How to Prepare Your Finances Before Applying for a Mortgage: Credit Score, Debts & Savings Explained

by Kelli Finney

Buying a Home? Make Sure Your Financial Health Is Mortgage-Ready

Before you start house hunting, it's crucial to assess your financial health. Lenders will examine your credit score, existing debts, and savings to determine your mortgage eligibility and loan terms. Taking time to evaluate and improve these areas can increase your chances of approval and help you secure a better interest rate.

1. Know Your Credit Score and What It Means

Your credit score is one of the most important factors in your mortgage application. It gives lenders a snapshot of your reliability as a borrower.

Good Score Range: 670–739 is considered good; 740+ is excellent.
Why It Matters: Higher scores may qualify you for lower interest rates and better terms.
How to Improve It: Pay down credit card balances, avoid new credit inquiries, and make all payments on time.

Tip: Request a free credit report from Experian, Equifax, or TransUnion to review for errors and address them quickly.

2. Evaluate Existing Debts

Lenders use your debt-to-income ratio (DTI) to assess how much debt you carry relative to your income.

What’s Ideal: Most lenders prefer a DTI below 43%.
Types of Debt Considered: Credit cards, student loans, car loans, and personal loans.
What to Do: Try to pay down high-interest debts or consolidate if it makes financial sense.

3. Build Your Savings

A strong savings cushion shows lenders you’re financially stable and ready for the upfront costs of buying a home.

Down Payment: Aim for 3–20% of the purchase price, depending on loan type.
Closing Costs: Usually 2–5% of the home price.
Emergency Fund: It's wise to have 3–6 months of living expenses set aside post-purchase.

Pro Tip: Some mortgage programs, like FHA or USDA loans, offer low down payment options—but you’ll still need funds for fees and moving costs.

4. Bonus: Get Pre-Approved

Once you’ve reviewed your financial standing, consider getting pre-approved for a mortgage. This gives you a clearer budget, makes your offer stronger, and may give you an edge in competitive markets.

Final Thoughts
Assessing your financial health before applying for a mortgage puts you in a powerful position as a buyer. Strengthening your credit score, reducing debt, and increasing savings not only improve your approval odds but also set you up for long-term financial success.