Get Finances in Order to Buy a Home

Once you have developed some personal knowledge about the home buying process, your next step — before you start your search for new homes or contact a real estate agent — should be to get a handle on your family finances and then attempt to prequalify for a mortgage.

Getting your finances in order

For most people, a home is the single most expensive item they possess, which means the house payments are their biggest monthly expenditure, often a full one-third or more of their monthly disbursements. What can you do to make sure that you have a clear picture of your financial situation?

• Obtain your up-to-date credit report. There are many ways to do this, including some that are free and on the Internet. Comb through the report and identify any inaccuracies or discrepancies. Notify the credit reporting agency of any anomolies you uncover. It could get you a better interest rate on your home loan, but it is important that you do this BEFORE you attempt to prequalify for a loan.

• Evaluate your current financial situation. What is your income? What are your expenses? How much do you have in savings? What other assets do you have, including equity on any current property you own?

• Develop a household budget and stick to it by keeping your spending patterns under control. This is easier said than done if you are not accustomed to it. It may require some belt-tightening; it will require self-discipline. But when it’s time to apply for a loan, your recent spending habits and expendistures will be under a microscope and will affect how favorable your interest rate is on your new home, which can translate into thousands of dollars saved or spent on your mortgage.

• Try to determine how buying a new home will affect your budget. Will your housing costs increase? (Don’t forget to factor in changes in interest rate, taxes and insurance, as well as repairs and maintenance on a new home.) If your housing costs are going up, do you have adequate financial resources to make up the difference?

• Start assembling pertinent papers. Items to assemble include copies of income tax returns going back three years, recent pay stubs (including records of secondary or supplemental income) and records regarding past derogatory credit information (which you will need to explain to potential lenders).

• If possible, pay off small debts. The fewer entries that indicate money owed that appear on your credit report when you apply for a mortgage, the better you will look in the eyes of the lender.

• Avoid new debt. Wait to buy a new car or other major expenditure that could be put off until after you close on your new home. Mortgages are based on debt-to-income ratios. If your debt is too high relative to income, you may not get a mortgage at all or you may have to pay a premium (a higher interest rate) in order to get a mortgage.

In our next post, we will discuss how to get prequalified for a mortgage.

If you're new here, you may want to subscribe to our RSS feed.

You may also Subscribe to New Homes Real Estate Listings For Sale by Email Thanks for visiting!