Preparing to buy your home

Before you plunge too deeply into house hunting, you should have a clear understanding
what you're getting into. Buying a house means you had better have your own financial
house in order. We'll help get you there -- and the time spent on preparation will save
you money in the long run!

First, we'll spend a few moments reviewing how mortgages work, and then help you get your
finances ready.

How mortgages work

A mortgage is a long-term loan that a borrower obtains from a bank, thrift, independent
mortgage broker, online lender or even the property seller. The house and the land it sits on
serve as collateral for the loan. The borrower signs documents at closing time, giving the lender
a lien against the property. If that borrower doesn't make payments as agreed, the lender can
take the home through foreclosure! Because mortgages are such large loans, consumers pay
them off over long periods -- usually 30 years. Their monthly payments gradually whittle away
the principal balance.

A monthly mortgage payment is sometimes called a PITI payment. That's because each one
covers a portion of the following four costs:

Principal -- the loan balance
Interest -- interest owed on that balance
Real estate Taxes -- taxes assessed by different government agencies to pay for school
construction, fire department service, etc.
Property Insurance -- insurance coverage against theft, fire, hurricanes and other disasters

Borrowers can choose to pay their real estate taxes and insurance in lump sums when they
come due or in monthly installments to an escrow accounts Depending on the kind of mortgage
a borrower has, the monthly payment may also include a separate levy for private mortgage
insurance (PMI) or government-backed mortgage insurance premiums.

The breakdown of each payment (the amount that goes toward principal, interest, etc.) changes
over time because mortgages are based on a repayment formula called amortization.
That's a fancy term meaning the lender spreads the interest you owe on the mortgage over
hundreds of payments so that the overall loan is as affordable as possible.

Better check your credit:

Your ability to get a loan at favorable rates rests largely on how well you have handled credit in
the past. So you'll want to check your credit reports -- the computerized records of the loans,
credit cards, mortgages, bankruptcy filings and other financial things lurking in your past.
Lenders take a close look at both credit reports and credit scores when evaluating borrowers.
By checking your credit history before calling a broker or logging onto a lender's Web site, you
can see if it contains any mistakes and correct them. That will keep your credit score from being
artificially low.

Mortgage companies will take the information contained in the credit report and use it to compute
a credit score, or numerical representation of your credit worthiness.
(This is often called a "FICO score" after Fair Isaac & Co., the firm that created the most commonly
used formula.) Scores range from the 300s to about 900, with the vast majority of folks falling in the
600s and 700s. The higher the score, the less risky you are as a borrower.

What has the biggest impact on your credit score?

1. Past delinquency: People who have failed to make payments in the past tend to do the same
in the future. The more recent the delinquency, the more important it is. A 30-day delinquency in the
past 12 months really hinders your chances of getting a mortgage at a favorable rate.

2. The way credit has been used: Someone who is maxed out or close to the limit on a credit card
is considered more risky.

3. The age of the credit file: The longer you have had credit, the better.

4. The number of times a person asks for credit: The system frowns upon those who have initiated
several requests for credit cards, loans or other unsecured debt instruments over a short period.

5. A customer's mix of credit: Someone with only a secured credit card is generally riskier than
someone who has a combination of installment and revolving loans

Once you've checked your credit, and your credit is OK, consider getting pre-qualified
(a lender will review your financial history before you find a home) or pre-approved
(a lender will check your credit and provide you with a letter stating you've been pre-approved for
a certain amount). Both will help you, but a pre-approval will help more by showing everyone you're
in a position to move.

There! That's a quick look at the mortgage world, and how you can save by preparing yourself for
the financial inspection that goes with it.

Pay for your credit report
by credit card or check