Get your financial house in order first

Before You Buy a Home

by Gary Foreman

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Dear Gary,
I am hoping that in one year I will be buying a home. I have found the area of town I want to live in and found the condo complex that I can both afford and enjoy. I have bought a home before so I won't qualify for any first time buyers deals. I am embarrassed to say that when I bought my first home, my husband and I were disgustingly naive. I am no longer married and I want to be totally prepared to search and purchase within a few months of my lease expiring.

I have almost $15,000 saved for a down payment. These condos are in the $95-$100,000 range. But, I don't have any idea what I should be doing besides continuing to save money. Should I be looking for a mortgage this early? What should I be doing at this point? Do I need to get a realtor, even though I know basically where I want to live? I have less than a $800 debt, but my car is 11 years old. I think it will easily last another two years and maybe longer. Any information would be appreciated!
Debbie in Nashville, TN

Debbie is off to a good start. She's identified the major areas needing her attention. First, she will want to get her financial house in order. Debbie has already begun saving for a mortgage. She'll want to continue that. A larger down payment often means lower mortgage rates.

She needs to figure out how large a mortgage payment she can afford each month. Experts advise that the mortgage, taxes and insurance be limited to around 25% of her monthly income. But a lot depends on other expenses like her car. She doesn't want to commit to a mortgage payment that will make it impossible to buy a car later.

She'll find mortgage calculators on the web. has some good ones. They'll translate a given mortgage size and interest rate into monthly payments.

The mortgage will probably be more than she's paying for rent. Beginning now, she should set aside the difference every month. That way she'll adjust to the new level of expenses before she buys. She'll also be setting aside some extra savings to help cover moving expenses.

Second, Debbie will want to do some things early to make the actual buying process easier. She'll need to check her credit report. Approximately one in four people have errors in their report that are large enough to deny them credit or cost them a higher rate. It can take six months to get an error corrected.

If Debbie has unused credit lines or credit cards, she might want to cancel them. Large amounts of available, unused credit will hurt her mortgage rate.

She'll need to collect some financial records prior to purchase. Pay stubs for the last 3 months. W-2 forms for the last two years. Recent bank statements. Also a listing of all of her financial assets and liabilities.

Now is the time to learn the differences between fixed and variable mortgages. She'll also want to study some of the lingo so she'll understand the decisions she's about to make. Find out about escrow accounts and private mortgage insurance. Some lenders require them.

Finally, there are some things that relate to the physical property to consider. Debbie has already found her neighborhood. Otherwise she would want to consider what communities would be best for her lifestyle considering tax rates and whether they're close enough to public schools, transportation and shopping.

Debbie has also found a condo complex. She might want to visit with some of the owners and ask how happy they are.

She will need to decide whether to use a real estate agent, a buyer's agent or just go it alone. An agent could help Debbie with many of these steps. If she's short on time or doesn't feel capable, she might want the help. Depending on what she decides and the laws of her state, she might also need to line up an attorney.

Before buying, she'll want to check out homeowners' insurance. Her lender will require her to carry insurance. Better to compare rates now while she has time.

Before the closing, a home inspection will be required. Now is a good time to find an inspector. Check their state certification and references.

As Debbie knows, buying a home is a complicated process and takes some work to do it right. She's wise to start early and make it as smooth as possible. We hope that she finds the perfect condo for her needs and the whole transactions goes smoothly.

Gary Foreman

Gary Foreman is a former financial planner and purchasing manager who founded The Dollar website and newsletters in 1996. He's the author of How to Conquer Debt No Matter How Much You Have and he's been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money, and Gary shares his philosophy of money here. Gary is available for audio, video or print interviews. For more info see his media page.

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