Mortgage loans: Preparing for buying your first home

With low mortgage rates and home prices making news, it's time for buying your first home -- or is it? Knowing when you're ready to buy is your first step toward successful and lasting home ownership. Consider these aspects of buying a home and qualifying for a home loan. Determine if you're prepared or need to do some home-work:

• Employment: Mortgage lenders and FHA prefer to see at least two years in your current career or profitable business ownership. Business owners should be prepared to provide profit and loss statements in addition to verifications of deposit and income tax returns for the preceding two years.
• Credit scores: You're entitled to free copies of your credit reports from the three major credit bureaus once a year, but you have to purchase your credit scores for a minimal fee. This expense is well worth it, as mortgage lenders consider credit scores when establishing mortgage rate and costs. FICO credit scores of 740 and above are generally required to receive the most favorable mortgage rates for conventional mortgages; Borrowers with FICO scores of 580 and above may qualify for FHA loans with a minimum down payment of 3.5 percent.
• Consumer debt: Mortgage lenders use ratios of your debt payments to your gross income. The front end ratio is the amount of your estimated housing expense divided by your gross income, and the back end ratio is the total of all installment debt plus your estimated housing expense divided by your gross income. Although FHA allows higher debt-to-income ratios, the higher your ratios, the more you risk encountering financial problems. Taking a few months to eliminate credit card debt can help you qualify for better mortgage rates and terms.
• Down payment and closing costs: How much have you saved for a down payment? Conventional mortgage lenders typically require a minimum of 10 percent of your home's sales price (or appraised value, whichever is lower) as a down payment; closing costs generally run from about 3 to 5 percent of your purchase price depending on customary costs for closing agents or attorneys in your area and individual aspects of your transaction.
• Short and long term goals: Buying a starter home can be a good investment, but only if you're planning to stay in your new home long enough to recoup the costs of buying it (and selling it down the road). Don't be pressured into buying a home by well-meaning family members or friends. If you're just finishing your college or professional education and expect to relocate for work, buying a home may not be your best option.
• Understanding home financing options: You can shop online and request mortgage quotes from your bank or credit union. Some communities and states offer first-time buyer assistance programs through housing finance agencies and community development programs.

Knowing where you stand can facilitate loan approval and finding an affordable home.