.

With a fall purchase in mind, here is a rough schedule:

July-August: Check credit reports, dispute errors, pay down debt, start gathering documents, calculate your budget. Apply for pre-approval with two to five lenders, compare loan estimates, select a lender.

September-October: Begin house hunting with your pre-approval letter in hand. A pre-approval tells sellers and their agents that a lender has reviewed your finances and is prepared to back your offer.

October-November: Make an offer, go under contract, complete inspections and appraisal, close on the home. Closing typically takes 30 to 45 days from the time a purchase contract is signed.

This timeline assumes no major credit issues or financial changes. If your credit needs significant repair or your savings are not yet where they need to be, it may make sense to delay the purchase by a few months and use the additional time to strengthen your application.

More on this topic:

• The anatomy of a mortgage: What determines your monthly payment
• How to get a mortgage: A step-by-step guide
• Understanding the mortgage process from pre-approval to closing