Switching from renting to owning your home is exhilarating for many Americans. But buying a home is a complex process. If you follow the checklist below for the year before you buy a house, your first home purchase process will be much smoother.
Lending Requirements to Buy a House in 2019
12 Months Out
- Get your credit score. You should get a copy of your credit report from the three major credit bureaus – Equifax, Experian and Trans Union. Each of them have to give you a free report each year. This is worth doing: An FTC study found that 25% of Americans have found errors in their credit report, and 5% had mistakes that could lower their score. Being first time home buyer with bad credit can be challenging, but it helps to know where you are at with credit before speaking with lending professionals.
- Figure out what you can afford. You should know well in advance how much how you can buy. Lenders generally will want to see that your total debt load is no more than 43% of your gross monthly income. This is called your debt to income ratio or DTI. This ratio includes your mortgage and all other monthly debts, such as car payments and credit card payments.
- Plan for your down payment. Most conventional mortgages want to see a 20% down payment, but there are other options available. Generally, it is recommended to put down as much as you can afford. This will lower your monthly payment and reduce the interest you pay. However, you should not let the inability to save 20% prevent you from buying. There are conventional loans with 5% down payments, and FHA offers great programs with only 3.5% down. Whatever you need to save up, banks like to see that the money has been in your bank account for at least 60 days before you apply for the loan.
9 Months Out
- Decide your priorities. What is most important for your home? Do you need to be close to work? Do you need a big backyard? Do you want an open floor plan, or to have a quiet street. You will make a better decision on your first home if you determine priorities early on. If you are deciding with a partner or spouse, now is the time to get differences ironed out.
- Research neighborhoods. Use websites such as realtor.com and zillow.com to get a feel for neighborhoods, cost of living and public transportation. Also go to open houses to get a feel for the homes in your price range in neighborhoods you want. Looking at real houses can motivate you to cut debt and save.
- Budget for home purchases expenses. Buying your first home is fun but it’s expensive. You should have cash saved for the home inspection, title search, survey, and home owner’s insurance. Start saving now.
- Save for home maintenance. It is a good idea to put aside money every month to pay for maintenance on your new home. Having to call a plumber isn’t fun, but it’s less fun if you have to put it on a credit card.
6 Months Out
- Get your home loan paperwork together. These days, you have to have all of your documentation together to be approved for a home loan. Be ready with W-2s, tax returns for the last two years, pay stubs, credit card balances, bank statements, addresses for the last seven years, 401k statements, profit and loss statement for the year if self-employed. Have them all together now so you can easily apply for mortgages.
- Research realtors and first time mortgage lenders. We recommend that you interview several buyers’ agents. A buyer’s agent will help you to find the best home for you. He or she will represent you to ensure that you get the best deal and home for you. Also talk to several mortgage lenders. We recommend a mortgage broker who can offer you products from many lenders.
3 Months Out
- Get pre-approved. If you have been following the above steps, you should have your credit score, loan paperwork and down payment in order. You also have researched agents and mortgage lenders. Now you need to get pre-approved. Work with your lender to run your credit and see if you can get a pre-approval for the loan that you want. You should borrow less than you can afford so that you are not house poor.
- Shop for a home. Once you have been pre-approved, you can work with your buyer’s agent to help you find your dream home in your price range.
2 Months Out
- Make an offer. It can take one or two months to close on your home. If you have a date that you need to move out, be sure to allow enough time to deal with any potential delays in closing.
- Get a home inspection. Once the offer is accepted, you should have the home inspected. If something is found that needs to be repaired, this could delay the closing.
- Check that all financial documents are in order. If you have all of your documents together and a down payment saved, these steps are the simplest. Going over the mortgage document can be a process, but your agent can help you.
- Get home owner’s insurance. You need to have home owner’s insurance in effect to close.
- Do your final walk through. You should do a last walk through a day or two before you close. Make sure the home is in the same condition as when you first looked at it.
- Get a cashier’s check for cash needed to close. Check that you have the exact amount of cash needed to close. This exact number can fluctuate from day to day. You cannot close a real estate transaction with a personal check, so make sure that you have a source lined up the day before closing to get the cashier’s check.
By following our checklist above, you will ensure that your first-time home buying experience is a smooth process. There is help available if you are buying your first home and have a limited down payment available. Talk to your first time buyer mortgage lender today about the above programs. Buying your first home could be much closer to reality than you might think.