There are many factors to consider before making one of the most important investments of your lifetime. Use this simple first-time homebuyer checklist to help you prepare and stay organized throughout the mortgage process.
12 months out
Check your credit
The first step of the homebuyer checklist is to check your credit. Lenders use your credit score to gauge creditworthiness and the likelihood you'll repay the loan. It's also one of the most important factors when calculating an interest rate. You can go to freecreditreport.com to get this information. Checking your credit 12 months out allows enough time to improve it in the event your score is considered fair.
Decide your budget
Knowing what you can afford will help narrow your focus even more. Use a simple mortgage payment calculator to get your estimated debt-to-income ratio and see how much you can expect to pay monthly for principal, interest, taxes, insurance, and of course your current monthly bills.
Quick Tip - Budgeting
It's easy to calculate a home purchase budget if you utilize the percentages distributed by banks (28% of your gross monthly income). But a better way to calculate your budget is to keep a daily log of your expenses over a four-week period. Then take a look at what is outgoing for housing expenses and what you could realistically spend on a monthly mortgage.
Organize a down payment plan
The largest upfront cost will be your down payment and closing costs. Plan for this ahead of time by organizing a savings budget. A down payment calculator can help estimate different options with their corresponding monthly payments.
Quick Tip - Consider All Costs
Most buyers get so excited by the home buying experience that they lose sight of what their actual out-of-pocket costs will be when it's time to close. For FHA loans, down payments can be as low as 3.5%, whereas conventional mortgages can be as low as 3% for a primary residence, and up to 20% for an investment property. Closing costs are a series of fees that are due upon signing the deal. These can include attorney's fees, title service costs, recording fees, survey fees, home warranties, a loan origination fee, and document preparation fees. Typically, closing costs equate to about 3% to 4% of the home's value.
Strengthen your creditworthiness (if needed)
Begin organizing your finances and cleaning up any issues. Use your credit report from step one to identify any issues. Contact creditors and ask for payment plans or work with an attorney to help clean up issues.
Owning a home means maintenance costs and other unexpected costs. Get in the habit of putting aside money each month for repairs, emergencies, and general home costs (think vacuum, light bulbs, cleaning supplies, etc.).
Does your new home have appliances already installed? Will you have to purchase a washer, dryer, and/or refrigerator? If not, budgeting for such items will be necessary.
Research neighborhoods/home styles
Finally, the fun part! Begin a home search that aligns with your anticipated budget, lifestyle, and future plans. Consider your home type. Do you want a single-family detached home, a condominium, a paired home, a covenant controlled home, etc.? These are all good things to know and to add to your homebuyer checklist.
Attend open houses to get a feel for a style or location. Use the excitement of exploring your options to help keep you motivated and focused on your savings goal.
6 months out
Research mortgage options
You're halfway through your homebuyer checklist! Now is the time we encourage everyone to learn a little about mortgage programs. This will give you a general idea of what options are available. A mortgage consultant can discuss specific programs based on your situation.
Home affordability is easier than you expect, especially once you look into state and government homebuyer assistance programs. Find financial help with down payments or closing costs, whether it be through a specific loan or even grant money.
Since this is the most time-consuming element of mortgage preparation, we suggest you start six months ahead of when you think you'll apply for a mortgage. Some documents may be easy to find, while others can take a little digging. Note that some of these documents may be outdated by the time you submit a mortgage application, but knowing where and how to get them will make the process easier.
Research mortgage lenders
Not all lenders are the same. Take the time to research several local and online mortgage lenders. Prepare questions and be sure they have expertise with first-time homebuyer programs. The last thing you want is a lender that misses an important detail or ideal mortgage program causing you costly fees.
About three months out, you'll want to start getting things verified. Getting pre-approved for a home loan shows your commitment to your real estate agent (buyer's agent), the listing agent (seller's agent), and the seller themselves. It's important to know the difference between "pre-qualified" and "pre-approved" as one is much stronger than the other when submitting an offer on a home.
Get pre-approved for a mortgage. Many home purchases fall through because buyers aren't able to obtain fast financing after finding their dream home. Shop around with three or four lenders, and compare the rates and loan types offered. After finding the right loan, the lender will issue a letter telling you, and sellers, the amount you are qualified for. Most sellers feel more confident about creating a contract when a buyer has a pre-approval letter.
Quick Tip - Negotiating Fees
Don't be fooled into paying everything someone tells you to pay. While some fees are required and cannot be negotiated, others are yours to shop around and trim. Speak up, and talk through closing costs and mortgage fees with your lender or real estate agent.
Hire a real estate agent
Friends, family, strangers you meet at parties; it seems everyone knows a real estate agent. Ask them for referrals, or do a local search for someone you think can best help answer your questions. If you're starting a real estate agent search, contact our sister company, American Home Agents, and they can connect you to a local real estate agent.
Now that your mortgage pre-approval is in place and you've connected with an agent, it's time to search for a place to call home. Talk with your agent to discuss your goals and requirements for a new home. Gather information from each house and take pictures to help you recall the features of each property.
While searching for homes within your price range, your agent may show you a home in the part of town you are not as familiar with. While you may fall in love with the home, yard, garage, and view, you must research the neighborhood itself. Bad neighbors can negatively affect the value of a home.
Make an offer
Once you know your budget and have found a home you love, it's time to work with your realtor on making an offer. The written offer will include details regarding the purchase price and terms, the amount of earnest money you'll be using, any contingencies the deal may be subject to, an offer expiration, and much, much more.
Once your offer is made, the seller can accept, counteroffer, or decline the offer.