Having recently purchased my first home I was able to learn a great deal about what’s important – and what’s not so important – when it comes to taking out a mortgage to buy a home. I’ve put together a list of useful advice that anyone buying a home and taking out a mortgage should know.

Know your credit

When taking out a loan as large as a mortgage (or when taking out any loan for that matter), you’ll want to know exactly what’s on your credit report and also have a good idea of what your credit score is. Know that you’ll receive the best deals on rates and the associated cost to those rates (e.g. discount points) when your credit score is above a 720. Also realize that most lenders out there will likely pull your credit from all three major credit bureaus (TransUnion; Equifax and Experian) so you’ll want to make sure you know what’s on all three of those reports.

To give yourself plenty of time to do any necessary damage control to your credit you’ll want to pull your credit report from the three major credit bureaus at least six months before you plan to take out a mortgage in order to purchase a house. Save yourself some money by getting your credit reports from AnnualCreditReport.com (your report is really free here) if you haven’t already pulled your reports in the last 12 months. You will have to pay to get a copy of your credit score though, unfortunately.

Plan for a down payment and closing costs

Know how much cash you’ll have available for a down payment and closing costs when you start looking to buy. If you already know how much cash you’ll be using as a down payment on your home then consolidate all of that money into one savings or checking account at least two months before you plan on applying for the mortgage. By doing this you’ll save yourself the hassle of providing account statements from each bank account, investment account and retirement account from which you’ll be using for the down payment and closing costs.

If you don’t have much cash available now but you do anticipate buying a home sometime in the near future you’ll want to start saving for this now. Unless you’re eligible for a VA loan you likely won’t have an option of a no-down-payment loan. Even going with an FHA loan (a type of government insured mortgage) you’ll still have to come up with at least 3 1/2% for the down payment. In some cases you can still secure a conventional loan with as little as 5% down and with no funding fee on these types of loans (as you’ll see on VA and FHA loans) they’re still a pretty good product. If you’re short on cash you’ll want to start saving now – my recommendation is to set up an automatic savings plan.

Be prepared to provide documentation on income and assets.

I’ve had a couple of friends who were interested in taking out a mortgage but for whatever reason were unable to provide documentation on their income and/or assets, whether it be because they were paid primarily in tips and didn’t report a majority of this on their tax returns or they kept a large amount of their free cash literally as “cash” rather than storing it away in a savings account. They were unsuccessful at getting approved for a mortgage because they could not provide adequate documentation to prove either their income or assets. Let me be clear about this: “no doc” home loans do not exist in today’s environment. If they do they’re probably going to be extraordinarily difficult to find and will likely have unreasonable rates and fees to accompany them. Moral of this story? Make sure you have adequate documentation of your assets and your income. If you’re even slightly unsure if what you have will be adequate then call your local lender and ask them if what you have would be sufficient.

Look for programs for first time buyers, but don’t count on them.

There are plenty of programs out there for first time home-buyers; you just need to know where to look and how to qualify for them. Try checking with your local city and county governments to see what programs are available. With that being said my advice is to plan for the worst and hope for the best. If you can’t find or don’t qualify for a first time home-buyer program then make sure it makes sense to buy a home still before you actually do!

Also don’t hesitate to ask for the seller to contribute to closing costs, but don’t count on that either. Again plan for the worst!

Know your limits and don’t be afraid to say no.

Personal finance should be personal but it shouldn’t be nearly as emotional as people let it be. Do not let your feelings get in the way of making a smart decision when it comes to taking buying a home. Don’t fall in love with a house that you can’t realistically afford. It’s not worth the stress and the possibility of losing it if you can’t keep up on the mortgage payments. Don’t get so attached to the idea of owning your own home that you purchase one when it just doesn’t make sense to do so. Don’t be afraid to walk away from something if it doesn’t make sense financially. You won’t regret it – stay positive and you’ll find that perfect home when you’re ready.

Today I’m going to feature my very first screencast, which walks you through getting a free copy of your credit report from annualcreditreport.com. Sorry about the crude quality, I’m still new to this, but it gets the job done!

You may have been turned down for a loan recently and were told by the bank that your credit was just not good enough.  Would this concern you, if it were the case?  It should.  They’re essentially telling you that you’re too risky and they don’t necessarily believe that they’ll be getting their money back once they lend it to you.  If you’ve always done well with making loan payments on time and you just don’t understand how you could have bad credit then it may be time to get a copy of your Credit report online.  You can do this from a number of sites on the Internet or by contacting the credit reporting bureau’s directly. They are TransUnion, Equifax and Experian.  These three agencies are responsible for collecting and then compiling all credit related information about you, me and everyone else.

I plan on doing a walkthrough soon on Debit versus Credit about how to get a free copy of your credit report online.  In the meantime it’s really not too difficult.  There are a number of websites that will allow you to get a copy of your credit report.  Just be weary of sites that try to charge you or make you sign up for product trials.  Unless you find the product useful it’s best to try another site that doesn’t do so.

Once you’ve ordered a copy of your credit report you should inspect it and make sure that there are no inaccuracies on it.  If anything looks wrong you can and you should dispute it.  For example if I were to order a copy of my credit report from Experian and it said that I lived in Oregon I would immediately question this and dispute it with Experian.  I have never lived in Oregon and thus it would be bad if my credit report were to list such.  Likewise it would be upsetting if I had never missed a payment on my credit card yet it was reporting that I was 60 days past due with it.  This would seriously affect my credit score and I would dispute it immediately because it is completely untrue.

These are the types of things that you should dispute.  Truthfully if anything looks incorrect or wrong at all then you ought to dispute it.  Your credit report is your financial lifeline and if anything is wrong with it you may run into some issues in the future.  Disputing inaccuracies is quite easy.  Follow the links for each of the different agencies: Experian, Equifax, TransUnion.

Good luck and if you have any questions or comments I’d love to hear from you!