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A Basic Four-Step Financial Planning Guide to Buying Your First Home

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Are you ready to make one of the biggest financial planning steps of your life? The process of purchasing a new home can be both frightening and exhilarating! There is so much to do, so much to plan for – and before you take one step into a realtor’s or mortgage lender’s office, you need to be very comfortable in your knowledge of your own personal finances!

If you are comfortable with your finances and you know as much information as you can before going in, you are less likely to get fooled into purchasing a home at a cost that you can’t afford or on a plan that will cripple you in just a few years.

1. To Buy or Not to Buy

Prior to making this vital decision to buy a home, you may want to compare the costs between buying and renting a home. This difference may help you come to a decision on whether it really is the time for you to buy a new home – or if it’s better to rent for the time being. You can find an appropriate calculator at Ginnie Mae, which can help you make this decision.

A much more detailed Rent vs. Buy calculator can be found here. It includes other factors such as home insurance rate, association dues if any and monthly housing maintenance cost. Thanks Millionaire Mommy for the link!

Make sure to be as accurate as possible as you sort out your current rent and how much you can really afford as a down payment. You may not yet know your interest rate, so you may want to identify common interest rates in your state and county. At the very least, it is a good idea to consider a higher rate, such as 7.5%. This way you know you are not underestimating, but overestimating instead.

If you do make the determination that buying is better than renting at this time, what can you provide as a down payment on this new home? If you are a first time home buyer, you probably don’t have the funds to do a down payment, take a look state home buying programs that offer down payment assistance or limited down payment options, especially for first time home owners. You can visit the U.S. Department of Housing and Urban Development for a list of local home buying programs by state.

If you are looking to purchase a home and have already owned a home, you may have the equity or liquid funds available to address a down payment. The more you can afford to put down, the more you can qualify for the loan which gives you greater buying power in the buyer’s market.

2. Seeing Where You Stand Financially

Now that you are on the market for a new home, it’s time to assess your personal finances. There are many factors you will need to consider in order to ascertain that your financial situation is going to benefit you throughout the home buying process. The first step is to get a copy of your credit report! You can request a free credit report online through at

Make sure you don’t pay for credit reports unnecessarily. Every consumer is guaranteed the right to a copy of his or her credit report per year from each of the major credit reporting companies. The major credit reporting companies are Equifax, Experian, and TransUnion. The ability to get a free copy of a credit report gives consumers the opportunity to track their credit report and identify possible mistakes, flaws, and credit rates.


The Difference Between Credit Score and Credit Reports. Unlike credit reports, credit scores are a formulated rating which lets you know where you stand in terms of creditworthiness. One of the most popular and credible credit score is the score from Fair Issac, also known as FICO score.


Get Your Credit Score! Find out where you stand in terms of credit by getting your scores.

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Experian Credit Score
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Don’t despair if you have bad credit! This does not mean that you cannot buy a home. However, it does mean you’ll pay more in interest rates and may need to make a larger down payment. However, it’s best to know exactly what is on your credit report so that you can explain it to a mortgage company. A loan officer may need clarification on every late payment and negative credit mark before they can finance you.

Once you have that copy of your credit report in hand, you’ll need to find out how much of a home you can afford. Your next step is to find out your monthly obligations. This means tracking how much of your money is going to bills every month and your other debt responsibilities, such as credit cards, car loans, student loans, child support, alimony or other types of debt. Keep in mind that any student loans you may have where the payments are suspended or in grace period will still need to be paid when the suspension or grace period is over with.

3. How Much Can You Afford?

Now that you know your monthly obligations and your credit information, you are ready to calculate how much you can afford for a home. This can be accomplished in several ways. One way is to contact a realtor and provide them with your income information, monthly obligations and credit rating. They can then calculate out an approximate home loan amount that will give you a basis for shopping.

You can also do this online through many online mortgage affordability calculators by searching for “Mortgage Affordability Calculator.” If you can’t find one to your liking, you can use’s Affordability Calculator. You can then plug your financial information into their calculators to determine how much of a house you can afford to purchase. Armed with this information, you are now ready to start your search.

4. Where To Live?

To start your search, you’ll need to make some key decisions on where you want to purchase a home. It is a good idea to base this decision on where you want to live and where you work so that you can cut back on gas and transportation costs. You’ll also want to take into consideration factors about the cities themselves, such as the price of homes selling in that area, the rate of crime in the area, and, if you have children, the quality of schools.

One way to look for this information is to visit the city lookup at Melissa DATA. This is a free service that allows you to do lookups for cities and gain pertinent information on each city. You can examine crime rates, recently sold homes, and average incomes for the city. All of this information can be very important in choosing your new home town.

Your best buying power is to find a realtor local to your target city. Now that you are armed with your financial information, credit information, city preferences, and home cost limitations, you are ready to start looking for that new home of your dreams!

Additional Resources:

Before buying a home, it is always a great idea to get a home inspected before you sign on the dotted line. An inspection will tell you about the condition of the home, and can help you avoid buying a home that needs major repairs.

  • For Your Protection Get a Home Inspection
  • Ten Important Questions to Ask Your Home Inspector

Another important step to consider is home insurance, as lenders will require you to have home insurance before extending credit to you.

  • Tweleve Ways to Save Money On Your Home Insurance
  • Homeowner and Renter’s Insurance

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