Buying your first home involves coordinating multiple processes. Preparing to qualify for a mortgage and purchase a home involves three steps:
Get your financial house in order
Your credit scores influence the cost of your mortgage; the lower your credit scores, the higher your mortgage rate and costs will be. Delaying your home purchase for a few months or more may be worthwhile if you can raise your credit scores.
- Order your credit reports and scores from all three credit reporting agencies. Purchase your credit scores and order free reports on annualcreditreport.com. You are entitled to one copy of each credit report annually, but must purchase credit scores. Mortgage lenders require FICO credit scores of 740 or more for the lowest mortgage rates and best mortgage terms.
- Pay off consumer debt. Lowering debt boosts credit scores and indicates to mortgage lenders that you're in control of your finances.
- Demonstrate stable employment. Mortgage lenders prefer at least two consecutive years of employment in your current field (exceptions apply for recent grads and military folks). If you're self employed or on commission, you'll need at least two years of earnings to get approved. Be ready to submit complete copies of federal and state tax returns; file all past due returns before applying for a mortgage.
- Save a down payment. The higher your down payment, the better your mortgage rates; a 20 percent down payment eliminates the cost of mortgage insurance.
Your first home home: Tenure and affordability
Mortgage lenders prefer monthly mortgage payments (P&I, taxes and insurance) that don't exceed 31 percent of your gross monthly income. Your total debts (mortgage payment and fixed obligations including credit card debt, car payments and child support) shouldn't exceed 36 to 43 percent of gross monthly income. Use free online mortgage calculators to estimate affordability.
Adjustable rate mortgage (ARM) loans can provide lower mortgage rates and monthly payments; if you're planning to sell within a few years, compare ARM loans with fixed rate mortgage (FRM) loans.
Assembling a team of real estate and mortgage lending pros and learning about first-time home buyer programs helps you avoid problems with purchasing and financing your new home:
- Hire a real estate agent. This person will help you find homes within your price range and negotiate the purchase.
- Find a mortgage broker or loan officer. Shop around, by requesting and comparing mortgage quotes from lenders.
- Check out first-time home buyer programs: State and community housing agencies offer incentive programs promoting home ownership.
Be patient and follow your instincts; if anything about a home, mortgage lender or loan seems "off," move on.