Before you embark on the exciting journey of homeownership, securing a home loan is a crucial step. To ensure a smooth and successful application process, it's essential to get your finances in order and understand what lenders are looking for. Here are seven key things to do before applying for a home loan:

1. Check and Improve Your Credit Score:

Your credit score is a primary factor that lenders consider when you apply for a mortgage. A higher credit score demonstrates your creditworthiness and increases your chances of securing a loan with favorable terms and interest rates. Aim for a credit score of 700 or above for the best loan terms.

• Obtain your credit report: Get a copy of your credit report from each major credit bureau (Equifax, Experian, and TransUnion) through AnnualCreditReport.com. Review your reports carefully to identify any errors or inaccuracies that could be dragging down your credit score, such as incorrect account information, late payments, or accounts that do not belong to you. Dispute any errors you find with the credit bureaus to have them corrected.
• Pay your bills on time: Payment history is one of the most significant factors influencing your credit score. Make it a priority to pay all your bills on time, including credit cards, loans, and utility bills.
• Reduce your credit card balances: High credit card balances relative to your limits can harm your credit score, even if you make your payments on time. Aim to keep your credit card balances below 30% of your available credit limit.
• Avoid opening new credit accounts: Refrain from opening new credit accounts in the months leading up to your mortgage application, as each new credit inquiry can temporarily lower your credit score.
• Keep old accounts open: Closing old credit accounts can shorten your credit history and reduce the overall available credit, negatively affecting your credit score. Consider keeping them open and using them occasionally to maintain a positive credit history.

2. Determine Your Budget and Assess Affordability:

Before applying for a home loan, analyze your monthly expenses and determine a comfortable Equated Monthly Installment (EMI) amount. A home loan EMI should ideally not exceed 28% of your gross monthly income. Consider additional costs like property taxes, insurance, and maintenance.

3. Save for a Down Payment:

Banks generally finance up to 75-85% of the property's value, requiring you to arrange the remaining amount as a down payment. The minimum down payment requirements is between 5% and 20% of the purchase price. A higher down payment reduces the loan amount and interest burden. Depositing regular cash windfalls, like an annual bonus or a tax refund, into your down payment savings can help speed up your progress.

• For homes priced $500,000 or less: 5% minimum down payment
• For homes priced more than $500,000 and less than $1,500,000: 5% on the first $500,000 and 10% on the remaining amount.
• For homes priced at $1,500,000 and over: 20% down payment.

4. Calculate Your Debt-to-Income Ratio (DTI):

Your DTI ratio measures your total monthly debt payments against your gross monthly income. A lower DTI demonstrates financial stability and increases your appeal to lenders. Lenders prefer a debt-to-income ratio below 36%.

• List your monthly debt payments: Make a list of every outstanding loan and the amount you must pay each month, including student loans, car loans, and credit cards.
• Calculate your monthly income: Use your gross monthly income—your total income before taxes and other deductions.
• Divide your debt payments by your income: Divide your monthly debt payments by your monthly gross income to calculate your DTI.

5. Gather Financial Documentation:

Lenders will require documentation to verify your income, assets, and debts. Gather the necessary documents, such as:

• Pay stubs
• Tax returns (last two years)
• W-2s
• Bank statements
• Investment account statements
• Loan statements

6. Shop Around for the Best Mortgage Rates and Terms:

Different banks and financial institutions offer varying interest rates and loan terms. Compare offers to find the most suitable loan based on interest rates, processing fees, prepayment charges, and tenure.

7. Get Pre-Approved for a Mortgage:

Getting pre-approved for a mortgage involves a thorough review of your financials, including credit and income, providing a clearer picture of what you can afford. A mortgage pre-approval strengthens your offer when house hunting. Lenders will evaluate your financial background and provide a pre-approval letter. Sellers, especially in competitive markets, tend to prioritize offers from buyers who already have pre-approval.