How to Financially Prepare For a Mortgage

From credit checks to down payments, everything you need to secure the best mortgage terms.

Buying a home is one of the biggest financial decisions you’ll ever make, and securing a mortgage is a key step in the process. However, many buyers overlook the financial preparation needed to ensure a smooth approval and affordable loan terms. From assessing your credit and debt to saving for a down payment and understanding costs beyond your mortgage, this guide will walk you through everything you need to do to get mortgage-ready.

Assess Your Financial Health

Before you apply for a mortgage, it’s crucial to take a deep dive into your financial situation. Lenders evaluate your financial health to determine how much you can afford, your ability to repay the loan, and the interest rate you’ll qualify for. Here’s what you need to review:

• Check your credit score – A higher credit score (700+) qualifies you for better rates. Pay down credit card balances, make timely payments, and dispute errors to improve your score.
• Calculate your debt-to-income (DTI) ratio – Lenders prefer a DTI ratio under 36%, meaning your total monthly debt (credit cards, loans, etc.) should be less than 36% of your gross income. Reduce debt where possible before applying.
• Determine a realistic budget – Use the 28/36 rule: Your mortgage (including taxes & insurance) shouldn’t exceed 28% of your monthly income, and total debt payments should stay below 36%.

Save For Your Down Payment and Closing Costs

Buying a home isn’t just about qualifying for a mortgage—you’ll also need upfront cash to secure your new place. Your down payment and closing costs are two of the biggest expenses you’ll face before you even get the keys. Here’s how to prepare financially so you can move into your home stress-free.

Saving For Your Down Payment

Your down payment is a percentage of the home’s purchase price that you pay upfront, reducing the amount you need to borrow. The amount you need to save ultimately depends on the type of loan you will get:

• Conventional loans typically require 5-20% down, though you can qualify with as little as 3%.
• FHA loans require as little as 3.5% down, making them a popular choice for first-time buyers.
• VA and USDA loans may offer 0% down payment options for eligible homebuyers.

While lower down payments allow you to buy a home sooner, saving at least 20% can help you get better loan terms with lower interest rates and reduce your monthly mortgage payment to save money in the long run.

Saving For Your Closing Costs

In addition to your down payment, you’ll need to budget for closing costs, which typically range from 3-6% of the home’s purchase price. These fees cover essential services like home appraisals, loan origination fees, and more. For a $300,000 home, you can expect to pay anywhere from $6,000 to $15,000 in closing costs.

Get Pre-Approved For a Mortgage

Once you’ve assessed your finances and started saving, the next step is to get pre-approved for a mortgage. A pre-approval is a lender’s written commitment to lend you a certain amount, based on your financial history. It gives you a clear idea of your homebuying budget and strengthens your position when making an offer.

Here’s how to get mortgage pre-approval:

• Gather your documents – Lenders need a full picture of your income, assets, and debts. Be prepared to provide recent paystubs, W-2s, bank statements, credit history, and debt statements.
• Shop around for lenders – Compare interest rates, loan terms, and fees from multiple lenders to find the best mortgage for your needs.
• Submit your application – Once you’ve chosen a lender, submit your paperwork for review. They’ll analyze your credit score, debt-to-income ratio, and financial history to determine how much you can borrow.
• Receive your pre-approval letter – If approved, you’ll get a letter stating how much the lender is willing to loan you. This document is valid for 60-90 days, so use it to start house hunting with confidence.

With your pre-approval letter in hand, you can confidently search for homes within your budget. When you find the perfect place, having pre-approval will help you stand out to sellers and speed up the home-buying process.

Plan For Homeowner Costs Beyond Your Mortgage

Buying a home isn’t just about making your monthly mortgage payment—you’ll also need to budget for ongoing costs that come with homeownership. From property taxes to maintenance and unexpected repairs, these expenses can add up quickly. Planning ahead ensures you can comfortably afford your home long-term.

• Property taxes – Property taxes vary by location and are typically 1-2% of your home’s value annually. Your lender may include these taxes in your monthly mortgage payment through an escrow account, so be sure to factor them into your budget.
• Homeowners insurance – Homeowners insurance protects your home against damage, theft, and liability claims. Some lenders require specific coverage types, so shop around for the best rate.
• HOA fees – If you buy in a condo, townhome, or planned community, you may have homeowners association (HOA) fees. Before buying, review the HOA’s rules, fees, and any special assessments.
• Routine maintenance and repairs – Your home will need ongoing upkeep to stay in top shape. Experts recommend budgeting 1-2% of your home’s value per year for maintenance.
• Utilities and other monthly costs – Your monthly utility costs will likely increase compared to renting. Research the average utility costs in your area before buying to get an accurate estimate.

Protect Your Investment

Buying a home is one of the biggest financial commitments you’ll ever make, and protecting that investment is just as important as securing it. Beyond paying your mortgage, you need a safety net to ensure your home remains secure, no matter what life throws your way. Here’s how to safeguard your financial future.

• Build an emergency fund – Homeownership comes with surprises—major repairs, medical bills, or job loss can quickly strain your finances. Having an emergency fund of 3-6 months’ worth of expenses ensures you can handle these situations without falling behind on your mortgage.
• Get life insurance – If you’re buying a home with a spouse, partner, or dependents, term life insurance ensures they won’t lose the house if something happens to you. A mortgage is a long-term financial commitment, and without proper protection, your loved ones could struggle to keep up with payments. Depending on your coverage amount, your term life insurance policy cost should fit easily within your budget.

Avoid Major Financial Changes Before Closing

Once you’ve been pre-approved for a mortgage, it’s critical to keep your financial situation stable until the loan is officially closed. Lenders review your financial details multiple times—when you apply and again before closing—so any major changes could put your mortgage at risk. Even seemingly small financial moves can impact your loan approval, interest rate, or loan terms.

• Don’t change jobs or reduce your income – Lenders need proof of stable and consistent income to approve your mortgage. If you switch jobs, change industries, or take a pay cut, your lender may reconsider your loan approval.
• Don’t open new credit accounts or take on more debt – Every time you apply for new credit—whether it’s a car loan, credit card, or financing for furniture—it triggers a hard inquiry on your credit report. This can temporarily lower your credit score and increase your debt-to-income ratio, which could cause lenders to rethink your mortgage terms.
• Don’t make large purchases or drain your savings – Your lender will review your bank statements before closing to ensure you have enough cash for your down payment, closing costs, and reserves. If they see large, unexplained withdrawals or purchases, they may ask for additional documentation—or even deny the loan.
• Don’t miss payments – Your credit score is checked again before closing, and even one late payment on a credit card, auto loan, or student loan could lower your score. A lower score could lead to a higher interest rate or even a mortgage denial.

The best rule of thumb before closing is simple: Don’t make any major financial moves unless absolutely necessary. Any sudden changes in your income, credit, savings, or spending could affect your mortgage approval—even in the final days before closing.

Buying a home is a major financial milestone, and preparing for a mortgage is just as important as finding the right house. By assessing your financial health, saving for upfront costs, reducing debt, and taking steps to protect your investment, you can ensure a smooth mortgage approval process and long-term financial stability. Homeownership is a big step, but with the right preparation, you’ll be ready to make the most of your investment.