Buying a home: Getting your finances in order

March 2nd, 2012 Carol Wynja

Editors Note – this article is part of our new series “Buying a home.”  In this series we’ll share tips and tricks that will help make the home buying process less confusing and more enjoyable.  

Whether you’re a first-time homebuyer, or you’re a seasoned pro, purchasing a house is a big step that can be stressful and overwhelming.

One of the best ways to reduce the anxiety that often comes with making such a big purchase is to be organized and prepared.

Follow our five simple steps and you’ll be fully prepared to start the home buying process.

Request and review your credit report.

Your credit history will not only dictate whether you will receive a loan – it will also determine the interest rate for the loan. As a result, it’s important to review your credit before you begin the home buying process so you are able to address any potential issues as quickly as possible.

The Fair and Accurate Credit Transaction (FACT) Act allows you to get one free copy of your credit report every 12 months from each of the three nationwide credit reporting agencies –Equifax, Experian and Trans Union. To get your free annual credit report, go through the FTC’s website at, call (877) 322-8228 or write: Annual Credit Report Request Service, PO Box 105281, Atlanta, GA, 30348-5281.

Once you have your report, review the information and ensure it is accurate. If there are any issues, take the steps to fix them immediately.

Reduce your debt.

When you apply for a mortgage, one of the things the lender will look at is the amount of debt you are carrying and how that compares to your gross work income. This is referred to as your debt ratio. In other words, the lender will want to make sure your debt does not exceed a certain percent of your income. (This percentage is typically around 38 percent.)

As you prepare to purchase a home, focus on reducing your debt as much as possible. Continue to make loan payments on time, pay down large balances on your credit cards and avoid taking on any additional debts.

Review your budget.

Your lender will want to have a clear picture of your monthly income and expenses to help them determine exactly how much money they will be able to loan you. More importantly – a budget will help you determine how much you can afford on a monthly mortgage cost.

Review your budget and get a concise picture of how much money you have coming in and going out. If you haven’t created a budget, now’s the time. Here’s how you set one up:

  • Determine your income.
  • Determine your fixed expenses.
  • Determine your variable expenses.
  • Compare your income to your expenses.
  • Adjust as needed.
  • Evaluate your budget.

Get your down payment together.

The more money you are able to put down when you buy a home, the better your interest rate and the lower your overall monthly payment. Using your budget, determine how much money you will be able to use as a down payment for your new home.

Many experts recommend a down payment of 20 percent of the purchase price. However, not everyone has that much cash available. Don’t worry; your lender may be able to identify other options for you.

Nevertheless, the fact remains that the more you put down, the lower the mortgage. Low mortgage balances carry low mortgage payments.

As you’re going through this process remember that you don’t want to utilize all your savings towards a down payment. In addition to money for every day expenses, make sure you have at least 2 months’ worth of living expenses remaining to cover emergencies that may arise.

Gather financial documents.

Start pulling together the documents your lender will want to review during the loan pre-approval process. These include:

  • 2 years of  Federal tax returns.
  • Most recent 2 years of W-2’ s.
  • 2 months worth of bank and 401(k) statements and other assets.
  • Most recent 30 days of pay stubs.

With these five steps completed you’ll be ready to schedule an appointment with your lender to get the credit approval process started.

Carol Wynja

About the author

Carol Wynja is a Real Estate Loan Officer with MidWestOne Bank. She helps customers navigate the home buying process and achieve the dream of home ownership.

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