Buying a home can be a confusing process. There are many moving pieces and factors to consider. First-time home ownership can be an attainable goal with the right research and advance planning. Here are some tips for steps you can take today to put you on the path to homeownership.
10 Tips For First-Time Homebuyers
1. Check your credit (12+ months out)
The higher your credit score, the better the interest rate on your mortgage. You should thoroughly understand where your credit is at, and why, by pulling free reports from all three credit reporting agencies (Equifax, Experian, TransUnion). You should be checking for inaccuracies and errors. Your credit score is largely based on your amount of available credit and how much you are currently using. This is called your credit utilization ratio, and it should ideally be 30% or less. Focusing on timely payments and paying down debt can help to improve your score. You should also consider signing up for a credit monitoring service.
2. Nail down your budget (6-8 months out)
Think about not just how much house you can afford, but how much you can take on in recurring costs once you’ve purchased your home. A mortgage, insurance, and property taxes are the three primary monthly expenses of homeownership, but you’ll also need to cover utilities and possibly HOA fees, plus it’s a good idea to put aside a bit of money on a regular basis to account for maintenance and unexpected repairs.
3. Consider your needs and wants (6-8 months out)
Finding the ideal location can take a lot more time than you’d expect, so consider scouting neighborhoods early in the process. Along with pinpointing the neighborhood, now is a good time to narrow down your preferences for the home itself. What type of house are you looking for? What can you compromise on? What are the dealbreakers? Think about what you like about where you currently live—that can help inform your list of needs and wants.
4. Get assets in place (3-4 months out)
Regardless of level of income, you should be able to document to potential lenders that you have a stable source of earnings. Lenders look at the previous 2 years of income in order to ensure that your income is consistent and ongoing. In terms of liquid funds and overall financial health, in addition to reviewing your credit report, mortgage lenders typically look at your bank statements from the last 2 months when assessing your application. If you plan to make any deposits into your checking or savings accounts from other assets, such as a down payment gift, do it before that 60-day window. You should also avoid opening new lines of credit or racking up additional debt at this point.
5. Shop multiple lenders (2 months out)
Things are heating up at this point. You should know what monthly payment you’re comfortable with, what areas you can afford, and how much you can put down. Compare mortgage rates from different types of lenders, as well as different types of mortgages. Consider your experience with the lender as well. It’s also a good idea to focus not just on the rates you’re being quoted, but all the terms of the mortgage. What are the late fees? What are the estimated closing costs? Is there a prepayment penalty? If you’re able to get a mortgage with the bank where you already have accounts, will you get a better deal? Sometimes it makes sense to choose a loan with a slightly higher rate if the other terms are more favorable overall.
6. Get preapproved (2 months out)
Once you settle on a lender, get preapproved for a mortgage. Unlike prequalification, which is a projection of the possible loan size you’ll be able to get, a preapproval is an official letter from a lender stating exactly how much they will loan to you. A preapproval will put you in a much stronger position when you’re making an offer on a house and it will ease the process once your offer has been accepted and you’re actually applying for your loan.
7. Look for down payment assistance (2 months out)
There are many first-time homebuyer and down payment assistance programs—including at the local, regional, and national level—that can help cover your down payment or closing costs. These programs are typically limited to borrowers with an income below a certain level (based on location) and can impose a cap on the home’s price.
8. Work with a real estate agent (2 months out)
After you have your financing squared away and a preapproval letter in hand, your next step as a first-time homebuyer is to hire a real estate agent. An experienced real estate agent who knows the area you’re looking to buy in especially well can advise you on market conditions and whether homes you want to make offers on are priced properly. Your agent can also identify potential issues with a home or neighborhood you’re unaware of, and go to bat for you to negotiate pricing and terms.
9. Put contingencies in writing (1 month out)
When you find a contender and prepare to make an offer, be clear about any contingencies that’ll allow you to walk away from the deal. These can include the home inspection revealing costly issues or your mortgage approval falling through. If these terms are spelled out in writing with deadlines, you will have an out if the transaction doesn’t go as planned—and get your earnest money deposit back, too. If there is a problem with the home, get estimates from contractors on any repairs or upgrades it might need before you close. Doing this research can help you plan for those expenses and buy you time to have the work done before moving in. It’s also a good idea at this stage of the game to enlist a real estate attorney to review your purchase contract and protect your interests.
10. Keep the status quo (1 month out)
A mortgage pre-approval doesn’t mean that things are set. Lenders recheck your credit, bank statements, income, and employment just before closing to make sure you’re still able to handle the repayment. Making big purchases, taking out new loans or lines of credit, or even closing accounts can delay the closing or kill your loan altogether.