Taking on a mortgage in Colorado Springs is one of the best decisions you’ll make in your lifetime. It means that you can own your dream home and start your path of increasing your net worth.

With real estate values increasing each year, it makes perfect sense to jump into homeownership and enjoy the capital gains you can earn just by owning a home. Before you apply for your first mortgage, though, you should know how to prepare for it.

A mortgage is likely one of the largest loans you’ll take in your lifetime. The key is to prepare yourself so that you can get the best rates and terms available. 

Here are 6 ways to prepare yourself for a mortgage in Colorado Springs.

1 — Check your Credit

Your credit is the first thing lenders look at when you apply for a loan. It tells them how well you’ve handled past debts, how much debt you have outstanding, and if you apply for new debt too often.

Think of it as a record of any credit transaction you’ve had in your adulthood. Lenders look at both your credit score and credit history and you can too before you apply for a mortgage.

You don’t need perfect credit, but showing stability and the ability to handle your finances can increase your chances of loan approval.

Pull your Free Credit Report

Your first step should be to look at your credit history. Everyone gets free weekly access to their credit reports here. You can pull your credit report from each of the three bureaus – Equifax, Experian, and TransUnion.

These reports won’t show your credit score, but for now, focus on your credit history. Any negative information you find, you should fix. Here are the most common issues to look for:

Late payments
If you make any payments over 30 days late, creditors report it to the credit bureaus and it hurts your credit score. If you have any late payments now, bring them current and keep making your payments on time. This is the largest part of your credit score so it’s important.

Credit utilization rates
Your credit utilization rate is the amount of credit you have outstanding compared to your credit line. Ideally, you shouldn’t have over 30% of your credit line outstanding at once. This means for every $1,000 credit line you have, don’t carry a balance higher than $300. If you have higher balances, work on paying them down.

Mix of credit
If your credit history is heavy in revolving debt, for example, you pose a higher risk because credit card lines are riskier than installment debts. Try mixing up your credit to be a balance of revolving and installment debt.

Collections or public records
If you have any collections or public records, see what you can do about resolving them. Certain public records, like bankruptcies, only get better with time, but collections can often be resolved and sometimes even removed from your credit report.

Check your Credit Score

If you want to know your actual credit score before you apply for a mortgage in Colorado Springs, you can usually access it for free.

Ask your bank or credit card companies if they offer free credit score access, as most do. If not, you can sign up for a free account at Credit Karma to see your scores.

They won’t match exactly what lenders see, but you’ll have an idea of where you stand.

 2 — Save Money

You’ll need at least some money to close on a house purchase in Colorado Springs. Even though there are loan programs that don’t require a down payment, there are typically closing costs and other costs to consider.

As early as you can, start saving for a down payment on a home. You don’t need the traditional 20% down payment to qualify, though. Different loan programs have different requirements, but you can secure an FHA loan with just a 3.5% down payment or a conventional loan with 3% down if you’re a first-time homebuyer.

The earlier you start saving, the more time your earnings have to compound. This also alleviates the risk of having to withdraw funds from your 401K or IRA for a home purchase. While legal and allowed, this can deplete your retirement funds which you might not want to do.

Understand your Debt-to-Income Ratio

Next to your credit score and history, your debt-to-income ratio is the next most important factor when you’re trying to get a mortgage in Colorado Springs.

Your DTI is a comparison of your monthly debts to your gross monthly income (income before taxes). Your monthly debts include things like:

Car payments
Personal loan payments
Student loan payments
Mortgage payments
Minimum credit card payments

Your DTI shouldn’t exceed 43% for the best rates and terms. This means your debt payments shouldn’t take up more than 43% of your income.

Understand your Mortgage Options

Today there are many loan options for borrowers with many different credit scores and financial situations. Understanding your options can help you determine where you fall and what you might need to do to qualify for a mortgage in Colorado Springs.

Some questions to ask yourself when deciding which mortgage is right for you are:

Do I want to make a large down payment? If so, what percentage of the loan amount?
Am I a veteran or belong to any other special organization that might have financing options, such as VA loans?
Will I need help with the closing costs or other seller concessions?
Do I want a loan that I can pay off fast (15 years) or a loan that has smaller payments but a longer term (30 years)?
Do I need the predictability of a fixed-rate loan or is an adjustable-rate a better option?

Get Pre-Qualified Early in the Process

Even a year before you might buy a home, get pre-qualified. A pre-qualification is an estimate of what you can afford/qualify for based on the information you provide the lender. 

You’ll tell the lender your estimated credit score (or actual if you know it), your monthly income, assets, and liabilities. You’ll talk about your financial situation and how much you might put down on the home.

Based on the information provided, you can find out how much you ‘might’ be able to afford. This gives you a starting point.

Is it enough to buy a house in the area of Colorado Springs you wanted? Can you afford the potential payment? Evaluate the situation and decide what you might need to improve or change before you formally apply for the loan.

Get Pre-Approved for a Mortgage in Colorado Springs

When you’re ready to look at homes and potentially make an offer, get pre-approved for a mortgage. This step can help you understand exactly what you can afford and it might help you win a bid in a bidding war because it shows sellers that you’re already approved for financing.

Here’s how to get pre-approved.

Apply for the Loan

Complete a loan application and provide all information required to determine if you qualify for the loan. This includes your personal identifying information, monthly income, assets, and liabilities. 

The lender will pull your credit to see what program your credit score qualifies you for and will then proceed with the process.
Provide Income Documentation

To get pre-approved, you must provide proof of your income. This means providing proof of your last 30 days of income with pay stubs and the last 2 years of income with W-2s.

Provide Asset Documents

You must provide your last 2 months of bank statements to prove you have enough money for the down payment and closing costs. This also helps prove receipt of your regular income to strengthen your mortgage application.

Provide any Necessary Documentation to Explain your Situation

If you have any unique situations such as a gap in employment, a period of credit mishaps, or a large deposit in your bank account, you can write Letters of Explanation and provide any documents that back up your claims.

Final Thoughts

Preparing for your mortgage in Colorado Springs is essential to get the best rates and terms. Mortgage guidelines are flexible today, but the more prepared you are and the more you understand about your mortgage options, the more confident you’ll be of your choice in a mortgage loan.

Fix your credit, save money, keep your employment stable, and get pre-qualified as soon as you’re thinking about buying a house. These steps will get you closer to an attractive mortgage approval that can help you buy the home of your dreams in Colorado Springs.