There are financial aspects of your life that you will need to have organized prior to obtaining a loan and selecting the home that best suits you (see "The Two Sides of Property Ownership" for more information). In addition, you will be working with a number of professionals dedicated to the business of real estate who will assist you in completing your transaction. You should know what and who you will need so you can be best served during the home purchase process (see "Who You Need to Buy a Home").

What You'll Need

You will need the "Two Cs"----Cash and Credit to demonstrate your ability to pay and manage your mortgage, property tax, and homeowner's insurance responsibilities. In different real estate market periods and areas, one may be more valued than the other. Outside of creative financing options, the home buying equation may not be solved without having both cash and credit (please see "Financing your Home" and "Predatory Lending Practices" to avoid potential pitfalls of creative financing).

• Cash: Unless you choose a loan with no money down, you will probably need enough cash to cover a down payment, typically 5 to 20% of the selling price. Additionally, set aside closing costs (a good estimate would be about 3% of the selling price), though sellers may offer incentives for purchase that may include them paying the closing costs for you.

An ideal situation would be to have not only down payment and closing cost funds, but also funds set aside for maintenance/emergency expenses, as well as 6 months of mortgage payments. This will demonstrate to a lender that you have the capability of paying, and are not wholly reliant on your income. This can also help you should the other "C"---credit not be enough to give you the ideal rates on your loan that you had hoped.

Finally, you need to be stable to lenders. Two years job history with the same employer, or two years of profitable tax returns if you are self-employed or a business owner will help.

• Credit: You will need to demonstrate you creditworthiness in order to qualify and be approved for a home loan. Your credit report, but even more so, your credit score is the most important determinants of this to lenders. You will need to make sure that the credit report and score best reflect your creditworthiness. Review your credit report in advance, and make necessary (and legitimate) corrections to improve your score (please see budgeting-help.com for tips on "Credit Report Resolution").

At a minimum, some lenders can approve your loan with a minimum credit score of 620. But expect bad terms or high variability in payments. If you have an abundance of the other "C"---cash, you may be able to rapid rescoring, a process in which you pay off entire outstanding debts in exchange for documentation, possible deletion, and rescoring of your credit file for the purposes of loan approval only.


References:

Federal Deposit Insurance Corporation. An Update on Emerging Issues in Banking

Federal Reserve Bank OF San Francisco. Innovations in Mortgage Markets and increased Spending on Housing

Credit Union National Association. News Now