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Financial Life Stages: Buying a Home

Buying a home is probably the single largest investment most people make in a lifetime. By preparing yourself and your credit report before buying a home, you can make the finance process go more smoothly and can potentially save thousands on your loan by getting lower interest rates.

To get the best possible mortgage rate before buying a home, make sure your credit history is healthy and accurate. Start by checking your credit reports from TransUnion, Equifax and Experian.

If your credit score is not where you want it to be, focus your efforts on paying bills on time, reducing your debt balances, avoiding new inquiries, and clearing any inaccuracies from your credit report before buying a home.

Make sure the information on your credit reports is correct before buying a home and fix any problems you discover. Give yourself at least 30 days to correct any inaccuracies.

Figure out how much you can afford

The rule of thumb is that most borrowers can afford a home loan that runs about two and a half times their annual salary. Calculate your loan-to-value ratio to see how much you can afford to borrow before buying a home by dividing the loan amount by the property's value. If your loan-to-value ratio is above 80% your rates may increase significantly. Find a less expensive home or save up for a larger down payment to lower this percentage.

Pick a mortgage to fit your finances

Fixed rate mortgages have a set monthly payment that remains constant through the life of the loan. The interest rates tend to be a bit higher on fixed rate loans, but these mortgages may be a better choice for someone who intends to stay in the home for more than 10 years.

Adjustable rate mortgages give you a lower initial interest rate with the risk of it rising in years to come, but would mean that you could be affected by upward adjustments in mortgage rates. Setting a rate cap above your initial rate will protect you from extreme jumps in interest rates, but any increase can still mean a much larger monthly payment, so be realistic about your expected income and how long you expect to stay in the home.

Don't be afraid to start small. Just because you may qualify for a large loan doesn't mean that it’s a smart financial decision to buy as large a home as possible. Take a careful look at your family budget and your housing needs before you decide how much you can really afford before buying a home.
Now that you know more about what to do about buying a home, get your Credit Report and Score.
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