What Should I Do Before I Buy a Home?

EVERYDAY MONEY BUYING A HOME

Before you even think about hitting open houses, the first thing to do is get your finances in order.

Six to 12 months before you start house hunting, order your free credit reports from the three big credit bureaus at annualcreditreport.com. Check them carefully; lenders use them to determine whether they’ll lend to you and at what rate. Fix any mistakes. You may also want to pay to get your credit score (available at myfico.com) to see if it needs boosting. You’ll need a score of at least 620 to get a mortgage; the best rates require a score of 740 or above, says Keith Gumbinger, vice president of mortgage information company HSH.

Next, set a budget. The standard rule is to aim for a home that costs no more than 2.5 times your gross annual salary, For a $100,000 salary, that’s a $250,000 home. See “How much house can I afford?”

Talk to a lender about your loan options. Most likely you will choose between a fixed-rate loan, with an interest rate and payment that stays the same for the life of the loan (usually 15 or 30 years), and an adjustable-rate mortgage, or ARM, with an initial fixed interest rate that adjusts after a set period. A 5/1 ARM, for example, has a fixed rate for the first five years, then adjusts annually.

Lenders typically require a 20 percent down payment, but if you can’t scrape together that much cash, you may qualify for a low-down payment FHA or VA loan.

Ready to start shopping? Choose a lender and get preapproved. Preapproval is not to be confused with prequalification, which is a lender’s cursory assessment of how much mortgage you can afford. Preapproval is based on your actual income, debt and credit history.

If your market is particularly competitive, you may want to go a step further into pre-underwriting, a thorough review of all the documentation required for a formal approval. Doing that work ahead of time will strengthen your offer by showing the seller you mean business—and can close the deal.