8 Steps to Getting Your Finances in Order

Buying a home is a large financial undertaking. Here are 8 steps to take so that your finances are ready for a home purchase:

Come up with a budget. Track where you spend all your money for two to three months. Look at bills paid, credit card charges, and cash spent. Be sure to take into account any items that are paid only periodically and may not have been paid during this time such as life insurance, auto insurance, or property owners association dues. Look for areas you can cut back. Could better meal planning help you trim your grocery bill? Are you paying more than you need to for any services? Are there any costly items you could do without?

Once you know what your spending looks like now you'll start to get a good idea of what you could afford to pay monthly for a new home. Be sure to factor in any added expenses that might come with that home such as increased utility or transportation costs if the house is larger or farther from work than your current one.

Pay down debt. If you reduce the amount of debt you have in accounts such as car loans, student loans, and credit card balances it may help you qualify for a lower interest rate when it comes time to apply for a mortgage.

Work on improving your credit. An excellent credit score will also help you qualify for the best available mortgage rates. Keep your credit profile in tip top shape by paying each and every bill on time and as agreed. It's also a good idea to take a look at your credit report once a year (you can do so for free) to check it for any mistaken information that may be reported.

Save for a downpayment. The amount of your downpayment will vary depending on the mortgage program you are applying for. If you qualify for a USDA rural housing mortgage or VA loan you may be able to borrow 100% of the home's value. With an FHA loan you may be able to put down as little as 3.5%, and with traditional financing expect to put down 10-20%. If you are purchasing an investment property or have particularly risky loan characteristics you may be asked for an even larger down payment.

Save for a rainy day. An emergency fund is even more important when you're a home owner. Work hard to set aside funds each month to build up savings you can tap into should you have an interruption in your income or an unexpected large expense.

Avoid taking on new debts. Hold off on applying for a new credit card, line of credit, auto loan, or even store credit card until after your home loan has closed. New credit accounts can cause a short term drop in your credit score and raise red flags among mortgage underwriters.

Maintain steady employment. It can be harder to be approved for a mortgage if you don't have a stable job history. If you're thinking of changing jobs or starting your own business, keep in mind that you may not qualify for a home loan until you can show a two year history of being self employed. You may be able to close on a mortgage before starting a new job if you can produce an offer letter showing your start date and how much you'll be making.

Keep track of financial documents. Remember that in the world of home finances if you can't document it, it doesn't exist. Your mortgage lender will want to see paperwork showing what is in your bank accounts, how much income you earn, where any large deposits came from, information on your existing debts, etc. Start gathering these documents in advance so you'll have to time to chase down anything you might be missing without the pressure of a looming closing date.

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