Although financing a first home can be challenging, buyers who are prepared and know what they can afford up front can expedite the process and save themselves unnecessary headaches later. Before starting your home search, follow these financial tips from the National Association of Home Builders and Bankrate.com.
- First, figure out what you can afford to pay each month. In addition to principal and interest, figure expenses for local taxes, insurance, and if buying a condominium, monthly assessments. Once you have this calculation, don’t be tempted by lenders to pay more than that. Free mortgage calculators, which are available on many real estate and financial websites, can help you estimate monthly payments based on current interest rates and down payment. Generally speaking, no more than 28 percent of gross monthly income should be allocated to housing costs.
- Pay down your debts. Any credit card debt you have can limit how much you can borrow from a lender. Check your credit report thoroughly for any errors or unpaid accounts, and resolve those issues before moving ahead. Allow at least six months to iron out any credit problems before shopping for a home, experts suggest.
- Determine your monthly cash flow. Track your spending for two or three months to see where money is going. Once you know what you can afford and what your cash flow is, you can determine your down payment.
- Organize documents, especially those that validate income and taxes. Most lenders may want to see two recent pay stubs, W-2s and tax returns from the previous two years, and the last two monthly bank statements. Having these documents ready ahead of time can help the lending process run more smoothly.
If you are getting started, check out local home-buying seminars or sites like HUD.gov, which provides information for shopping for and financing a home. Ask friends, family and co-workers for referrals for lending professionals they’ve worked with previously, and talk with lenders and credit counselors to find financing options that will work best for you.