1. Save aggressively for a down payment. Many first time homebuyers seek a mortgage insured by the Federal Housing Administration (FHA). FHA requires as little as three percent down. But if you do not meet the income and sales price criteria for an FHA-backed loan, you will have to seek a conventional mortgage. To qualify for a conventional loan, most lenders will require you to put down anywhere from 10 to 20 percent of the sales price. So get saving!
2. Get your finances and paperwork in order. Lenders will be scrutinizing your debt-to-income ratio, which is the percentage of your monthly income that goes to paying your debts, including credit cards, auto loans, student loans and housing costs. They will also want to see documentation of your income, including W2’s, check stubs, federal tax returns and bank statements. You may also have to show rent receipts and investment reports. Start gathering these documents together now so you will be prepared.
3. Clean up your credit. Your credit score is critical for a mortgage. The higher your score, the more likely you will get a mortgage and favorable terms, including a lower interest rate. Your credit score is based on your credit history. You are entitled to one free credit report a year from the three major credit reporting agencies, Transunion, Equifax and Experian. Get your free report at: annualcreditreport.com.
Correct any mistakes you find in your report, and pay down your bills, pay down balances and make payments on time. Those two factors alone account for two-thirds of your credit score. Also, do not apply for new credit. Postpone any big purchases, car, boat, etc. until after you are in your new home.
4. Don’t forget to factor in other expenses that will come with a new home. First-time buyers can be so focused on putting together a down payment, they forget about other expenses that go into setting up a household. Consider putting aside an extra $5,000 to $10,000 to cover closing costs and the expenses of moving, minor repairs, setting up utility services etc.
5. Shop around. Attend lots of open houses, check out different neighborhoods. Interview different realtors. Find one you like who is knowledgeable and well versed in current market conditions. Do the same with a lender. Compare rates and terms. Get the best terms and the mortgage product that best fits your needs.
Finally, have fun. It’s a great time to be shopping for a new home.