Lenders use your credit scores and the information on your credit report to determine whether you qualify for a loan and what interest rate to offer you. Check your own credit reports early on to prevent unpleasant surprises and correct any mistakes. You’ll also need a good idea of your credit scores to make the most of our budgeting and planning tools.

KEY TOOL

Credit report checklist

WHAT TO DO NOW

Get copies of your credit reports.

There are three major credit reporting companies – Equifax, Experian, and TransUnion. You can get a free copy of your credit report once per year from all three companies at www.annualcreditreport.com.

Check your reports carefully for errors.

Look on your credit reports for any debts or credit cards you don’t recognize.  Also check for disputed items that still show up even though they were resolved in your favor. A late or missed payment isn’t an error if it actually happened.

• Use our credit report checklist to review each report.
• If you find any errors on your reports, file a dispute to get them corrected as soon as possible. Learn how.

Get one or more of your credit scores.

A credit score is a number calculated based on the information in your credit report. You actually have many different credit scores, and there are many ways to get a credit score.

• You may be able to get a credit score for free, or you can buy a score.  Learn more about your options for getting a credit score.
• Most mortgage lenders use FICO ®  scores. Learn more about what a FICO score is.

WHAT TO KNOW

Checking your own credit won’t hurt your credit scores.

When you check your own credit reports or scores, the request is processed differently than when a lender checks your credit.  Checking your own credit won’t hurt your scores.

Credit scores range from 300 to 850.

Higher scores represent a better credit history and make you eligible for lower interest rates.

• As of March 2015, the median FICO score nationwide was 721 – half of consumers with a FICO score had scores above 721, and half had scores below 721.

The score you receive can differ depending on which credit reporting company is used.

Most mortgage lenders look at FICO scores from all three companies and use the middle score for deciding what rate to offer you.

• If you are applying for a mortgage jointly with a co-borrower, lenders typically look at both borrowers’ middle scores and use the lower one to decide the rate and approve the loan.

The rate you are offered on a mortgage can vary quite a bit depending on your credit score.

Your credit score is only one factor in a mortgage lender’s decision, but it’s an important one.

While there are no firm rules about exactly how your credit score affects the interest rates you may be offered for a home loan, in general:

• The best rates go to borrowers with credit scores in the mid- to high-700s or above. These borrowers typically also have the most choices available to them.
• Borrowers with credit scores in the high-600s to the low-700s typically pay somewhat higher rates.
• Borrowers with credit scores in the low- to mid-600s range generally pay the highest rates and have the fewest choices. Borrowers in this range may have trouble qualifying for a loan, depending on the loan type and the specific lender.
• Borrowers with scores below 600 may want to improve their credit before applying for a mortgage. If you need help improving your credit, contact a HUD-approved housing counselor.

Explore interest rates for different credit scores to get a sense of how much your credit score matters.

A housing counselor can help you get your credit report and check for errors.

A housing counselor can be a good resource throughout the home buying process.  You can find a HUD-approved housing counselor online or by calling 1-800- 569-4287.

HOW TO AVOID PITFALLS

Errors on your credit reports can reduce your scores unnecessarily.

An error in your credit reports could mean a higher interest rate and less money in your pocket – so it is important to correct any errors well before you apply for a loan.

• Check your reports carefully – if there are any errors, file a dispute with the credit reporting company as soon as possible. If you are unable to resolve the dispute, you can submit a complaint to the CFPB.

Be wary of companies offering to “fix” your credit score.

Be especially wary if they charge an upfront fee – these companies are often scams.

Never pay in advance. Don’t believe promises of anyone who says that they can get negative, but correct, information off your credit report.

• If you need help improving your credit, contact a HUD-approved housing counselor online or by calling 1-800- 569-4287.

If you don’t have a credit report or score, consult a housing counselor.

If you haven’t used credit cards or taken out a loan before, you may not have a credit report.  Or if you’ve only had a little bit of credit, your credit file may not contain enough information to calculate a score.  A housing counselor can help you figure out what your options are.

Before you start home shopping, take a close look at your current spending. For most people, buying a new home means taking on new expenses — whether you are currently renting or already own a home. You need a clear understanding of how much you’re currently spending to decide what you can comfortably afford to spend on a new home.

KEY TOOL

Spending tracker

WHAT TO DO NOW

Take a realistic look at your current spending patterns.

