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Tips on Getting Your Finances In Order

By Eleanor Boschert

Getting your financial house in order is the first step in the home buying process. You will need to make sure your credit is in good shape, figure out how much you can realistically afford and set aside cash for a down payment and fees related to purchasing a home. You will also need to establish you home criteria and find a mortgage lender you trust.

Work Out Your Credit and Get it in Shape

Lenders rely heavily on your credit score and history in determining whether to grant you a loan for your mortgage and the amount of debt for which you qualify. Get a free copy of your annual credit report from the nationwide consumer reporting companies: Equifax, Experian, and TransUnion or from www.annualcreditreport.com. A credit report includes information on where you live, how you pay your bills, and whether you've been sued or arrested, or have filed for bankruptcy.

Depending on these factors, you will be assigned a credit score. A score over 700 indicates good credit management. If you find your credit score is lower than you anticipated or there are inaccuracies with your credit report, contact the reporting agency to fix them.

Not only will your credit record and score contribute to whether or not you can get a mortgage, it also affects your mortgage rate. It's simple. The higher your score, the better your rate and the more you save on your monthly payments.

Reality Check on How Much Home You Can Afford

Lenders have guidelines they follow to figure out the hard numbers of how much home you can afford.

Your Debt-to-Income Ratio (DTI)

The ratio of how much you owe to how much you make should not exceed 36%. Lenders also like your total housing expenses to not exceed 28 percent of your monthly gross income. To figure out your DIT, use this mortgage calculator

Your Down Payment

The amount of your down payment dramatically affects your mortgage options and rates. The more cash you put down the lower your interest rate and better your terms. A typical down payment runs 10 to 25% of the total purchase price of the home. If you put down less than 20%, you will be required to pay private mortgage insurance (PMI) which usually amounts to ½% - 1% of the loan.

Now the Fun Part: Your Home Wish List

Now it's really about you. Put together a home buying wish list. Figure out the criteria for what you want in a home, neighborhood, and community. You may not be able to afford everything your heart desires, but using this checklist will help you prioritize what you want: www.hud.gov/buying/wishlist.pdf

Find a Mortgage Lender You Trust

After the lending meltdown, you will need to be extra careful in choosing a mortgage lender. A knowledgeable mortgage professional should be ethical, experienced, and responsive to your needs. They can use their knowledge of the many mortgage offerings to find a loan at a favorable rate that matches your profile.

To find the right lender, ask your friends and real estate agent for referrals. Check out the credibility, licenses, and certifications of their recommendations with the Better Business Bureau. Then ask them direct questions, including:

  • What are your rates?
  • What are your points?
  • What are your fees?
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