You’ve done it! You think you’ve finally saved up enough money to buy your first home. It’s an exciting time, and while it may be easy to begin planning décor in your head, you don’t want to get too far ahead of yourself.
As a first-time home buyer, there are many things you will want to consider before even beginning the search. This guide will walk you through some of the do’s and don’ts of buying that dream home to make sure there are no sneaky surprises later in the process.
First things first – you need to take a serious look at your own finances and really ask yourself, “Can I afford a house?”
There are more factors than just having a bit of money. You’ll need good credit and steady, reliable income. Without those, buying (and keeping) a house is going to be a challenge.
As for cash on hand, you’ll need a decent amount for the down payment. This amount averages about 20%, but you can often shop around for lower (however these may have more fees and costs down the line – make sure you do your research!). Besides that down payment, however, you’ll still want a decent amount in your accounts. Lenders want to see that buying a house won’t be draining your account. Not having an ‘emergency fund’ left behind in your savings account could be quite damaging – not just for when it comes time to get that mortgage, but also in case of an actual emergency!
The next thing you need to come to grips with is your credit score. This will be a very real factor in the whole buying process, and without a good score, it might be very difficult to get approved for a mortgage loan.
Even if you think your credit score is passable, you still might want to plan ahead a little and start working that score as high as possible. Better scores get the lowest interest rates possible on mortgages.
Anyone can download their credit report for free annually. Before you begin searching for that dream home, it’s wise to download your report and check what it says. First, check for any errors, especially anything marked as a late payment or an incorrect balance due on open accounts. If you find any errors, you’ll need to file a dispute with the reporting agency to get them removed from your credit report. This is why planning ahead is so important, as these errors can take some time to fix. Second, check for any outstanding balances on debts owed. If you have the cash, pay down those balances to improve your credit score.
Before getting too invested in the real estate search, you’ll need to have a firm grasp on what your budget will be. Now that you have assessed your finances and are aware of your credit score, it’s time to look at mortgage pre-qualification. This is very different from pre-approval; pre-qualification is a less formal estimate of what you loan amount and interest rates you will be likely to receive when it comes time for pre-approval.
With this pre-qualification estimate in mind, double-check that you will have that 20% for the down payment, and start figuring out that spending budget.
A realtor will be potentially the most powerful tool in your search for the perfect house, especially as a first-time buyer. By hiring a realtor, it becomes their job to deal with the numerous contracts, negotiations, legalities and paperwork that come with buying a home. Save yourself the stress and hire an expert to perform those time-consuming necessities.
Remember, no one knows the real estate market better than a realtor! They are a huge asset when it comes to finding the perfect house in the perfect neighborhood and getting a good deal at the same time.
As you begin your real estate search (or really before) it’s wise to keep a tight grasp on any spending. Remember, you don’t have that pre-approval yet, and lenders will look at your spending habits. A few months of cautious spending will help you avoid appearing as a high-risk borrower.
That means that in the months leading up to this big purchase, you need to appear as stable as possible. Avoid major purchases and new credit card accounts until after your house is purchased and everything with the mortgage is settled.
It’s never too early to start getting your documents ready. You never know when you might find that dream house. When you do, you don’t want to be scrambling to gather up everything you’ll need for your mortgage loan application.
In general, the information you’ll be asked for may include: social security numbers and birthdates for all borrowers; history of residence and employment (name, number and address of employers); W-2s; 1099s; recent paystubs (past 60 days); tax returns; any bank and investment statements (past 2-3 months); student loan information; and credit card statements. Unless otherwise indicated above, the lenders will probably ask for two years’ worth of documentation.
Now that you’ve found every document, you know your credit score, and you’ve got the realtor ready to find your dream home, it’s time to get pre-approved. This is the formal step in really figuring out what rate various lenders will give you. With this guaranteed rate in your pocket, you will be able to submit an offer with confidence. Even better, your bid will look more competitive and likely to attract the attention of the seller, since they know your money is guaranteed!
As for timing, most lenders are only able to honor a pre-approved mortgage for 90 days. Since your financial circumstances (especially your credit score) may fluctuate with time, they need to put a time limit on their guarantees to ensure nothing has changed. Make sure that you only take the step of applying for pre-approval when you are definitely ready to begin your search.
Closing costs can often catch first-time buyers off-guard. You may have had a certain amount of money set aside for your down payment and thought that was it, only to be told at the end of escrow that you have more fees to pay. Unfortunately, those fees are a necessary part of the repayment that occurs at the end of escrow.
Closing costs vary in amount from state to state and from lender to lender. However, there are sometimes also ways of getting around these costs, depending on your location. Sometimes you are able to negotiate for the seller to pay closing costs. Other times you may negotiate premium pricing with your lender – you pay a higher interest rate in exchange for the lender paying the closing costs. Your realtor will be better able to advice and assist with these negotiations if they are available to you.
Finding your first home is an exciting time in anyone’s life, one that you don’t want spoiled by not being prepared. With this guide and the assistance of a realtor, you should be well-equipped to make purchasing your home a dream come true!