When buying a home, you may think that the first step is to find the home of your dreams so you can make an offer. In reality, the first step toward purchasing a home is securing the proper financing to assist with the purchase of the property. To take this first step, there are several factors that need to be addressed. Here is a look at the things you need to do in order to obtain the financing you need for your home purchase.

Checking Your Credit

Before you begin to explore your financing options, you need to take an honest look at the state of your credit. If you have poor credit, you may not even be approved for a loan. Or, if you do receive approval, the conditions may be less than desirable. Therefore, you should look into your credit score and, if necessary, take steps to improve it before you apply for a loan.

If your credit score is less than desirable, there are several things that you can do to help improve it. The most important step you can take toward improving your credit is to simply make sure you are paying your loans back on time and as agreed upon. In some cases, a poor credit score may be due to a lack of credit history. In this case, you may need to take steps to build your credit history by taking out smaller loans and repaying them as agreed. 

You can also improve your credit by ensuring the loan-to-credit ratio on your credit cards is as low as possible. In other words, carrying a balance of $4,500 on a credit card with a $5,000 balance may negatively impact your credit score while that same balance on a card with a $15,000 credit line may not hurt it at all. This is because that balance on a card with a lower credit limit gives the appearance that you are stretching your finances too far.

Gathering Your Documents

Once your credit is in order, you will need to gather all of the proper documents to help support your credit history and your current financial situation. Documents you will need when applying for a loan include paystubs, W-2s, bank statements and documents to support any self-employment income that you may have. You will also need to have copies of your last two tax returns.

Selecting the Right Loan Type

Finally, you will need to determine which type of loan you want to take out for your purchase. There are two major types of mortgage loan categories from which you can choose: fixed-rate or adjustable rate (or ARM). As the name implies, a fixed-rate loan is one where the interest rate remains the same throughout the lifetime of the loan, whereas the interest rate on an ARM will change according to current conditions. Fixed-rate mortgage is the most common, but an ARM may be a better option for you and your financial situation. Exploring both types of loan and how each work will help you better decide which one is best for you.