First Time Home Buyers

Four Steps to Home Ownership

Not sure if you are ready for a mortgage? Follow these four steps to prepare for buying your first home.

It takes patience, persistence and planning to shape up your finances for a new home purchase. Start planning early (12-18 months before your purchase) using these four steps and you'll not only be ready to buy that home, you'll be able to get a great deal on your mortgage and be comfortable with your payments.

  1. Save for Your Down Payment

    Saving may seem difficult, but it's essential if you dream of owning a home. Save as much as possible by cutting expenses. Put your savings into a stable investment, such as a CD or money market. Stock and even mutual funds can lose value, and you don't want your hard work to go to waste.

    To save even more, set up automatic payroll deductions or automatic transfers from your checking account into a savings account so impulse spending will be less tempting.

    You don't need to save for a 20% down payment, but the more you have to put down, the better credit risk you are. That translates into lower rates and payments when it comes time to get your mortgage.

  2. Clean Up your Credit

    Be sure to make ALL your credit payments on time. Every late payment on a loan or credit card can reduce your credit score, which plays a big part in determining what kind of loan you qualify for, and even whether you can get a loan at all.

    You should also avoid any major credit purchases or applying for new credit cards. New loans and credit inquiries can have a negative impact on your credit score.

    If you have a lot of debt, pay off some loans or pay down your credit card balances, but don't close the accounts. Closing unused accounts can reduce your available credit, and your existing debts will represent a higher percentage of your total credit, which can also have a negative impact on your credit score.

  3. Get Pre-Approved for Your Mortgage

    When you are ready to start shopping for your home, get pre-approved for your mortgage so you know exactly how much you can afford. Pre-approval is NOT the same as being pre-qualified. A pre-qualification is simply an estimate of the mortgage amount a borrower could get. Pre-qualification can be a good guide line, but its not binding and doesn't give you any leverage in the home buying process.

    In order to pre-approve you, a lender must pull your credit report, check your debt-to-income ratios and complete other assessments to determine how much money you can borrower. A pre-approval will allow you to show sellers that you have the ability to close the loan on the property you want to buy, making you a much more attractive buyer when its time to negotiate your home purchase.

  4. Know What Your Home Will Really Cost

    Home ownership costs are not limited to your mortgage payment. At purchase time you will have closing costs, payments into an escrow account for taxes and insurance, moving costs and the expenses associated with turning on utilities, telephone, cable or satellite TV and other services.

    If you are moving from a small home or apartment, you will probably also want to buy some new furniture and decorate your new home. Budget for these items before you move, so you don't end up in financial trouble after you close your loan.

    Be sure to include a certain amount of money in your budget for home repairs and maintenance as well. It is much easier to set aside small amounts over time, rather than trying to figure out how to pay for new carpet, appliances or a roof when it's suddenly time to make a repair.