Home Buying a Home 4 Must Dos When Buying a Home

4 Must Dos When Buying a Home

by Eric Rothman
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Thinking of buying a home? Read on to learn about the four simple steps to set yourself up for success.

1. Check your credit report

One of the first steps to take before you start looking for a home is to check your credit report. Ideally you’ll do this about a year before you plan to buy. You’ll want time on your side so you can fix any errors on your credit report or work to improve your credit score if needed.

A score of 650 or higher is the minimum you’ll need to qualify for a traditional mortgage. Assuming all your other financials are in order, a 740 or above should qualify you for a desirable mortgage with a low interest rate.

2. Determine what you can afford

Most banks look very closely at debt-to-income ratio when deciding if and how much of a mortgage they’ll approve. In general, your front-end-ratio or total monthly housing payment should not be more than 28 percent of your gross monthly income, and that percentage includes principal, interest, taxes, and insurance in addition to your mortgage payment.

Of course, that’s not the only number the banks are thinking about. What are your other debts, such as car payments, student loans, and monthly credit card payments for which you are responsible?

Those get rolled into what’s called a back-end ratio, which is the total amount of monthly debt you’ll be carrying in addition to the new mortgage. Generally speaking, that number should be no more than 36 percent of your gross monthly income, although banks will approve higher ratios for well-qualified buyers.

3. Get pre-approved for a mortgage

You should run your own numbers, but in the end it’s the debt load that a lender thinks you can carry that’s going to get you that mortgage (or not). Although getting pre-approved for a mortgage doesn’t guarantee a mortgage, it will force you to get all your financial documents in order and help to convince a seller that you’re a serious contender.

Your potential lender will verify your documents, assess your financial stability, and run a credit check. You’ll also fill out an official mortgage application; if there’s not a specific residence in mind, you’ll leave that blank.

Your pre-approval letter offers a conditional commitment to lend a specific sum to the buyer based on available information. A pre-approval is usually valid for 60 to 90 days, so it’s not something you want to do until you’re serious about jumping into the house-buying pool.

4. Scope out potential neighborhoods.

The best buyer is an informed buyer.  The more you know about where you want to live, what kind of housing is available, and what places are going for in that area, the better prepared you’ll be to land your dream home.

Go to the area or areas you’re considering during the day and at night. Try a test commute to see how long that morning drive will really be. Check out a few coffee shops and restaurants to get a feel for the kind of people who will be your neighbors.

Quiz people you know who live there and see what their likes and dislikes are and how well they match with your own desires.

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