There are several ways to look at your current spending.  Choose what works best for you.  Consider one or more of the following:

• Look at your checking account and credit card history for the last several months.
• Consider signing up for a personal financial management tool to help track your spending, if you don’t currently use one. Several private companies offer online tools, and your bank or credit union may also offer similar tools.
• Save your receipts and use our spending tracker to tally them up at the end of the week or month.  Or, carry a small notebook with you to record all your expenses. Don’t leave anything out.
• Active duty servicemembers can also consult their installation’s personal financial manager (PFM) for questions and help with this step.

Draw up an as-is monthly budget that accurately reflects your current spending.

• Make sure to include a “miscellaneous” category. Whether it is a brake replacement for the car or plane tickets to a best friend’s wedding, there’s always something out-of- the-ordinary.
• If you make regular savings contributions to an emergency fund or other savings goal, include these in your budget.
• Look back over several months to make sure you don’t miss less frequent expenses like insurance payments, medical expenses, school clothes, tuition, support for family members, seasonal and recreational costs, gifts, charity, and vacations.

Add up all the categories and compare this budget to your monthly take-home pay.

How much is left over?

• Check your bank statements carefully to see whether your budget is realistic. If the amount you typically have left over in your bank account each month doesn’t match the amount your budget says should be left over, re-examine your spending patterns to see if you need to adjust the numbers in your budget.

WHAT TO KNOW

If you’ve never done a budget or spending plan before, you’re not alone.

About half of Americans don’t have a budget.  But knowing how you spend your money is an important step in deciding how much you can afford to spend on a home.  Even if you don’t generally like to think about money, it’s doable. It is worth it to spend some time looking at your spending now, as you’re deciding how much you can afford to buy.

Research shows that people who plan carefully for big purchases like a home are much less likely to have financial trouble later.

HOW TO AVOID PITFALLS

Don’t edit your budget to reflect what you “could” or “should” be spending.

The goal here is to assess what you are spending – in the next step you’ll decide what changes you might be able to make in the future.

Now that you have a clear picture of your current spending habits, you can develop a forward-looking budget for how you’ll spend your money once you’ve bought a new home. This lets you decide on a target monthly home payment.

WHAT TO DO NOW

Decide how much you can afford to spend on a total monthly home payment.

• Your total monthly home payment includes mortgage principal, interest, property taxes, homeowner’s insurance, and any mortgage insurance.
• Estimate expenses for electricity, gas, cable, water, and other required monthly costs of homeownership such as condo or Homeowner’s Association (HOA) dues.  Also estimate expenses for home maintenance and improvements. Make sure you will have enough money to pay for these costs in addition to your total monthly home payment.
• Think about what your budget will be once you have bought your home, and decide how much you want to be saving each month for emergencies and other goals.

Make adjustments.

If you are considering cutting back on some of your discretionary spending in order to be able to comfortably afford the kind of home you want, take a second look at your budget and make realistic adjustments. Make sure your adjusted budget adequately accounts for all the new costs of homeownership.

WHAT TO KNOW

This is just the first step in deciding how much you can afford.

As you move forward in your home search and mortgage process, you’ll gather more information and can refine your assumptions. Come back to this step and revisit your budget and your calculations as you gather more information.

Many homeowners pay their property taxes and homeowners insurance bundled into their mortgage payment.

This arrangement is known as an escrow account. If you do not have an escrow account, you will still have to pay these costs. An escrow account lets you put aside the money monthly so that you won’t have a big expense during the year.

Some types of homes may have additional required monthly costs.

If you’re interested in buying a condo, co-op, or a home in a planned subdivision or other organized community with shared services, you usually have to pay condo fees or Homeowners Association (HOA) dues. These fees vary widely depending on the amenities provided by the community. Consider these fees carefully when comparing potential homes. You may not be able to afford a home that is generally in your price range if the condo or HOA fees are higher than you were expecting. Condo or HOA fees are usually paid separately from your monthly mortgage payment.

HOW TO AVOID PITFALLS

Owning a home means more than just trading a rent payment for a mortgage payment.

New homeowners are often surprised by the extra costs of owning property, including insurance, taxes, and association or condo fees. You also have repair costs, upkeep, and may want to make improvements and upgrades. A bigger space may need new furnishings or appliances. Finally, there are things you pay for as a homeowner that may have been included in your rent previously, such as water, trash pickup, and other utilities.

Now that you have a good sense of what you can comfortably afford on a monthly basis, it’s time to look at your savings and determine how much you can afford for a down payment.

WHAT TO DO NOW

Determine how much money you are able to spend upfront on your home purchase.

