5 Essential Rules for First-Time Homebuyers

Buying a home can be stressful and complicated. But if you follow just five basic rules, you'll make the challenge of buying a home a bit less intimidating.

1. Meet With a Mortgage Lender Before Touring Homes

Touring homes is the fun part of buying. But before you start looking at properties, you need to meet with a mortgage lender.

That's because a lender can pre-approve you for a mortgage loan. To do this, your lender will run your credit. You'll have to provide copies of such documents as your last two paycheck stubs, bank-account statements, W2s, and tax returns. Your lender will take this information and determine if you qualify for a mortgage loan, and how large that loan can be.

This is important for house hunters. Once you know that a lender will approve you for a mortgage loan of $200,000, you won't waste time looking at homes that cost $300,000.

Make sure, though, that you get pre-approved and not pre-qualified. A pre-qualification is when a lender takes down your information by phone and tells you how large of a mortgage loan you can afford. But in a pre-qualification, lenders don't actually verify your financial health as they do when pre-approving you.

2. Review Your Credit Reports

You have three credit reports, one each maintained by the credit bureaus of TransUnion, Experian, and Equifax. These reports list how much you owe on your credit cards and any other loans. They also list if you've missed any payments or paid any bills late. They'll list, too, any negative judgments such as recent foreclosures and bankruptcies.

You can order one free copy of each of your three credit reports every year from AnnualCreditReport.com. Once you do, study the reports to make sure that the information contained in it is accurate. If it's not, it could cause your credit score to fall.

3. Order at Least One of Your Credit Scores Before You Start House Hunting

Speaking of credit scores, this three-digit number is critical to anyone buying a home. Lenders rely on your credit score to determine how much of a risk you are. If your score is low, say under 640 on the FICO scale, you'll struggle to get a mortgage loan without paying an exorbitantly high interest rate. If your score is above 740, though, you'll generally qualify for the widest variety of mortgage loans and the lowest interest rates on these loans.

To determine how strong your credit score is, you'll have to order at least one of your three reports, one each maintained by the credit bureaus again. You can order your score from Experian, Equifax, or TransUnion for about $15.

4. Reduce Your Debt

There's another number that lenders look at when you apply for a mortgage loan — your debt-to-income ratio. This ratio compares your monthly debt obligations with your gross monthly income. If this ratio is too high, you'll struggle to qualify for a mortgage.

Lenders prefer that your total monthly debts, including your estimated new monthly mortgage payment, equals no more than 43% of your gross monthly income. If your debt-to-income ratio is too high, cut down as much of your debt as possible — maybe starting with credit card debt — before you start looking for a new home.

5. Interview to Find the Right Real Estate Agent

When you're buying a home, you get to work with a real estate agent for free. When you find and buy a home, your agent is paid by the seller, who uses part of the profit of the home sale to provide your agent with a commission. Because of this, there's no reason not to work with a real estate agent when you're buying a home.

But you do want to work with the right agent, so schedule interviews with several. When you're speaking with agents, ask them some key questions: How long have they worked as real estate agents? Do they work often in the neighborhoods that you're targeting? How much of a home's asking price do they shave off on average for their buyers? Do they represent both buyers and sellers or are they exclusively buyers' agents?

Be sure, too, to ask agents for referrals from past customers. You'll want to talk to some of these past customers to determine how responsive and effective an agent was for them.

Is our list of rules too short? What other rules should home-buyers heed?