Ready to talk to a lender? Here are three things you’ll need.

“I want to buy a house, but I’m not sure how to start.”

I’ve been having this conversation, or one similar to it, for years. It can be daunting, thinking about buying a house. After all, it’s not as simple as going to the store, picking out a home, and handing over your card. It can be very emotional and time-consuming, and often there is uncertainty.

But I have found that the emotions, the time, and the uncertainty can all be put a bit at ease with a little preparedness up front. And when it comes to buying a house, being prepared means getting pre-approved before going out to look at houses.

Keep in mind, every lender is different, and some may have requirements or criteria that are different than what I’m writing here. But in my experience working with lenders in my area, and in my research on mortgages, I’ve found three things lenders consistently look at when working on a mortgage or pre-qualification:

Credit score
Down payment
Stable income or employment history

Let’s explore each of these a bit more.

1. Credit score

Before approaching a lender, you’ll want to verify that your credit score is solid (it’s a good idea to keep an eye on your credit, in general). This can save you time and energy in the house-buying process, because you know right from the beginning that you’re in a position to buy.

What is a good credit score?

This answer is somewhat lender-dependent, because each lender will have their own criteria for pre-qualification. That said, this article from NerdWallet notes 620 is the minimum for most loans. A “good score,” however, is usually considered anywhere above a 690. It is important to note that the higher your score, the better terms you may be eligible for in a mortgage, including interest rate and down payment.

How do I find out what my credit score is?

You are able to access your credit report once per year from each of the three credit reporting agencies: Equifax, Experian, and TransUnion. A good resource to do this is from AnnualCreditReport.com.

Something to keep note of, however: you don’t want to have your credit run too many times in a 12-month timeframe, because it can lower your score. Every time you apply for a loan, whether it’s for a credit card, a car, or a home, the lender runs your credit score. So, pace yourself!

How do I raise my credit score?

Your credit score is a number used by the credit reporting agencies to evaluate your relationship with debt. And a lender, who is qualifying a person for a mortgage, wants to evaluate the risk they’re taking before loaning out hundreds of thousands of dollars.

There are lots of ways to help raise your credit score, but at the heart of each one is this: improving your relationship with debt.

This article, from Clark Howard, gives five suggestions to help improve your credit score:

Find out when your issuer reports payment history
Pay down debt strategically
Pay twice per month
Raise your credit limits
Change up your credit mix a bit

Raising your credit score isn’t necessarily an overnight ordeal, so even if you’re not anticipating buying a house right away but you know you’ll need to raise your credit score, it’s best to start early to get it where you need it to be.

2. Down Payment

When buying a house, especially in the current market, it’s likely you’ll need to have at least some money saved up for a down payment. And, while it does mean you’ll likely be planning for your home purchase for a little while before you actually start the process of buying a house.

How much money do I need?

The first question that comes to mind when thinking of a down payment (or any savings goal) is: How much will I need?

The standard is 20%. So if you’re looking at buying a house for around $200,000, a safe bet would be to save up approximately $40,000 to put towards the cost of the home.

That said, the minimum down payment can be dependent on the type of loan you end up getting. A conventional loan may only require 5% down (with private mortgage insurance, which is something your lender may talk to you about).

A government-backed loan, like a VA or a USDA loan, may not require a down payment at all. This post, from Rocket Mortgage, goes into more detail on the types of loans and what would be required for them.

What is the purpose of a down payment?

At its simplest, the higher your down payment, the less you’ll have to borrow from the bank. (If you put a $40,000 down payment on a $200,000 house, for example, you’ll only be borrowing $160,000).

And, just like credit, lenders like a higher down payment because it lowers the level of risk on their end.

Ideas to get some more money together to build up the down payment

Looking for ways to earn some money for that down payment?

FinanceBuzz has put together a list of 13 ways that people can earn (or save) a little extra — and some of them may be things you haven’t even thought of before.

Walk dogs on the weekends
Deliver takeout food or groceries
Rent out your car
Utilize cash-back benefits on your credit cards
Take surveys
Sign up and use money-saving apps
Take inventory of the bills automatically coming out of your account each month, and cancel what you no longer find valuable
Automate your savings according to your goals, so you don’t even have to think about it
Run errands or check off task lists for others in your community
Sell the things you no longer need in your home
House-sit
Re-sell items on Amazon or a similar site
Become a local tour guide

3. Stable income or employment history

When lenders are determining your pre-qualification or working through your loan process, they will undoubtedly check with your employer to verify your income. And they’re looking for a few things:

That you make enough money to cover the cost of the loan (according to their formulae)
That your income is stable and consistent

Why does it matter?

Again, it all comes down to risk. Someone who is jumping from job to job each month may likely pose a higher risk than someone who can show they’ve been with their employer for the last three years. Typically, a good rule of thumb is two years of employment history.

Self-employed? You’re not out of luck. But you will likely need to show a year or two of tax returns for employment history, depending on the type of loan you get and the amount of time you’ve been self-employed.

For more reference, I found an article from TIME that goes into more detail of what lenders are looking for in terms of your employment history.

What counts as “income”?

When we hear the term “income,” we often automatically associate it with “salary” or “wage.” And this is true when it comes to a mortgage as well. Base pay, bonuses, commissions, and secondary income are all standard forms of income lenders look to when evaluating your loan.

But there are other forms of income that aren’t necessarily tied to employment, that still may help you in qualifying for a mortgage.

Fannie Mae, or the Federal National Mortgage Association, has a list of more than 20 non-employment sources of income that it may consider in their loan approval process:

Alimony, child support, or separate maintenance
Automobile allowance
Boarder income
Capital gains income
Long-term disability income
Employment offers or contracts
Employment-related assets (such as qualifying income)
Foreign income
Foster-care income
Housing or parsonage allowance
Interest and dividends income
Mortgage credit certificates
Mortgage differential payments income
Non-occupant borrower income
Notes receivable income
Public assistance income
Retirement, government annuity, and pension income
Royalty payment income
Schedule K-1 income
Social Security income
Temporary leave income
Tip income
Trust income
VA benefits income

Buying a house is a large, long-term investment, to be sure. And to help make this process go more smoothly, having the necessary information and documentation is crucial. Putting yourself in a good financial position for a mortgage is key in getting the best terms on the loans available for you. Understanding what a lender may be looking for, and preparing ahead of time, will not only save you time up front, but could save you money (thousands of dollars) over the life of your loan.

This post is part of a larger series on the step-by-step process of buying a house. Want to see more like it?

The first step to buying a house

Kate Padilla