5 Steps Suze Orman Says to Take Before Buying a House

How many of them have you taken?

Before you buy a home, it's crucial that you're in a good position to get a mortgage and are prepared to cope with the financial responsibilities of property ownership. It can be hard to know when you've met these milestones and you're ready to call a real estate agent, but finance expert Suze Orman has some advice that can help.

Orman recommends taking these five steps before a home purchase to make sure you can get an affordable mortgage and cover new costs.

1. Improve your credit score

First, Orman suggests working to improve your credit score if it's below the 740 to 760 range. Borrowers get the best deal on a home loan with a score above this threshold. While you can buy a house with a much lower score -- as low as 620 for a conventional loan, or around 500 for government-backed loans -- you gain more options with better credentials.

While Orman acknowledges that not everyone can get a credit score to 740 or above by the time they want to become homeowners, she points out that the more improvement you can achieve, the better your mortgage rate is likely to be.

2. Reduce credit card balances

Although Orman says it's ideal to pay off your card in full each month, many of us end up carrying a balance. Reducing a balance can make a big difference in qualifying for a better home loan.

Her recommendation is to aim for a credit-utilization ratio below 20%. This means using just 20% or less of the total credit available. Following this advice could also help you improve your credit score (utilization rate is an important factor in the scoring formula), and improve your debt-to-income ratio (the ratio of total debt relative to income, which lenders consider).

3. Pay down other debt

Debt-to-income ratio is an important consideration for mortgage lenders -- they want to know you aren't over-committed, and can repay your home loan. Orman says the ideal debt-to-income ratio is below 36%. If you owe more than that, it's a good idea to pay down debt before shopping for a home.

4. Avoid buying non-necessities

Orman advises becoming a "shopping miser" for a few months before purchasing your home. This is important because even if you pay your credit card balance in full each month, card issuers sometimes report the balance before monthly charges are paid off. If you've charged a lot on your cards, that could make your debt-to-income ratio worse, affecting your approval or your mortgage loan rate. If you charge as little as possible, you won't have to worry.

5. Build up cash reserves

The finance guru's last recommendation is to build up an emergency fund with eight months of living expenses before purchasing a home. This is advisable both because lenders like to see you have a large cash cushion, and because you'll have the money you need if something goes wrong after you purchase your property.

If you haven't accomplished any one of these steps yet, think seriously about whether buying a house right now is a good move for you.