Before you dive into house-hunting, you should take a few steps to ensure that you’re financially prepared to   buy. Take stock of your finances: Do you have enough income to pay a mortgage payment that may be higher than your monthly rent? How much can you afford to spend? Do you have any money saved up for a down payment and closing costs? Will buying a home detract from your other financial goals, like saving up for retirement or your child's college education? Here are three important financial tips for home buyers:
 

1. Check your credit score: Your credit score will determine whether or not you get approved for a loan and what kind of interest rate you receive. That’s why you should order a credit report before you start house-hunting. If you notice any errors on your report, be sure to notify the major credit bureaus and ask them to make corrections. If your credit score is low, now is the time to give it a boost. The fastest way to do that is to pay down your credit card debt and pay all of your bills on time.
    
2. Start saving: Before you start shopping around for a home, try to save up for a sizeable down payment. Many buyers try to save up enough so they can make a 20% down payment on their home. That's because if you make a down payment of at least 20% of the purchase price of the home, you'll avoid paying private mortgage insurance (PMI). PMI is a type of insurance that protects the lender against the risk of your default. Although the cost of PMI varies depending on your mortgage company, premiums typically run about 0.5 percent of the loan amount for the first year of the loan. PMI premiums usually decrease after the first year.  Even if you have to cut way back on your spending or take on a second job, it will be well worth the effort. The higher your down payment is, the lower your house payments will be.
    
3. Budget wisely: Before you even start talking with mortgage lenders, you should carefully calculate your home buying budget. Ask yourself these questions: How much can I qualify for on a home loan? How much can I realistically afford to pay? If I were to face a family emergency, would I have enough money to cover it and the mortgage payments? Once you’ve determined your budget, you should shop around for a mortgage to see what various lenders can offer you.

The best way to figure out how much home you can afford is to get pre-approved for a loan. During the mortgage preapproval process, your lender will contact your bank, your employer, the credit bureaus and other financial institutions to verify your income, assets, debts and credit history. Based on this and other information, they will estimate how much mortgage you can afford. If everything checks out and the lender sees you as a low risk, they will issue you a letter stating that the loan of a certain amount is approved for a specified amount of time.

Generally, lenders don't want you to spend more than 28 percent of your gross monthly income on a mortgage payment. Lenders will also look at the housing expense-to-income ratio, which is determined by calculating your projected monthly mortgage cost, property taxes, hazard insurance and HOA dues. Your expense-to-income ratio should fall somewhere between 28 and 33 percent. If it's much higher, you probably cannot afford the house.

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