Bad debts attributed to you but really owed by someone with a similar name or Social Security number will cost you big bucks if they lower your credit score. That's because a lender might charge you a higher mortgage rate -- assuming they don't reject your loan application outright. So McBride recommends starting any house hunt by pulling your credit reports and looking for errors. "You want to look for collection items showing up as unpaid even though you paid in full, bills showing up as paid late even though they weren't yours or weren't late -- things like that," he says. "Those are issues that need to be addressed." Federal law requires the three major U.S. credit bureaus -- Experian, Equifax ( EFX) and TransUnion -- to give you one free copy of your credit report each year. Some states also have separate laws that entitle you to a second free copy every 12 months. To order your free reports, go to the industry's https://www.annualcreditreport.com/cra/index.jsp site and request a copy of all three agencies' files on you. (Avoid other "free-credit-report" sites with similar Web addresses.) If you're planning to apply for a mortgage with a spouse or significant other, pull their credit reports as well. Should you uncover any mistakes (as 20% of consumers who participated in recent Federal Trade Commission study did) file a dispute with Experian, Equifax or TransUnion. Fixing problems can take weeks, so start now.
Once you've checked your credit reports and corrected errors, it's time to get preapproved for a mortgage. McBride says you need preapproval from only one lender, as you can always decide later to borrow money from a different bank if they offer you a better deal. In the meantime, getting an OK from a single bank should help you figure out exactly how much you can afford to pay for a home. You'll also have a leg up on competitors in the "bidding wars" that are happening more and more for homes as the market recovers. Expect to pay a small amount of money to apply for mortgage preapproval, as the lender will likely pass on costs for such things as buying its own copy of your credit report. McBride says such fees shouldn't top $100. Step 3: Assemble your down payment
Mortgage preapproval will tell you how much money you can borrow, but you'll still have to come up with a down payment. Financially conservative buyers often put 20% or more down on homes, but many consumers can qualify for traditional mortgages with just 10% in down payments -- or even 3.5% if they're getting Federal Housing Administration loans. (You'll have to take out FHA insurance or private mortgage insurance if you put less than 20% down.) Regardless of which route you take, you'll likely need to have thousands or tens of thousands of dollars ready to go for a down payment shortly after you make an offer on a place. McBride recommends building up your down payment using funds you don't need for any other purpose -- no draining of 401(k)s, Individual Retirement Accounts or emergency savings. "Some people scrape together whatever cash they possibly can for a down payment, but that leaves them without any emergency funds at the point when they need it the most," he says. You'll also need to pay closing costs for your mortgage, either by using out-of-pocket funds or rolling the expenses into your mortgage balance. Make sure you factor that into your financial calculations. Step 4: Start setting aside pay stubs, tax returns, etc.
You'll probably have to show a bank various financial records for your mortgage preapproval, and you'll definitely need to produce them once you apply for a loan for real. So McBride recommends setting aside a folder to keep updated pay stubs, tax returns and the like in one place. "Having a package of records all set to go will accelerate your mortgage application's processing time," he says. The expert suggests keeping your two latest pay stubs, two latest tax returns and six months of bank statements in a single folder set aside for home buying. (If you're married, keep your spouse's material in the same folder.) As new pay stubs and other relevant items come in, put them in your folder and take the old paperwork out. That way, you'll always have your loan documentation up to date and in a single spot.