Before you start house-hunting, there are some things you should do that will make the entire process easier. Establish a record of paying your bills on time. Avoid taking out any new loans or applying for any new credit cards in the months before you start looking for a house. Pay off as much debt as possible to help you qualify for the loan and to give you more expendable income after you move in.

Check your credit report. It's the first thing a lender will do when you apply for prequalification or a mortgage, so it's a good idea for you to do it first. Make sure there's nothing in it that's inaccurate or will raise a potential lender's eyebrow. Be prepared to explain any late or missed payments. For information on how to get a copy of your credit report, see Chapter 6.

Review your entire financial situation. If you haven't already prepared a Net Worth Statement, as discussed in Chapter 1, now's the time to do it. Ditto for a budget (see Chapter 2). Make sure you can really handle the mortgage payments on top of the other debt you owe, and that you have a realistic feel for what other expenses you'll incur from home ownership.

Avoid Becoming House Poor

You don't want to end up in a situation where you have such high house payments that you can't afford much of anything else. You may think buying your dream house is worth any sacrifice, but years of doing without the enjoyment of vacations, new cars, eating out, decorating, or a myriad of other simple pleasures can make your dream house feel like a jail. It can also put a strain on your relationship with your spouse or partner. A good rule of thumb is to buy a house that costs less than two and a half times your income. If your income is $50,000 a year, try to keep your home price under $125,000.

Prepare the Down Payment

A down payment is the amount of money you pay up-front when you buy property, and it reduces the amount of money you need to borrow. The larger the down payment, the smaller your loan and monthly payments will be, but it's difficult to save enough for a sizeable down payment and closing costs that require cash (real-estate transfer taxes, escrows for property taxes and insurance, title insurance, attorney fees, loan origination fees, and so on).

There are several options for coming up with more cash. One is to go on a crash budget for a few months by cutting your spending to the bare minimum and saving as much cash as possible. While you wouldn't want to stick to a budget this strict for long, you may be able to do it for a few months. Another method is to sock away all the extra money that comes your way: income tax refunds, overtime, bonuses, cash gifts, or — if you're lucky — lottery winnings. You may have a relative who's willing to lend you money, but it's not legal to borrow money for your down payment unless you identify the loan as a debt and can still qualify. Otherwise your lender will require a statement that the money is a gift.