Step 2: Before You Begin

Before you begin the refinancing process, there are several steps you need to take.

One: Figure Out What You Can Afford

Determine how much you can afford - and what your monthly payments will be.

The traditional debt-to-income ratios are 28 and 36 percent. This means that your total monthly housing payment - including mortgage principal and interest, insurance, real estate taxes and any condo monthly assessments - should not exceed 28 percent of your before-tax monthly income. Then, when adding in all other consumer debt payments, the total figure typically shouldn't exceed 36 percent of your monthly income. However, each person's financial situation varies, so let's discuss what's right for you.

Two: Reduce Your Debt
The fewer credit cards you carry - and the lower the balances - the better. That's especially true if you have other debts such as a car or student loan. However, don't pay down or pay off balances with cash intended for a down payment. Even if you choose a low-down payment option, you're going to need cash available to pay the down payment and closing costs.

The easiest way to improve your debt picture is to close all dormant credit card accounts. Contact card issuers and ask for instructions on closing the accounts(for instance, you may be asked to cut up your card and return it by mail). Instruct the card issuer in writing to enter into your credit report, "Closed at request of cardholder." That way, there won't be any reason to suspect that a credit problem caused the account to be closed.

Three: Solidify Your Savings
If you're like most people planning on buying a home, you need to reduce your spending to save up for a down payment and closing costs. It's never too early to review your spending, cut out excess spending and set a budget.

Four: Review Your Credit
It's important to understand if there are problems or errors that could affect your ability to qualify for a loan. To do this, you'll want to get a copy of your credit report. Because these reports contain your credit history, it's important that you're aware of what they contain - and whether the information is accurate. You might have excellent credit, but odds are 1-in-4 that you'll find an error in your report. Look for mistakes, such as accounts that are not yours. When you find errors, contact the creditors by phone or mail to correct the error. Then get another copy of the report 30 to 60 days later to make sure the corrections have been made.