Buying Your First Home? 8 Ways To Be Prepared (Review)

As you begin to think about buying a home, it may be tempting to fire up those real estate search engines. What’s more exciting than finding the perfect listing on Realtor.com, Zillow or Trulia and imagining the day when you’ll call that house your home?

Before you get lost in the magic of the popular real estate listing sites, though, you’ll want to invest in some logistical groundwork. If you skip these steps, you’re only setting yourself up for disappointment further down the line.

The eight steps below will help you get your financial and mental houses in order so you can search for a new home with confidence.

1. Assess Your Debt

Lenders want to know that you’ll be able to handle the debt you already have, in addition to your new mortgage payment. An important metric is your debt-to-income ratio. The historic rule of thumb has been for your total monthly debt, including your mortgage payment, not to exceed 36% of your gross monthly income. The Consumer Financial Protection Bureau reports that a maximum DTI ratio of 43% is required to receive a qualified mortgage.

Getting your existing debt under control is imperative before you can begin your mortgage application and your house-hunting process:

• Credit cards. Pay down your credit card balances so you’re using no more than 30% of your available credit. Maxed-out credit cards could signal that you’re not using your available credit responsibly and will lower your credit score.
• Installment loans. You might consider paying off or significantly paying down any installment loans (e.g., auto loans) to ease your monthly obligations.
• Student loans. If you carry student loan debt, consider how these monthly payments will impact your ability to pay a mortgage. Paying off any credit card debt might give you more leeway in your budget to service both your student loans and a mortgage.

The more debt you pay off before applying for a mortgage, the less stress you’ll likely have when it comes to making your monthly payments.