Tips

Don't build yourself a mortgage mountain

It's fine to want the best home you can afford, but be certain that it is comfortable affordability. Although you may find certain mortgage lenders who will stretch your qualification ratios (the ratio of your total mortgage payment to your total income) the traditional ratios--the mortgage payment as 28% of your income and the total of your mortgage payment plus your monthly debt payments as 36% of your income--are good basic guidelines.

Get your budget under control

Spending some time reviewing your budget (or developing one if you don't already have it) and sharpening your money saving skills can bring big rewards later. A coordinated budget allows you to get the most home for your money without strapping yourself while eliminating wasteful spending.

Prepare to pay off small debts

Having 3 credit card balances, for example, one with a $125 balance, a second with a $165 balance and a third with $275 balance will only cloud the picture. Even though the total is only $565, all 3 will have minimum payments, credit lines, etc. If possible, prepare to pay them down to $0 balances.

Begin to gather documentation

It is not necessary that you have all items on hand before you apply, but there are a number of documents you will need eventually and the approval process will go much smoother if you begin to gather them now. Examples: W-2's and income tax returns from the last few years (especially if you are self-employed), copies of pay stubs, a copy of your credit report, records of any child support or alimony (either going out or coming in) and bank statements for all accounts (checking and saving) for the last several months.

Don't forget about closing costs

In addition to your down payment, you will need to reserve funds for closing costs. Depending on the type of loan and your location, these costs can range from 2-6% of the mortgage amount, will be paid in cash at the closing and cannot be borrowed funds.

Consider points when comparing

Your total mortgage cost will be determined by 3 factors: The interest rate, the term and the amount of points.

Consider a 15 or 20 year term

Many home buyers make the assumption that a shorter term will boost their payments out of reach. Unless you make the comparison, though, you may never know if a 15 or 20 year (if available) term could have been affordable. See a comparison of a sample loan (see our loan calculators). If you are concerned about committing to the higher payment of a shorter term, try this tactic: Mortgage the home with a 30 year loan but pay the mortgage at the shorter term payment. It will do wonders for your equity position!