The decision to buy a home is a big one, personally and financially.
With so much to consider - such as location, size and cost - it can feel exciting, overwhelming, empowering and confusing all at the same time.
The good news: There are three initial steps you can take to make the path to homeownership smoother and less stressful.
Read more: 10 ways to save for a down payment
1. Check your credit score
If you’ve rented before, you’ve likely had your credit score checked. This number is a quick way for landlords to verify your financial reliability as a tenant. As you prepare to buy a home, it’s one of the first things lenders look at to help them understand how reliably you’ve managed debt in the past.
The strength of your credit score can ultimately impact whether or not you’re approved for a mortgage and how large your home loan is, as well as your mortgage rate. (It’s not the only qualification lenders take into consideration though.) Higher scores make you eligible for lower interest rates.
Credit Score | Rating |
|---|---|
<580 | Poor |
580 to 669 | Fair |
670 to 739 | Good |
740 to 799 | Very good |
800+ | Exceptional |
Typically, those with a score over 670 are considered by lenders to have good creditworthiness. Most mortgage loans require a score of at least 620, so you may want to improve your credit score before applying.
A few steps you can take to boost your score include:
Pay your bills on time
Avoid opening new lines of credit
Keep older credit accounts open
Pay off outstanding debt
Maintain a low credit utilization rate
Limit unnecessary hard credit check
Curious which type of mortgage is right for you? Take our quiz.
2. Determine your budget for homeownership
As a first-time homebuyer, you probably have a good grasp of how much money you’ve saved for the house. But do you know exactly how much you can afford to spend on your new home?
A monthly mortgage payment is only part of the picture. As you think through how much you can afford, keep in mind the full price tag of buying a home goes beyond the selling price and your down payment. Be sure to factor in things like:
Property taxes
Homeowner insurance
Closing costs, which can be 2% to 5% of a home’s purchase price
Inspections
Moving expenses
Homeowner association fees (if applicable)
Typical homeowner costs like maintenance, utilities and more
Consider optimizing your savings to help you reach your price point by looking for an account that compounds interest daily, does not charge monthly maintenance fees and offers digital tools to boost your savings, like an Ally Bank Savings Account.
3. Calculate your debt-to-income ratio
Another factor of your financial history is your debt-to-income ratio (DTI). Your DTI compares how much you owe each month to how much you earn, showing lenders how much of your money goes toward debt and providing a clear picture of how much you can put toward your mortgage payment each month. As you prepare for homeownership, a low DTI (36% or below) may make it easier to get a loan.
Our calculator can help you quickly find your DTI if you’re not sure where your debt stands:
Preparation for homeownership is key
Before you head off to open houses, nail down the details. With a strong understanding of your finances and what you’re looking for, you can start home shopping with confidence.
If you’re ready to focus on the smaller details of the home-buying process, check out our first-time homebuyer guide . It can help you find the right real estate agent, discover your perfect neighborhood and shop for a home with confidence.
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