November 13th 2022

Step 1: Why financing is the key to buying a new home

While figuring out the financing might not sound like the most exciting way to embark on your house hunt, it’s essential for home buying. Unless you have enough cash lying around to buy some real estate outright—and let’s face it, few do—first-time home buyers will need a loan first, not a real estate agent.

Furthermore, lenders don’t just hand out loans to everyone who walks in their door. Rather, they’ll need to review your financial history, which includes your credit score, to determine how much money they’re willing to fork over for your real estate venture.

This info, in turn, will help you decide how much of a down payment you, the future buyer, can make, and which homes are realistically in your price range.

Without that step, you have no idea what your purchasing power is.

Step 2: Qualify for a home loan or loan pre-approval

If you’re still in the window-shopping phase, with no immediate plans to buy, you might want to opt for mortgage pre-qualification, which gives you a ballpark sense of your purchasing power without promises of a loan. But if you are actively house hunting, you probably want to seek loan pre-approval, where the lender performs an in-depth exploration of your finances, followed by a solid promise of a home loan of a certain amount.

To be pre-approved for a loan, expect to be asked to disclose your income, the amount of money you have in savings, your credit score, and your credit history, which will help lenders determine how much money they’re willing to loan you (and what kind of down payment you can afford).

Consider this pre-qualifying step akin to getting a full medical checkup before you train for a marathon. In this sense, a lender can tell you whether you’re fully ready to embark on this home-buying journey or whether you should take a step back and do some prep work first.

If you don't have sufficient savings, you'll want to start putting away every dime you can.

If you have blemishes on your credit history or if your credit score has taken a hit (e.g., for late or missing credit-card payments), you may need to take steps to clean up your credit report before you can even qualify for a loan from a lender.

You could also explore easy-to-use online tools and credit-reporting bureaus to determine how much house your take-home pay can cover for mortgage payments on your first home.