Buying a house is no doubt the biggest financial decision most of us will ever make. Developing a financial plan is the first step when you’re looking to commit to a mortgage on a house or other property. It may be overwhelming for first time buyers, but you just need to use a measure of management and foresight. Start by gathering information on your financial state, considering your price range, and then evaluating your options.

The first step is to develop a good picture of your financial state by reviewing your financial records or working with an advisor. Prequalification is a good move because it allows you to figure out your price range and makes you a more attractive buyer. Either way, you will need to gather your financial information to apply for a loan. It’s also good idea to review your credit report thoroughly and make sure you agree with it and that debts are paid off if possible.

The next step is to determine how much you can afford on a home. Fannie Mae has established two different income-to-debt ratios to determine eligibility for real estate loans. The first requires that the total monthly mortgage payments, including principal, interest, insurance, and taxes, cannot exceed 28% of the buyer’s monthly income. The other ratio requires that total debt payments be no more than 36% of gross monthly income. Also, a down payment of between 10 and 20% of the purchase price may be required.

You should also consider what type of mortgage you want to commit to. Longer terms generally have lower monthly payments and run at a fixed rate, but generally require higher interest payments. On the other hand, if you aren’t planning on living in the home for longer than 3-5 years, you should consider an adjustable rate mortgage.

There are still options if you can’t afford a conventional mortgage. The Federal Housing Administration (FHA) loans offer down payments as low as 3%. The Veterans Administration offers mortgages with zero down payment for qualifying veterans. Check out options offered by affordable housing advocates in your area, which may offer low-money-down loans.

As long as you approach home-buying the smart way, you will ensure that your purchase is a good investment. Before you jump into the listings, whether for a house, condo, or lot, you must first consider your financial picture.

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This is filed under Financing.

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