by Caryna St. John

Created on: December 03, 2009

Are you a first-time home buyer on your way to apply for a mortgage? If so, there are a number of things that you should know before you take this big step toward becoming a homeowner. Being prepared before you walk into a bank to apply for a mortgage will go a long way toward securing the loan that you need for the best terms. Below are some tips to help you succeed.

1. Work History

In order to qualify for a mortgage you generally need to have a steady work history, meaning that you have been in the same job for at least two years. If you have not been working at the same job for the past two years but have been in the same industry for at least three years, that generally will qualify as a steady work history.

2. Affordability

Before you apply for a mortgage it helps to determine what you can afford. Take your gross income and multiply it by .25 (25 percent). This is the most that your house payment should ever be. If you enter into the risky situation where your house payment is more than 25% of your gross income, be prepared to either short-sell or walk away with a foreclosure on your credit report.

3. Debt-to-Income Ratio

Calculate your debt-to-income ratio. If your monthly debt payments will be greater than 36% of your monthly gross income (including your new mortgage), don't go through with an application. Wait until you have paid down debt to the point that taking on a mortgage will not mean paying more than 36% of your gross income toward debt each month.

4. Check Credit

Check your credit! Do not go to the free credit report websites, as they will not provide you with an accurate FICO score. Get your credit scores by purchasing them online through http://www.annualcreditreport.com. If your middle FICO score is less than 700, don't be surprised if you are offered an exorbitant rate for your mortgage.

5. Save the Down payment and Closing Costs

Finally, you need to save up some cash before you apply. You will need enough for the down payment, 5% of the loan amount for closing costs, and ideally proof that you have at least six months worth of payments set aside.

6. Plan Ahead

If you really want to plan ahead, consider from the beginning how you can pay down your mortgage faster. Figure out the amount that you would need to set aside each month in order to make the equivalent of one extra payment each year (it should be 1/12th of the payment amount each month). By making your monthly payment and paying 1/12th more each month, you will be making 13 payments every year and that will abbreviate your loan; just make sure that you have no pre-payment penalties.

By covering all of these bases you will greatly improve your chances of being approved for a mortgage, qualify for a better rate, and increase the likelihood that you will successfully pay down your loan. Above all else, remember that buying your first home is not a decision to be made quickly. Assess your finances, determine what you can afford, and congratulate yourself on this new chapter in your life!

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