Making the transition from renting to owning is freeing: privacy, your own yard, closets that can pass for a studio apartment and freedom to decorate however you please! I put together a list for Home Buyers that’s essential for first-timers and a great resource for people who have done it before. It’s a 12 month timeline to avoid common and frustrating mistakes – like buying the house or location that doesn’t work for you or paying too much.
Having the right agent guide you through this process is so important. I am experienced in helping my buyers – first time or seasoned – through this process from start to keys.
12 Months Out
- Check your credit score. Get a copy of your credit report from a reputable source. The three credit bureaus (Equifax, Experian, and TransUnion) are each required to give you a free credit report once a year. Avoid last-minute bombshells by checking your score long before you’re ready to make an offer. And work diligently to correct any mistakes. A study from the Federal Trade Commission found one in four Americans identified errors on their credit report, and 5% had errors that could lead to higher rates on loans.
- Determine how much you can afford. Ask yourself, how much house do I really want to afford? Lenders are happy to lend you as much as your debt load allows. But will that amount make you house poor? Lenders look for a total debt load of no more than 43% of your gross monthly income (called the debt-to-income ratio). This figure includes your future mortgage and any other debts, such as a car loan, student loan, or revolving credit cards.
There are plenty of resources to help you determine what you can afford. If you’re pushing the limits, start reducing your debt-to-income ratio now. Having a good referral from your agent for a mortgage professional can make the difference. To read another blog post about working with a mortgage professional, click here.
- Make a down payment plan. Most conventional mortgages require a 20% down payment. If you can swing it, do it. Your loan costs will be much less, and you’ll get a better interest rate. If, however, you’re not quite able to save the full amount, there are many programs that can help. FHA offers loans with only a 3.5% down payment. The U.S. Department of Housing and Urban Development (HUD) provides a list of nonprofit homebuying programs by state. Also check with credit unions; and your employer might even have an assistance program.
As you’re planning your savings strategy, keep in mind that banks like you to “season” your money. That is, they like to see that you’ve had stable funds in your account for 60 to 90 days before applying for a loan. Don’t worry: You can still use a financial gift from a family member or bonus received close to the time you buy.
9 Months Out
- Prioritize what you most want in your new home. If it’s a joint decision, now is the time to work out any differences to avoid frustration and wasted time. What is the most important feature of your new home? Proximity to work? A big backyard? An open floor plan? Being on a quiet street? You’ll make a much better decision on what home to buy if you focus on your priorities. Perhaps most important: Know what trade-offs you’re willing to make. (This will become clearer as time goes on from visiting a tour of homes when you choose your agent.)
- Research neighborhoods and start visiting open houses. Most of my clients come to me by personal referral or meet me at an open house as they begin their search. I always provide the opportunity for referrals from my clients who have gone through the process. Now is when the fun part really begins. Research the neighborhoods you are interested in, such as public transport, and cost of living, community events, etc.
Seeing potential homes will also keep you motivated to continue reducing your debts and saving for your down payment. Start visiting open houses to get an idea of what kind of homes are in your price range and what neighborhoods appeal the most. When you are ready to purchase, finding out what price the homes you saw sold for will educate you and give you a great pulse of the market.
- Budget for miscellaneous expenses. Buying a home has some miscellaneous upfront costs. A home inspection, title search, property survey, and home insurance are examples. Costs vary by locale, but expect to pay at least a few hundred dollars. If you don’t have the cash, start saving now.
- Start a home maintenance account. Speaking of saving, start the good habit now of putting a little aside each month to fund maintenance, repairs, and home emergencies. It’s bad enough to have to call a plumber. It’s worse if you’re paying credit card interest on that plumbing bill.
6 Months Out
- Collect your loan paperwork. Banks are very particular when it comes to mortgage loans. See my earlier blog about paperwork. If you start collecting these documents now, it’ll lessen the stress when it’s time to get your loan. What they’ll want from you includes:
- W-2 forms — or business tax return forms if you’re self-employed — for the last two years
- Personal tax returns for the past two years
- Your most recent pay stubs
- Your bank statements
- Brokerage account statements for the most recent two months
- Most recent retirement account statements, such as 401(k)
3 Months Out
- Time to give your trusted realtor a call (that’s me ). You need a expert with local knowledge who will not waste your time. When you find an agent that understands your needs, they can refer you to other locales they do not cover. I work very hard to develop a network of agents that will take care of my clients in towns or regions that are beyond my area of expertise. A buyer’s agent will work in your best interest to find you the right property, negotiate with the seller’s agent, and shepherd you through the closing process. Your agent also can be instrumental in finding a lender who’s familiar with first-time home buyer programs.
Even better, look for a mortgage broker, who will shop for a competitive loan rate for you among multiple lenders, unlike a bank, which can only offer its own products.
- Get pre-approved for your loan. At this point, if you’ve been following this timeline, your credit score, paperwork, and down payment should be on track. You’ve done your research on lenders and buyers’ agents. Now it’s time to start working with them. First you’ll need to get pre-approved for a mortgage. Make an appointment with your lender or mortgage broker and bring all your paperwork. He’ll run a credit check on you and tell you how much of a loan you’re approved for. It often makes sense to borrow less than the maximum the lender allows so you can live comfortably. Draft a budget that accounts for mortgage payments, insurance, maintenance, and everything else you have going on in your life.
- Start shopping for your new home. One you’re pre-approved, the buyer’s agent you’ve chosen will be able to target homes that meet your priorities in your price range.
2 Months Out
- Make an offer on a home. Sixty days is an acceptable closing date for most sellers. So if you have a firm move-out date, allow enough time to deal with any hiccups that can delay closing.
- Get a complete home inspection. One of the first things you’ll want to do after an offer is accepted is have a home inspector look at the property. If the home inspector finds something that needs repair, that’s a common example of something that can delay closing. Also, it is the opportunity to due your own due diligence with the guidance of your agent on whether it’s the right home for you.
In the Last Month
- Triple-check that all your financial documents are in order and review all lending documents before closing. You’re in the home stretch! The review of the mortgage documents is probably the most difficult. Remember to keep everything in order.
- Get insurance for your new home. Don’t forget to secure insurance before closing. You’ll need to bring proof of insurance to closing.
- Do a final walk-through. Do a final walk-through of your new home, usually a day or two before closing, to make sure the home is in the shape you and the seller have agreed upon.
- Get a cashier’s check or bank wire for cash needed at closing. Make sure you get an exact amount of cash needed for closing. Regular checks aren’t accepted and you’ll need a bank check. Your lawyer will advise you through this phase.
- It might seem like a lot, but the right real estate agent will help you and guide you through this process with the least amount of stress and the most availability.
That’s it. Congratulations!