You have made that all-important decision to buy a house.  Your dream is finally close to becoming a reality. Once the decision is made, the real work begins. The importance of getting your finances in order cannot be stressed enough.

Pay Down Your Debt

When you begin the process of looking for a lender, you will find that most want your total debt to be no more than 38% to 40% of your gross income.

For example, is your income is $3000 a month, and then the bank figures your total debt can be $1240 a month. If you already have $1000 in debt, you will only have $240 left over for mortgage payments. By paying off credit cards and car loans, you will greatly reduce this number an increase your borrowing power.

Credits cards normally have the highest interest rate, so start there. Then move onto car loans and lastly, student loans.

It is always a good idea to get into the habit of paying off your credit cards completely each month and never carry a balance. Few things can kill the dream of homeownership quicker than credit card debt.

If you are finding this difficult to do, then follow the rule of pay-yourself-first. That means, take 20% of your pay check to pay for something you really want or to put into savings. In this case, it is making a credit card payment.

If you take care of everything else first, you may never have enough to pay down your credit card debt.

Get the Down Payment Together

If you don’t already have a savings account, get one now. If you find it hard to save money, try the pay-yourself-first technique. When you get a paycheck, put a pre-established percentage into your savings account and then make certain you leave it alone while your down payment accumulates.

A seperate savings account for your down payment that will allow you to see what you are accumulating toward your dream of homeownership. You will be surprised at how fast the balance grows if you pay yourself from every pay check.

If you want to qualify for a larger home loan, you will have to make a large down payment to qualify.

Clean Up Your Credit Report

Good credit not only helps you qualify for a loan, it also allows you get a better deal when you do get the loan.

Lenders will look at your credit report. Bad credit doesn’t mean you will not get the loan, it just means you will have a much higher interest rate and you will be required to pay a much larger down payment than someone with a good credit score.

Credit Report vs. Credit Score

Did you know that your credit report and your credit score are two different things? Your credit report is a list of thing like your credit card and bank accounts, outstanding loans and you payment history. Your credit score is a rating of how good your credit is, based on your report. In other words, your credit report is a bunch of pages and your credit score is a number from 300 to 850. Pay attention to both of these if you have decided to prepare for homeownership.

Taking a few months or even a couple of years to get your finances in order will help you get your dream home.

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