Getting ready to buy your first home is more about straightforward financial homework than it is picking out the perfect floor plan or choosing the right carpet. As intimidating as the process can seem to a first-time buyer, getting all your facts and figures in order well before you’re ready to hit the market is the key to a successful, low-stress purchase.
- Check your credit score. The starting point to buying your first house is checking and cleaning up your credit score. Go to AnnualCreditReport.com to get a free credit report from each of the three major credit bureaus. It costs a little more to see the numerical credit score so many people refer to, but what’s most important is that you scrutinize the reports for mistakes. And check your utilization rate, or the ratio of credit you are currently using versus your available credit limit. Most lenders prefer that you be using one-third or less of your available credit. Correcting credit report errors and paying off bills takes time, so give yourself at least six months to work through this process before it’s time to start house shopping.
- Organize your documents. Lighten the administrative load by getting all your financial and tax records in order well before you begin the loan application process. You’ll need at least two recent paystubs, tax returns and W-2s for the last two years, and two months’ worth of bank statements for every account you have. If you’re self-employed or work on commission, be prepared to document your income for the past two years.
- Know your overall budget. You’re making one of the biggest financial commitments of your life, so it’s vital that you know how much money you have coming in, and how much is going out and where. Many lenders will look for a couple of general household financial benchmarks: Your housing costs should be no more than 28 percent of your gross monthly income, and all debts including housing costs should total no more than 41 percent.
- Figure out how much you can afford to spend. You don’t have to wait for a banker to tell you how much you qualify for to buy. Try an online mortgage calculator like the one at Bankrate.com to figure out what your potential payments could be. The sooner you have a handle on what you can actually afford, the sooner you can make adjustments to your budget or your goals.
- Add up all the extras. Don’t get caught unprepared for closing fees and other costs associated with your purchase, and don’t neglect to factor in taxes and insurance to your mortgage payments. Do your homework now so you won’t find yourself in over your head later.
- Run a reality check. Visit a website such as Zillow to see how much house your money will actually buy. Do the areas you’d like to live in offer homes in your price range? Are there areas you haven’t considered yet where you might find suitable homes for sale?
- Secure your down payment. How much cash will you have on hand for your down payment? Will you need an FHA loan? What options are available to first-time homebuyers or buyers with small or no down payments in your state? You might want to seek professional advice from a qualified mortgage professional.
- Find a mortgage lender you trust. Word of mouth from friends, family and coworkers is the best way to find out which lenders in your area are easy to work with and which are not so buyer-friendly. Or go with someone you already trust: PenFed has a variety of mortgage options to fit your needs.