Spring Financial Checklist: 7 Steps to Prepare Your Finances for a Mortgage

Preparing your finances is the most critical step before applying for a mortgage. A thorough financial "spring cleaning"—reviewing your credit, stabilizing your income, and organizing your documents—can significantly increase your approval chances and secure a better interest rate. This guide outlines seven actionable steps to get your finances mortgage-ready, based on common lender requirements and industry best practices.

Why is your credit score the first thing a lender checks?

Your FICO score is a numerical representation of your creditworthiness, typically ranging from 300 to 850. Lenders use this score, along with your full credit report, to assess risk. While a score of 620 is often the minimum for a conventional loan, a higher score unlocks better rates. Lenders scrutinize your credit history, including payment patterns and debt levels, to ensure you are a reliable borrower. Before applying, obtain a free copy of your report from AnnualCreditReport.com and dispute any errors immediately.

How does job stability impact your mortgage application?

Lenders prefer a consistent two-year employment history. Frequent job changes or irregular income can raise red flags, as the primary concern is your ability to make steady monthly payments. If you have changed jobs recently but remain in the same field, prepare to explain the transition. Lenders want verification that your income is stable and reliable.

What should you avoid doing with credit before applying?

Limit new credit inquiries and avoid large purchases on credit cards in the months leading up to your application. High credit card balances can lower your score and suggest financial strain. A key metric lenders review is your credit utilization ratio—the amount of credit you're using compared to your total limits. Aim to keep this ratio below 30%. Also, avoid opening new credit accounts, as each hard inquiry can temporarily ding your score.

How much should you budget for a down payment?

A down payment is the initial, upfront payment you make when purchasing a home. While a 20% down payment is ideal to avoid Private Mortgage Insurance (PMI)—an additional insurance premium that protects the lender—it is not a strict requirement. According to the National Association of Realtors' 2023 data, the median down payment for all buyers was 15%. Various loan programs, like FHA loans, allow for down payments as low as 3.5%.

What are the creative ways to fund a down payment?

Beyond traditional savings, many buyers use alternative methods. These can include:

• Gift funds: Money given by a family member (requires a gift letter).
• Securities liquidation: Selling stocks or bonds (allow time for the transaction).
• Side income: Earnings from a part-time job or renting a room. Document all sources of your down payment thoroughly, as lenders will require a paper trail for the previous 60-90 days.

Which financial documents do you need to gather?

Being prepared speeds up the underwriting process. You will typically need to provide:

• Two most recent pay stubs
• W-2 forms from the past two years
• Personal tax returns from the past two years
• Bank and investment account statements
• A government-issued photo ID Your lender may also request IRS Form 4506-T, which allows them to verify your tax return information directly with the IRS.

Conclusion: How can you confidently approach a lender?

The path to mortgage approval is built on financial preparation. By following these steps, you present yourself as a qualified and organized buyer. Focus on reviewing your credit report early, maintaining stable employment and credit habits, and organizing all necessary documents. Based on our experience assessment, this preparation not only improves your application but also gives you a clearer understanding of your budget, leading to a more successful home purchase.