Home Buying--Getting Ready

Buying a home is one of the largest financial transactions that most of us will make in our lifetimes. Especially considering the new and higher standards of mortgage approval, it is a very good idea to take the time to prepare before buying a house. Here is a quick checklist of some of the most important and relevant things you can do to prepare:

Know what is on your credit report before you apply for the loan. You can use the free annual credit report option and pay a little extra to get your three FICO scores and all three complete credit reports. This can be done online in a matter of minutes. It is a good idea to do this prior to making a loan application, because it will allow you the opportunity to anticipate and deal with any issues on your credit report that could otherwise slow your loan process down and cause you to miss a sales contract closing date.

Budgeting: Knowing what your FICO score is will allow you to have a hypothetical conversation with a loan officer and find out what kind of rate, payment and down payment you would have on your purchase loan. This will allow you to factor in and budget for the money out of pocket, the new monthly mortgage payment, and will give you a rough idea of what price range you should be looking in when you are shopping for your new home.

Down Payment: Another result of the mortgage meltdown is that it is very hard if not impossible to buy a house with no down payment. Unless you are able to qualify for a VA loan, you will have to make a down payment of at least 3% of the purchase price. Depending on the price of the home, even 3% can be a large amount. Plan for this and be aware that most lenders will require valid documentation of where the down payment is coming from and some will even require that the down payment funds will have been in your account for at least 30 days.

Reserves: In addition to having funds available for the down payment, many lenders also require verification that you have reserves---money in the bank---sufficient to cover two months of payments on the new loan including principle, interest, tax and insurance---your loan payment plus escrow, in other words.

Pay off Debt: Be aware that lenders will look closely at your debt to income ratio. Anything that shows on your credit report as an open account with a balance will be factored into your monthly outflow. Most lenders will require that your monthly outflow including your new mortgage payment be less than 45% of your gross monthly income. If you can----keeping in mind the down payment and liquid reserve requirements---pay off as much existing debt as you can a full month before you start applying for mortgage financing. This will give your credit reports time to update and reflect your new, lower debt load. This can also have the affect of improving your credit score.

These are just a few of the most important things you can do to prepare yourself for the home-buying process.

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