Howard urges future homebuyers to make "virtual" mortgage payments today as a way to build up savings and learn to budget for actual mortgage payments down the road.
"Renters can estimate a mortgage payment and set aside the difference between that payment and their rent each month," Howard says. "If they are paying $800 in rent and estimate their mortgage will be $1,100, they can put $300 per month in a special savings account.
"Not only does this help them save for a down payment, but it demonstrates to a lender their ability to afford that higher housing payment."
Kirchner recommends future buyers create a simple budget and set a savings goal.
"If they find they can save $300 a month, then they will have $3,600 at the end of the year," Kirchner says. "Lenders want to see that pattern of savings, and buyers will need at least 3.5 percent for a down payment on an FHA loan or at least 10 percent for a conventional loan."
Kirchner recommends setting up an automatic transfer of funds into saving through your employer or your bank.
While buyers increase their savings, they should also reduce their debt.
"Paying off debt tops saving in terms of priorities because of the interest payments on the debt, which exceeds the amount of interest they can earn on their savings," Kirchner says. "Lenders want to see that you are managing your debt and keeping your credit card balances low."
Howard says debt-to-income ratios are an important element in a loan approval. This ratio compares minimum monthly payments on all debt to gross monthly income.
"If your debt-to-income ratio is over 50 percent, you need to pay off your debt before even thinking of buying a home," Howard says. "Some companies will relax their standards for borrowers with a strong credit score or substantial cash reserves, but in general, FHA will only go up to 43 percent and conventional lenders will only go to 41 percent for the overall debt-to-income ratio."
While it might be premature to visit a lender two years before a home purchase, it can be valuable for consumers to know if they qualify for a mortgage, Kirchner says. He also recommends visiting open houses.
"A lot of people have no idea what $100,000 or $200,000 will buy, so the more they look at places and neighborhoods, the better understanding they will have of the value in a home," Kirchner says.