• Gather your savings and investment statements and add up your total available funds.
• Decide how much you want to set aside for other savings goals, moving costs, and any renovations for your new home. Subtract these amounts.
• Now, subtract an additional amount for an emergency cushion. A good rule of thumb is at least three to six months’ worth of expenses.
• The result is your maximum available cash for closing – how much you can contribute out of pocket at the time you close on your loan.

Estimate your costs to “close.”

In addition to your down payment, there are many costs associated with “closing” or finalizing your loan and home purchase. Closing costs depend on a lot of things – the price of the home you buy, your down payment amount, the lender costs, the kind of loan you choose, and the location of your new home. Since you’re still early in the process, it’s hard to make a precise estimate at this stage.

• You can make a rough estimate now, using a home price that is typical for the neighborhoods you’d like to live in. Come back and refine your estimate as you move forward and gather more information.
• Typically, closing costs (not including your down payment) range from 2-5% of the home purchase price.

Determine your down payment.

Subtract your closing costs estimate from your available cash for closing to determine your maximum down payment.

WHAT TO KNOW

Set aside some money to cover initial home expenses.

New homeowners often find things that need fixing, or discover that they need an additional piece of furniture to make the new home work for their family. Moving expenses and utility set-up fees can also add up. When thinking about how much you can afford for a down payment, make sure to set aside some money to cover these expenses.

Your down payment amount affects the type of loan you can get, your interest rate, and your loan costs.

In general, the higher your down payment, the less your loan is likely to cost.

• In most cases, you need a down payment of at least 3 percent of your target home price. Many loan types and lenders require 5 percent down or more.
• You can often save money if you put down at least 10 percent of the home price, and you’ll save the most if you put down at least 20 percent.
• When lenders decide the interest rate and loan costs to offer you, they typically look at your down payment in increments of 5 percent. There are usually no savings for putting down “almost” the required amount. For example, if you have enough saved for a down payment of, say, 8 percent of your target home price, think about whether you could save up a little more before buying, or choose a slightly cheaper home, so you can hit the 10 percent mark. If you’re unsure about what to do, consider talking to a HUD-certified housing counselor.

Low- or no-down payment options may be available to you.

• There are special programs for veterans and service members, rural residents, some types of first-time homebuyers, and others. A housing counselor may be familiar with local programs in your area.
• Individual lenders may also offer their own low- or no-down payment options.
• Low-down payment options usually come at increased cost. When you meet with lenders, ask questions and ask to see multiple choices.

Putting money into your home means it’s not available for other things.

When deciding how much money to put down, keep in mind that once you put money into your home, it’s not easy to get it back out again. If you need the money for another major expense, like paying for college or medical expenses, you may find that there is no way for you to access this money. While home equity loans or lines of credit allow homeowners to borrow against their equity, you usually need to have owned your home for several years and built up significant equity in order to qualify. Borrowing against your equity also isn’t free – you pay interest on the loan.

HOW TO AVOID PITFALLS

Give yourself a cushion.

At this stage, none of the numbers you are working with are precise. It’s a good idea to give yourself a cushion in your estimates, so that if your costs turn out to be higher than expected, you’re not left scrambling for money.

Don’t forget your other savings goals.

When considering how much savings you have available for your down payment, don’t forget your retirement and other savings goals.

Once you know your estimated down payment amount, one of your credit scores, and a few other details, you can use our tools to figure out what interest rate you might expect to pay for a mortgage. This lets you get a realistic estimate of the home price range that you can comfortably afford.

KEY TOOL

Explore interest rates

WHAT TO DO NOW

Explore interest rates.

The interest rate you receive is one of the most important factors in determining the home price you can afford. It’s important to know the range of rates you can expect, and the impact that rate has on your home price.

• Explore the range of interest rates you can expect, based on your information.
• Choose a realistic interest rate to use in calculating your affordable home price.

Figure out how much you can afford for monthly principal and interest.

The loan amount you can afford depends on how much you can afford to pay back each month.

• If you haven’t already, decide how much you can afford to spend on a total monthly home payment.
• Your total monthly home payment includes several costs of homeownership. Your principal and interest payment is the part of your total monthly payment that pays back your loan and is used to calculate your affordable loan amount.  Make sure you understand the difference.
• Estimate how much you expect to pay monthly in property taxes and homeowner’s insurance. Browsing for-sale listings or talking with family, friends, or a real estate agent in your area is a good way to get a rough estimate.
• Subtract your estimated taxes and insurance from your target total monthly home payment to get the amount you can afford to pay monthly for principal and interest.

Calculate your affordable loan amount.

