Your initial impression may be that we have incorrectly placed the financing segment first. Actually, we’ve chosen to discuss finances at the beginning for good reason: The buying experience usually goes smoother if financing has already been secured before you begin searching for your home.

Most homebuyers find that they need to finance at least part of their home purchase. So, in many respects, owning your dream home hinges on your ability to get the financing you need, in the price range you can afford. The very first step is ensuring that you are in an optimum buying position. This entails a careful review of your financial situation. Think of it as a means of pre-qualifying yourself.

A very basic—and yet extremely important—factor in your ability to get a mortgage is your credit rating. It is not a secret that the best interest rates, as well as the most flexible loan terms, are available only to those with the strongest credit scores. Your credit history is one of the principal measures used by a lender to determine your interest rate. Not only will your monthly mortgage payment depend on your interest rate, but the amount you qualify to borrow will be affected by it as well. A higher interest rate translates into a higher payment and may reduce the loan amount for which you can qualify.

You should be aware of what information the credit reporting agencies have regarding your financial situation by obtaining and reviewing copies of your credit report from the three main credit reporting agencies. (Even if you are not planning to purchase a home, you may want to consider obtaining and reviewing your credit reports on an annual basis to make sure the information reported is accurate, and to catch any discrepancies that could damage your credit.) By making this task one of the initial steps in your house-hunting venture, you may save yourself from unnecessary delays later in the purchasing process.

There are three major credit-reporting agencies: Equifax, Experian (formerly TRW), and Trans Union. Rather than contacting only one of them, we strongly suggest that you request a credit report from all three. Since not all creditors report to all three agencies, it’s not uncommon to find different information reported on each one.

However, your goal in ordering all three credit reports is to make sure that all of the information stated on each report is accurate and correct. You can request your credit report from these companies for a nominal fee. An annual report is free upon request for residents of Colorado, Georgia, Massachusetts, Maryland, New Jersey, and Vermont. Additionally, you may obtain a free personal credit report if you have been denied credit within the past 60 days.

Although it is early on in your plans to purchase, it is likely that you have wondered how much home you will be able to buy. The best way to determine your purchasing power is to speak with a lender. However, there are several rules of thumb that will give you an approximate idea of what you will be able to spend. The first rule states that you can afford a home with a price tag that is 2.5 times your annual salary.

For example, if your annual salary is $50,000, applying this formula would mean that you can probably shop for a house with a price up to $125,000. The second rule says that you should be able to use 30% of your gross monthly income (before taxes and deductions) for a house payment. Assuming, for example, that your gross monthly income is $4,000 and using this formula as a guide, you may be able to comfortably afford a monthly payment of $1,200.