Buying A Home Home Loans

9 Steps for Preparing to Buy a Home

Aaron Crowe
Written by Aaron Crowe

Deciding to become a homeowner is an important, exciting first step. But to buy a home and move in, there are many steps to take that can take much more time than picking the home of your dreams.

Here are nine steps from financial professionals to take before you buy a home so that you can come out with the best deal. Give yourself a year to get through all of them before you buy a home:

1. Check your credit reports

Check all three nationwide companies, Equifax, Experian, and TransUnion. They can hold surprises from the past that should be cleared up before you talk to a bank.

Your credit score should be above 700 to get a good loan rate to buy a home. Each person who will be listed as buyer/owner of the property will need good credit numbers.

2. Have a credit history

Having a credit history is good, and is better than never having debt. Banks like to see your financial responsibility — that you pay bills on time, don’t overdraw your checking account, and that your debt-to-credit ratio stays in a reasonable range.

Realtor.com says banks look to see that you have three active and up-to-date credit lines, such as a car loan, a student loan and a credit card if you want to buy a home.

It’s better if they aren’t all credit cards, but if you don’t have multiple trade lines, get a card. Your credit score will probably go down when you get the card, but you should try to have a year’s history with it before you go for your loan. After a year of on-time payments or low debt, your rate will go back up.

3. Lower your debt before you buy a home

Don’t worry if you have more than three accounts — unless your credit information shows your debt-to-credit ratio is unbalanced.

Although it might be the way to go, be careful about closing accounts too quickly. Dropping major credit cards with larger limits can actually negatively affect the ratio. Consider getting financial counseling to determine the best debt-fixing moves.

4. Have a reliable source of income

If you’re relying on the income from your job and not a trust fund, you need to have a history with your employer. If you’re in a new job, wait to apply for a loan.

If you’re thinking of changing jobs, do that within this year of preparation. Also, long-term employment shows the stability of the company as well as your job.

5. Save, save, save

Prepare to have 20% of the home cost for a down payment. If you have more, the bank will be happy and so will you as you pay less monthly. If you have less, lenders will still work with you, but consider waiting longer.

It’s a good idea to start a separate savings for the house in preparation for home ownership as well. This will show that you’re thinking about those other expenses — closing costs, taxes, insurance, appraisals and inspections, and incidentals.

6. How much house you can afford?

Sure, the bank will run some numbers and give you an amount of a loan you qualify for before you buy a home, but what can you really afford?

About the author

Aaron Crowe

Aaron Crowe

Aaron Crowe is a freelance journalist in the Bay Area who specializes in personal finance. He has been a writer and editor at newspapers and websites, including AOL’s personal finance site WalletPop.com, WiseBread, Bankrate, LearnVest, AARP and other sites. Follow him on Twitter at @aaroncrowe, or at his website, www.AaronCrowe.net.

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