mortgage

4 secrets to budgeting for a home purchase

Living from one paycheck to the next may be the norm for many people. But homebuyers need a better strategy.

"If buying a home is your goal, then it needs to be your priority," says Tim Kirchner, vice president of MetLife Bank in Irving, Texas. "Most people need to sacrifice a little and stick to a budget in order to save for a home."

A good budget plan begins one or two years before the buyer makes an offer. Here are four tips for renters who plan to become homeowners.

Build strong credit

When it comes to securing a loan at the best mortgage rate, credit is king.

"The most important focus for all potential buyers should be improving their credit score," says Jean Badciong, chief operating officer of Inlanta Mortgage in Waukesha, Wis. "A low score can prevent someone from buying a home or at least from qualifying for an affordable mortgage rate."

Greg Holmes is national director of sales and marketing for Credit Plus, a company in Salisbury, Md., that provides credit reports to mortgage lenders. He says potential buyers should request their free credit report at AnnualCreditReport.com.

"Some people who think they have good credit don't, while people who think their credit is bad may be surprised that it is actually OK," Holmes says. "Everyone should check their report for accuracy and fix any mistakes. It can take months to correct errors."

To improve their credit scores, Holmes says buyers should pay off past-due bills, pay every bill on time and reduce their balances to less than 30 percent of the credit limit on every account. Also, it is best to have three to five credit accounts, such as a car loan, student loan or credit card, for one year or longer.

Holmes recommends against frequently switching credit cards to get the best rate, though.

"Lenders do not want to see a lot of credit inquiries or too many new accounts because this could indicate someone who is about to take on a lot of extra debt," Holmes says.

Kirchner says people often do not realize the consequences of paying bills late or missing a payment, which can stay on your credit report for a long time.

Some young people assume they can improve their credit scores as an authorized user on a parent's card. But Badciong says this will have no impact on their score.

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