By Margaret D.

Thinking about buying a home? Taking a few steps now to get your financial house in order will help you once you’re ready to buy – and put you on the path to a better financial future.

1. Get a snapshot of your financial picture

Start by taking a look at your own personal balance sheet – that is, make a list of what you own (assets) minus what you owe (liabilities). The remaining amount is your net worth (positive or negative). If it’s a negative number, you may need

to work on paying down debt and building up your savings before you’re ready to buy

2. Check your credit health

While there are mortgage programs available if you have less-than-perfect–credit, the higher your credit score, the less you’ll have to pay in interest on your loan. So, before you start the home buying process, get a copy of your credit report and review it for errors or places it can be improved. Keep in mind disputing errors and cleaning up your credit can take some time.

3. Save!

Although some loans allow you to buy a home with little or no cash down, there are additional upfront costs you’ll need to save for.

  • Down payment. Down payment requirements can range from three to 20 percent of the purchase price of the home. However, if you purchase a home with less than 20 percent down, you’ll also be required to pay for mortgage insurance – which is typically added into your monthly payment.
  • Closing costs. Loan closing costs include the fees for processing loan paperwork, appraisals, inspections, etc. and can be between two and five percent of the purchase price.
  • Reserves. While an emergency fund is an important part of any personal financial plan, you may be required to have enough savings to cover at least two months of mortgage payments.

4. Decide what you can afford (not what you’re qualified for)

How much you are qualified to borrow may be different than how much you can comfortably afford.

To get an idea of how much you’d be able to borrow, you can meet with your lender to get pre-qualified (see below). However, before going out and looking at homes that are at the maximum end of what you’re qualified for, decide how much home you can afford by creating a spending plan or budget with programs like Money Management or Mint.com. You’ll want to be sure you can realistically afford your mortgage and other financial obligations while still having room for home maintenance, retirement savings, vacations, emergencies, etc.

5. Get preapproved

Once you’re ready to start house hunting, shop mortgage rates and meet with a lender to get preapproved for a loan. Getting preapproved can take a couple of weeks and is similar to applying for a loan – your lender will run your credit report and you’ll need to provide documentation related to your finances and employment (paystubs, bank statements, etc.).

Then, when you’re ready to make an offer on a house, your preapproval letter will show sellers you are in a financial position to buy!