Step 1: Preparing Your Finances

Ten Steps to the Successful Completion of the Home Buying Process

Are you ready to become a homeowner? This the most important and fundamental question for you to consider before you make the decision to purchase a home as there are many expenses and responsibilities that come with homeownership. Just because you have the desire to own your own home, does not mean that you necessarily have the financial ability to own a home.

Unfortunately, a mortgage payment is not the only expense involved in becoming a homeowner (although it is certainly the largest and most important financial obligation in the process). In addition to the actual costs of purchasing the home (including all transaction costs such as down payments and closing costs), homeowners are normally responsible for making repairs and maintaining the property on an ongoing basis following the purchase.

Before you make the decision to purchase a home, the first step is figuring out how to budget and manage your money in a manner that will allow you to afford what will most likely be the largest purchase of your entire life. Although budgeting and money management are painful, they have to be done in order to ensure you are financially capable of becoming a homeowner.

First, you must step back and objectively evaluate whether you are financially ready for the costs associated with homeownership. Once you complete the purchase and become a homeowner, you will be faced with fixed monthly costs to complete that purchase and maintain the property that cannot be avoided. If you are not able or willing to meet these demands, then homeownership may not be right for you at this time.

The following self-assessment checklist will help you determine if you are ready to own your own home. A “yes” answer to all of the following questions indicates that you are probably ready to take the next step on the path to homeownership. One or more “no” answers does not mean that you should not become a homeowner, but you may just need some more time to get yourself ready.

Checklist: Ready for Homeownership?
	Yes	No
Do you have a steady source of income?
Do you expect this same level of income to continue in the future?
Do you always pay your bills on time?
Do you have enough income to pay all your bills each month?
Do you have enough income to make a mortgage payment each month plus handle additional costs for taxes, insurance and property maintenance?
Do you have a plan for getting or saving the money needed for a down payment and closing costs?
Are you ready to take on the responsibility of maintaining your home?
Do you have enough income to make a mortgage payment each month and still continue to set aside funds for other savings goals and emergencies?

Second, you should thoroughly review your credit history to maximize your ability to obtain mortgage financing at the lowest possible interest rate. A “credit report” is an electronic record that details and tracks all the credit-related activities in your life.

These activities include many common acts such as borrowing money to purchase a car or home or applying for a loan or credit card. Every time you apply for a credit card or some type of financing it will be recorded in detail on your credit report.

Most importantly, financial institutions (such as home mortgage lenders) use credit reports and credit scores to determine whether you are a creditworthy borrower and how much risk you present in terms of a mortgage loan. In nearly every single situation involving the extension of credit, lenders will rely on the information contained in the credit report in making their decision.

Unfortunately, any mistakes or mismanagement of credit in the past can force you to pay a very steep price in the future as this information remains on your credit report for many years. As a result, it is very important that you thoroughly review a copy of your credit report to ensure whether you have a good enough credit history to obtain a mortgage loan at an affordable price.

Towards this end, you can request a free copy of your credit report from the three major credit reporting agencies at http://www.annualcreditreport.com. As you examine your credit report, you should pay particular attention to identifying any inaccurate or outdated information to ensure that your credit score is only based on accurate and current information. In order to obtain your actual credit score, you will have to pay an additional fee to view your credit score from each of the major credit reporting providers.

Finally, you should avoid applying for any other types of credit as you are preparing to apply for a mortgage loan. Every application for new credit that appears on your credit history has the potential to dramatically lower your credit score, which should be avoided if at all possible. Once you have completed the home purchase, you can apply for other forms of credit if you are financially stable.