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Home Buyer

Organize Your Finances Before Qualifying for a Home Loan

Buying a home takes more than desire—it also requires qualifying for a home loan. Most people rely on mortgages when buying a home. But getting a mortgage isn’t as simple as renting. So it's important to prepare financially before meeting with a lender.

"Buying your first home can be a complicated and intimidating process, both emotionally and financially," said Steve Trumble of American Consumer Credit Counseling, Inc. "Buying a home is one of the largest investments consumers will ever make, and it's critical that they prepare financially before they take the leap."

Here are five steps to make yourself the perfect candidate for a home loan.

1. Pay Your Bills on Time

If you don’t pay your credit card or utility bills on time, a mortgage lender may not approve your application. Chances are, you’ll also pay your mortgage late. You need to demonstrate an excellent payment history. It’s important to budget your money and always pay your bills on time. Set up reminders or put your bills on auto-pay to never miss a due date.

2. Check Your Credit Report

Errors on your credit report can lower your credit score. Make sure you monitor your credit regularly, especially if you’re planning to purchase a home. Checking your own credit does not lower your credit score. Plus, every consumer is entitled to one free credit report from each of the bureaus annually. Go to AnnualCreditReport.com to pull your credit reports, or request a copy of your report from each of the three credit bureaus. Dispute any errors you find on your report.

3. Establish Credit

Having no credit history can be just as damaging as bad credit. A mortgage lender needs to see a history of responsible credit management. If you don’t have a credit history, your lender can’t assess whether you’re capable of handling a mortgage payment. So if you're thinking about buying a house in the future, now’s the time to establish credit and open an account. This can include a student loan, an auto loan or a credit card. 

4. Pay Off Debt

But although you need to establish credit before applying for a mortgage, keep your debt amount within a reasonable range. The lender will calculate your debt-to-income ratio, which is your percentage of monthly income that goes to paying your minimum debt payments. Since a high debt ratio reduces borrowing power, you should pay off as much debt as possible before getting a mortgage, particularly high credit card debt.

5. Save Your Money

Come up with a plan to save money for your down payment. This takes sacrifice, such as skipping an annual vacation, eating out less, cutting back on expenses and shopping less. Other options for drumming up cash for a down payment include saving a tax return or a work bonus, or getting a part-time job to build your down payment fund quicker.

Bottom Line

You should be financially secure before you apply for a home loan. Your credit habits and assets say a lot about your ability to manage a mortgage loan. Take steps now to make yourself a desirable candidate for a loan.