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First-Time Homebuying, Part 1: Getting Your Financial House in Order

The purchase of your first home may be the most important financial decision you'll ever make — and possibly the largest, as far as dollars and cents go. Yet, finding the perfect property in the location you love is not the beginning, nor the end, of the journey.

Knowing ahead of time what steps you'll need to take can help you make informed, responsible decisions and eliminate a lot of anxiety and uncertainty as you start on the road to home ownership. The first step, particularly if you plan on financing the home with a mortgage, is getting your financial house in order.

Tackle your debt

A couple holding a sign that says 'Our First Home'.

It’s important to minimize your debt load because mortgage lenders calculate what’s known as your debt-to-income ratio (DTI). Essentially, this is how much money you spend each month paying off your debt expressed as a percentage of your total monthly income. While a higher DTI ratio can create difficulties, certain lenders, including FNB, have expanded programs for low- to moderate-income borrowers or those from majority-minority census tract areas. Some federal programs provide a route to financing for those with high DTI levels, as well.

Work on your credit score

Your credit score is your credit history, your current credit situation and a prediction of your future credit performance expressed as a single number — in most models, from 300 (poor) to 850 (excellent). It’s based on several factors, including your credit payment history, outstanding debts, mix of credit accounts and number of new requests for credit.

Importantly, lenders take into account your credit score as part of their decision on whether to approve you for a home mortgage — or other forms of credit, for that matter. Your score can also affect your insurance rates and even what jobs you can get. Therefore, the better your score, the more favorable the terms of a mortgage you’ll be offered, although certain banks, including FNB, have home loan solutions for those who lack a credit history or have a subpar score.

Check out FNB’s free financial education resources for more on improving your credit score. Online and Mobile Banking customers also have access to FNB’s Credit Center, where they can see their updated score, the factors impacting it, set goals and receive recommendations for improving it.

Check your credit reports

It’s important to check your credit reports several months before you apply for a mortgage to ensure that there are no errors in it. You and, if you have one, any additional borrower should request a report from each of the three national consumer-reporting agencies — Equifax, Experian and TransUnion. It’s best to check all three reports because the information in each may be different. Errors are common, and they can range from inaccurate payment information to an out-of-date home address or employment information. If there are errors, you will have time to correct them. Learn about credit report basics here.

Get pre-qualified — and pre-approved — for a mortgage

As discussed, a healthy credit score that reflects good debt management habits opens the door to more credit opportunities, including residential mortgage approval with a competitive rate. The ideal way to approach a mortgage is to get approved for one before you begin actively shopping for homes.

Understand your budget and how much you are willing to spend for a monthly payment. For most people, their mortgage will be the heftiest line item on their budget, so it’s crucial to be sure you can afford it. Next, search for the right lender who can offer you the right mortgage, including the down payment, rate, fees and closing costs, that works best for you. (See First-Time Homebuying, Part 2  for an introduction to mortgages.)

Understand, too, that there is a difference between pre-qualification and pre-approval. The former is based on nonverified data submitted to a lender by the consumer, resulting in an estimate for the size of the loan that may be offered. In some situations, pre-approval is a more detailed process, featuring the receipt and review of borrower documentation.

Once you are pre-approved, the home search can be much easier. You’ll know what homes are within your budget — narrowing the search and cutting out unrealistic options — and the sellers will feel more comfortable accepting an offer from someone who already has financing in place.

One house down, another to go…

When you’re feeling secure and your financial house is in order, you’ll be able to continue the process with confidence. Of course, there are many more details to consider, so don’t ignore our Knowledge Center’s other educational articles on homebuying and our Learning Center module on Buying a Home.

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