Before purchasing a new home, the smart home buyer will take several things into consideration. There are decisions to be made in regards to finding a good realtor and/or a reputable home builder; researching local communities and obtaining information on schools, community services, and amenities; and if this is not a first home purchase, decisions on how to market and sell their current home. It is, however, financial preparation that is most important for the smart home buyer.

Evaluating your credit report

Your credit score can determine the type of loan you get or if you get a loan at all. Individuals with low credit scores are not excluded from obtaining a mortgage, but it definitely makes the process more difficult. Before you begin shopping for a home, you should obtain a copy of your credit report and ensure that there are no major blemishes that will stand out to a lender.

You may already know that reduced credit scores are the result of late payment or non-payment of credit accounts, but did you know that lenders also look at your available credit vs. balances owed? The closer your credit balances are to their maximum limits, the lower your overall credit score.

Some individuals make the mistake of consolidating and canceling credit accounts because they erroneously believe that too much credit looks bad to lenders. This is not necessarily true. The most important factor that the lender takes into consideration is how close the applicant is to being "maxed out" on their credit. This is why you should make sure that you have more available credit than balances owed.

Debt to income ratio

Another major factor in a lenders determination of whether to extend a mortgage is the all-important debt to income ratio. Basically, your debt to income ratio is how much money you bring in vs. your total amount of debt. This includes credit cards, real estate, car payments, student loans, and any other debts that you may have incurred.

Debt to income ratio can make it difficult to buy a new home before selling your existing home if your lender does not think you have the income to cover two mortgages. If at all possible, you should sell your existing home before purchasing a new one. Also, you should pay off as many outstanding debts as possible before applying for a new mortgage.

How much home can you really afford?

After evaluating your credit score and debt-to-income ratio, you should have a much better idea of whether you can afford a new home, and if so, how much you can afford to pay for your new home. Be sure to take insurance and tax payments into consideration, as these are often added to your monthly mortgage payments. If you decide against the monthly addition, you will need to produce a lump-sum payment and should plan accordingly.

Once you have your financial information in order, it is time to find a lender. You can choose your personal bank, a private mortgage broker, or one of the many online services which provide quotes from several different lenders. Your realtor or home builder can help with finding the best mortgage broker.

Pre-approval puts you ahead of the game

After choosing a lender, it is a good idea to complete an application and obtain pre-approval for your mortgage. This does not obligate you to accept a mortgage or terms, it simply gives you an estimate on the maximum loan amount you can obtain from that particular lender. This information is critical when deciding the ideal price range for your new home and saves you the time and trouble of looking at homes outside your target price range.

If you find credit issues or blemishes in the course of your preparations or during the pre-approval process, it doesn't necessarily mean that a new home is out of your reach. Some lenders will approve a mortgage for the buyer with imperfect credit, but it often comes at the price of a higher down payment and interest rate. Take this into consideration when evaluating your target price range.

Reaping the benefits of preparation

By completing these simple preparations and realistically evaluating your financial situation, you will be starting out ahead of the game when it comes to purchasing your new home. You now have a target price range for your new home that suits your individual budget, and pre-approval for your mortgage. Now you can put all of your focus and energy into finding the perfect new home.