There are many mortgage calculators available online. You can use our simple calculator, or try searching online for “mortgage calculator.” How you calculate your affordable loan amount depends on the kind of calculator you use:

• Most mortgage calculators ask you to input the loan amount, loan term (length) in years, and interest rate to find out the monthly principal and interest payment.
• Start with a ballpark estimate for the loan amount, and see whether the resulting principal and interest payment is more or less than the amount you can afford for principal and interest. Adjust the loan amount up or down until you find the loan amount that corresponds to your affordable principal and interest payment.
• Some mortgage calculators allow you to input the interest rate and the principal and interest payment amount to calculate the maximum loan amount directly.

Estimate your affordable home price.

Add your down payment amount to your calculated loan amount to get an estimate of the home price that will be affordable for you.

WHAT TO KNOW

Your home price estimate is not perfect, and it’s not set in stone.

Think about your home price estimate as a good starting place for deciding how much you can comfortably afford. You had to make some assumptions to get here. As you move forward and gather more information, you can go back and refine those assumptions. Try out different scenarios – for example, a different down payment amount – and make adjustments.

Your down payment amount affects how much you can afford.

If your down payment amount is less than 20% of your target home price, you will likely need to pay for mortgage insurance.  Mortgage insurance adds to your monthly costs. You may need to reduce your target home price accordingly if you plan to put less than 20 percent down.  In the next phase, explore your loan choices to learn more about how your down payment and loan choices affect how much you can afford.

Most mortgage calculators start by showing you a standard 30-year fixed rate loan.

This is fine for estimating your home price at this stage. In the Explore loan choices phase, you’ll learn more about different options for your loan and how to get the best overall deal for you.

The home price you can afford depends on four key factors.

Change any one of these four factors, and you may be able to afford a more expensive or less expensive home:

1. How much you can pay monthly.
2. How much you can pay up front in a down payment.
3. The kind of loan you get, for example a 30-year fixed, 30-year adjustable, 15-year fixed, etc.
4. The interest rate and terms of your loan.

Buying a home is a big financial decision. Now that you’ve looked at your finances and estimated how much you can afford to pay for a home, consider whether now is the right time for you to buy.

WHAT TO DO NOW

Compare your estimate for the home price you can afford to the prices of homes in your target area.

• Real estate websites can help you find general prices for the neighborhoods you are interested in.
• If the typical home price in your target neighborhoods is more than you can afford, you may want to explore options in other neighborhoods or adjust your search criteria.

Explore the financial tradeoffs of renting vs. buying.

If you’re currently renting, or moving to a new area, a calculator like the New York Times’ free “Is It Better to Rent or Buy?” calculator can help you assess the financial tradeoffs of renting versus buying based on your financial situation and the length of time you expect to be in your new home.

• Calculators necessarily make assumptions about future economic conditions, such as the rate of home price growth. These assumptions can have a big impact on the calculator’s results. Try several different scenarios to see the range of possible outcomes.
• Some people choose to rent first when moving to a new area, so they can get more information about potential neighborhoods before buying.

Understand the risks and responsibilities of homeownership.

Homeownership can be rewarding and a good way to build wealth. But there are risks and responsibilities associated with owning property. When you rent, your landlord is responsible for the property and takes on the risks. When you buy, you take on these risks and responsibilities:

• Your home value could decline, and you could lose equity or even owe more than your home is worth.
• If something important breaks – for example, the furnace quits working, or the roof starts to leak – you will have to pay for expensive repairs to get it fixed right away.
• If something else breaks – for example, a cracked window, a broken dishwasher, or a clogged toilet – you will need to spend the time to fix it yourself or pay for a professional.

WHAT TO KNOW

Your decision isn’t final.

You’re still early in the home-buying process. You don’t have to decide once and for all whether now is the right time for you to buy. At each step of the process, you make a tentative decision based on the information you have available to keep moving forward, wait for a better time, or stop. As you get more precise information about home prices and loan costs, you can continue to reevaluate whether the value you get from buying is worth the price you have to pay.

If what you can afford to pay for a home isn’t enough to get the type of home you want in a neighborhood you enjoy, you may want to consider:

• Cutting back your optional monthly spending so you can afford a higher monthly payment.
• Waiting to buy until you can save enough for a higher down payment.
• Renting in or near the neighborhood you’re interested in.

Keep an open mind.

Depending on your location and how long you expect to live in the home, buying or renting might be the right financial choice for you right now.

HOW TO AVOID PITFALLS

In some situations, it may be better to rent.

Is your current employment short-term or unstable?

