The Financial Side of Buying Your First Home

May 8, 2006

It’s spring: the time of year when “for sale” signs pop up on lawns as quickly as wildflowers. If you’ve been thinking about buying your first home, you probably already know that it’s likely to be one of the biggest investments you’ll make. The best way to approach your purchase is as an educated consumer. The following advice from the Connecticut Society of CPAs will help get you started.

Examine your finances.

Before you start house hunting, review your financial situation to determine how much of a down payment you can make and how large a monthly mortgage payment you can handle. Most lenders use the 28/36 rule to determine whether prospective homebuyers can comfortably meet their monthly mortgage payment. Though somewhat flexible, the 28/36 rule means that:

your monthly housing costs should not exceed 28 percent of your total monthly income and
your total debt load, including your mortgage payment, should not exceed 36 percent of your monthly income.

Check on your credit.

Lenders rely heavily on credit scores when determining whether to grant a mortgage. Your credit score is a number determined by a statistical analysis of the information contained in your credit file. It looks at factors such as your payment history, your outstanding debts, and how many places you have applied for credit recently. Many lenders use FICO scores, developed by the Fair Isaac Corporation, to assess your credit risk. Generally, lenders consider a FICO score above 700 to be good. One of the best ways to improve your credit score is to pay your bills on time. Other steps you can take include paying off as much credit card debt as you can and postponing any applications for new credit.

If you would like to know your credit score, contact the Fair Isaac Corporation website or call 1-800-342-6726. You may also order your credit score from the Annual Credit Report Service at http://www.annualcreditreport.com/ or by calling 1-877-322-8228.

Your credit report is an important part of the scoring system, so it is a good idea to review your report to make sure it’s accurate. Credit reports can be ordered online at the Web site for the Annual Credit Report Service shown above. Ordering your credit report early in the house hunting process will give you time to correct any errors before submitting your mortgage application.

Get pre-approved by a lender.

Next, visit a bank, credit union or mortgage company to learn about the different mortgages available and get pre-approved for the mortgage type that best fits your needs. Don’t confuse pre-approval with pre-qualification, which is based on a cursory review of your financial position. Pre-approval means you have submitted a complete loan application, and the lender has verified your information, checked your credit, and determined how much of a mortgage you can comfortably carry. When you’re pre-approved, the lender commits, in writing, to the specific dollar amount it is willing to lend you.

Once you have a written commitment, you know exactly how much you can spend. This will not only help you feel more secure, it may also give you a negotiating edge. This is particularly true when there are multiple offers on your home of choice and the other buyers are not pre-approved. The pre-approval tells the seller that you already have the financing in place.

Meet with a CPA.

If you would like additional guidance in understanding and preparing for homeownership, consult with a CPA.

Questions? Contact Mark Zampino at 860-258-4800, ext. 212 or markz@cscpa.org.

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