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Whether it's your first home or your retirement home, this is one purchase that should never be taken lightly. Making wise choices now will pay off down the road.

Before you start shopping for a home, do your homework.

Fewer than 10 percent of homebuyers purchase their homes with cash, so chances are you’re going to need financing. The best way to get a low interest rate (and to avoid a default later!) is to not borrow more than you can afford. Here’s how to figure out a reasonable amount:

Calculate Your Debt-to-Income Ratio

The general rule of thumb is that your mortgage payment should equal no more than 28 to 33 percent of your gross income. And your total debt (i.e. your anticipated mortgage amount plus your car loan, credit card balances, etc.) should not surpass 36 percent of your gross income.

Determine Your Down Payment

Look at how much cash you have saved up for a down payment. The larger the down payment, the lower your monthly payments can be.

Map Your Budget & Test It Out

Use a budget worksheet to determine how much income you can spare each month to put toward a mortgage payment. Simply subtract your expenses from your total income. Do a "practice run” for two months by saving the difference in your anticipated monthly mortgage, taxes and insurance payment and your current rent payment. See if you can maintain the lifestyle that you are accustomed to while not neglecting savings activities such as your IRA and college savings for the kids. If you find yourself falling short you may want to consider a smaller mortgage.

Buying a home takes years of financial preparation. If you're falling short of where you want to be, here's how you can get there.

Don’t Deplete Your Savings

Lenders often look at your cash reserves. They don’t want you to empty your savings accounts in order to afford your mortgage payments. For this reason, avoid making other major purchases in the year you plan to buy.

Borrow with a Co-signer

You may be able to borrow a larger amount or get a lower interest rate if you borrow with a co-signer. Consider this option carefully. You will both be held responsible if you default on the loan.

Track the Current Market

Look at the current buyer’s market and interest rates. Are rates increasing or decreasing? The lower the interest rate, the more home you can afford.

Patch Up Bad Credit

Get a copy of your credit report from each of the three credit bureaus (see below). Make sure that there are no mistakes on it that could cost you—or even prevent you from getting financing. Pay all of your creditors in full and on time for at least a year before you want to get a mortgage loan. And try to avoid changing employers. The better your credit rating, the more you’ll be able to borrow—and at a better interest rate.

The Three Credit Bureaus:

  • Experian (888) 397-3742
  • Equifax (800) 685-1111
  • TransUnion (800) 916-8800

Get Started Today!

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