• Owning a home is a big financial commitment. If you’re not confident that you can continue earning a similar income for the foreseeable future, it might make more sense to keep renting.
  Is there a chance you might move within the next few years?
• Renters have more flexibility. It can be risky and expensive to buy if you end up needing to move again within a few years. You pay real estate agent commissions, taxes, and other transaction costs to sell your home and buy a new one. If prices decline, you may not be able to sell your home at all.

Buying a home and choosing a mortgage can be complicated. It helps to have people you can talk things over with. People tend to do best when they rely on a network of trusted advisors – not just one person – to help them through the process. Your friends, relatives, and co-workers can all serve as advisors in this process – they don’t have to be professionals.

WHAT TO DO NOW

Make a list of friends, family, co-workers, or other people you trust who have bought a home or refinanced a mortgage recently.

Identify at least three people you feel comfortable talking to about the home buying and mortgage shopping process.

The people you choose should be knowledgeable and trustworthy, but they don’t all have to be the people you are closest to.

• You should be able to talk frankly about money issues with at least two people. Also include people that you’d feel comfortable talking to about their own home buying experience, and people you can ask for recommendations on lenders or real estate agents.

Talk with the people on your list.

Ask the people you choose if they will share their recent experiences and if you can come back to them from time to time as you move through the process. Here are a few questions you might ask to get the conversation started:

• Were there things during the process of buying a home and finding a mortgage that surprised you or that you were not expecting?
• What did you learn during the process that you wish you knew at the beginning?
• If you were buying and financing a house again, what would you do differently?

Consider meeting with a housing counselor.

Especially if this is your first time buying a home, a housing counselor can be a very helpful advisor throughout this process. You can find a HUD-certified housing counselor online or by calling 1-800- 569-4287. Ask for the pre-purchase counseling services.

Start to gather names of recommended professionals.

Throughout this process, you need to work with many professionals, including real estate agents and loan officers.

WHAT TO KNOW

Real estate agents and mortgage loan officers are important sources of information in this process – but they are not the only people you should consult.

These professionals make money based on your decisions. Their interests may not always be aligned with your interests. Always ask yourself, “does what I’m hearing make sense?” Having a network of advisors helps you evaluate what you’re hearing and help you think through major decisions.

Building a network of advisors is not just for first-time homebuyers.

Everyone can benefit from an outside perspective when making big financial decisions. The market changes rapidly, so the experience may be very different from your last home purchase or refinance.

Active duty servicemembers may want to contact their installation’s personal financial manager (PFM).

HOW TO AVOID PITFALLS

Don’t rely on just one person for advice.

Get a second – or a third – opinion throughout the process and before making key decisions. Then make the best choice for yourself.

In the Explore loan choices phase, you will talk with several lenders to get acquainted. You’ll need to give these lenders some information about your finances. It’s best to gather this information now, so you’ll have it ready at your fingertips.

WHAT TO DO NOW

Gather your personal and financial information.

• Pay stub for the last 30 days
• W-2 forms, last two years
• Signed federal tax return, last two years
• Documentation of any other sources of income
• Bank statements, two most recent
• Documentation of the source of your down payment: investment or savings account statements showing at least two months’ history of ownership. If some of the funds were a gift, get a signed statement from the giver stating that the funds were a gift.
• Documentation of name change, if recent
• Proof of your identity (typically a drivers’ license or non-driver ID)
• Social security number
• Certificate of housing counseling or home buyer education, if you have one

Servicemembers or veterans should obtain a certificate of eligibility from the VA.

The VA’s Home Loan Guarantee Program is a good option for veterans and servicemembers to consider, and you need this certificate if you decide to go that route.

WHAT TO KNOW

The more organized you are, the faster the loan approval process is likely to be.

Make sure your documents are accurate and complete.

Your lenders use the information you provide to decide how much they are willing to lend you at what interest rate. If your information is inaccurate, you could encounter costly surprises down the road. If your documents are incomplete, lenders may reject them.

• Make sure to include every page of multi-page documents, even ones marked “intentionally left blank.”
• Make sure when printing online documents that the full URL is included on the bottom of each page.

Chances are, you’ll need to update your loan application packet at least once during this process.

Lenders like to see the most recent bank statements, pay stubs, etc. If you access any of these items online, write a reminder to yourself on how to find the information again so you can update your packet easily.

If you are self-employed or have irregular or non-wage income, you may need additional documentation.

Requirements vary from lender to lender and depending on your specific situation. Share your situation when you meet with loan officers or a housing counselor and ask what kind of documentation you need.