Being a first-time homebuyer can be an overwhelming experience. There’s so much planning to do, from your budget plan to saving to negotiating an offer.
Luckily, the homebuying process doesn’t have to be a mysterious, self-navigated journey. There is plenty of help available from professionals who will ensure that you get your ideal home.
In this checklist, learn about the 12 things you should do when starting the process of becoming a homeowner.
1. Figure Out Your Finances
When planning out your finances, there are ways to cut spending and save for your down payment. There are two steps in preparing for this endeavor: calculating your Debt to Income Ratio (DTI) and checking your credit score.
Step one would be to figure out your DTI, which helps find the price of a home you can afford with your income and monthly payments.
Your DTI also lets lenders know how much money you spend compared to the amount of money coming into your household every month. There are two types of DTI, Front-End and Back-End.
Front-End DTI includes house-related expenses such as your monthly mortgage, property taxes, and homeowner’s insurance.
Back-End DTI includes all of your minimum recurring payments every month. That includes your credit card bills, student loans, car loans, and personal loans. In addition, your lender will focus on your credit report because it gives them an idea of your monthly spending.
To calculate your DTI, add all of your recurring monthly debts like bills and debt repayments. Then divide that number by your household’s total gross income. Your result will be a decimal, so take that number and multiply it by 100 to get your DTI.
Now, on to credit scores. Credit scores are reported on the FICO model that determines which financial products you qualify for, such as credit cards and other loans.
Your credit score is calculated based on these factors: your payment history, the total amount of credit and loans you have, your credit limit, the amount of time you have had a credit card, how often you apply for a new account, and any other credit you have.
FICO scores range from 300 to 850. A score of 760 and higher will give you the best rates and terms. Typically, a score under 500 is too low to get approval for a mortgage. To be approved for a conventional loan, your score will need to be at least 620. A score of 580 is usually the minimum for an FHA loan, but you will receive higher interest rates and fees.
What if you have a lower credit score and can’t qualify for a mortgage loan? Unfortunately, this means you may have to hold off on purchasing a home. Instead, take action to improve your credit score, like paying off bills that could be keeping your score low.
Lastly, check how much cash you have to use towards your down payment and closing costs. For example, although some mortgages require a 3-5% down payment, some loan programs may ask you to pay a 20% down payment.
Improving your credit score will help substantially, but if you’re short for cash, you may have to be patient and get your finances pulled together before purchasing a home.
2. Set a Budget
You’ll never settle on a home if you’re looking way out of your price range, so setting up a budget is crucial to keep you on track.
While it might be tempting, you don’t necessarily want to buy a house that is at the tip-top of what you can afford. If building a savings for retirement, your kid’s college or just having extra in the bank for a rainy day is important, you’ll want to aim for a house that’s within a certain budget.
To set up your budget, write out your regular and recurring monthly expenses. That can include your monthly bills, student loan payment, car loan payment, and subscription services.
Add the expenses to your new home projections, like your monthly mortgage payment, homeowners insurance, mortgage insurance, and property taxes. If you’re not sure about estimating the amount for a home, you can use an online affordability calculator to get a more accurate assessment.
To make sure you have a nice cushion, it’s best to make sure your DTI (follow the steps above with calculating your DTI) is between 25-30%. Although you can afford your home at 43%, you may not have much in the bank after your monthly payments.
3. Save for a Down Payment
To calculate the amount you’ll need for a down payment, you’ll need to have some idea about what sort of loan you’ll be applying for and what the down payment requirement is for it.
There are several options for loans that your mortgage lender will guide you through, but it’s good to know some basic knowledge about them beforehand.
Depending on your credit score, you can get a conventional loan for as low as 3% down, although most lenders prefer you get a bit closer to the traditional 20% down payment. Also, because conventional loans aren’t insured or guaranteed by the government, their eligibility requirements for borrowers are usually tougher to meet than the requirements for government-backed mortgages (like FHA, VA, NADL, and USDA loans).
Two of the most well-known loan providers are Fannie Mae and Freddie Mac, created by the Federal Housing Finance Agency. These loans offer guarantees on conventional loans through approved lenders, plus they both offer fixed-rate and adjustable-rate mortgages with lower down payments.
A loan given by the Federal Housing Administration (FHA) is an excellent option if you have a credit score of 580. Other requirements for this loan include a DTI of less than 43%, Mortgage Insurance Premium (MIP). FHA loans only require a 3.5% down payment, but you’ll likely need private mortgage insurance until the 20% mark is reached through regular monthly payments.
The Department of Veterans Affairs (VA) offers loans to US military members, spouses, and dependents. There is no down payment required, but there will be a VA Funding fee to pay upfront. However, it’s significantly lower than a down payment.
The Native American Direct Loan (NADL) is a VA loan curated for veterans with a Native American background or their spouse. This loan helps in buying or building a home on federal trust land. In addition, you can receive a low-interest rate 30-year mortgage with no down payment or closing costs.
The United States Department of Agriculture (USDA) loans help homebuyers in the suburbs or rural areas. If you have a credit score of 640 or higher and are thinking of buying a single-family home in an eligible area, you can receive a zero-down payment mortgage at a low interest rate.
Whether you’re looking to apply for a loan or save money for a down payment, check out these tips for saving money during this process.
Tips for Saving:
* Start Planning your Budget: You won’t get ahead on your finances if you don’t know where your money is going each month. Check your bank account and start keeping track of how much you spend each month. Cut spending for less important things so that you can save for your down payment.
* Begin Automatic Savings: Most workplaces offer direct deposit, so your money will automatically be added to your current balance. You don’t even see the money unless you log into your account, so you’re less likely to spend it.
* Find a Side Hustle: Pick up a side hustle to make some extra money. Side hustles have become more common since the pandemic when we experienced massive lay-offs or working from home.
* Cut Expenses: Are there areas in your budget that you know you could cut down? Cutting any unnecessary costs, no matter how small, will significantly help you achieve your savings goals.
Many of us sign up for services but don’t realize how much money goes out the window each month. Make a list of automatic payments billed to your account and see how many of them you can cut out.
* Grow Your Savings Account: After cutting expenses, you’ll notice more significant savings in your bank account. But if you only have a checking account, it may be time to get a savings account. If you have a habit of spending when you’ve got a few extra bucks, moving money over to a savings account can help to cut down on the temptation.
4. Talk to Mortgage Lenders and Get a Pre-Approval Letter
Before you start browsing for homes, an important next step is to talk to a mortgage lender.
A lender will pull your credit report, decide on a pre-approval amount, and help you choose a loan type and the length of that loan. You’ll also be able to ask them about potential terms, interest rates, and requirements for your credit score and DTI.
It’s good to remember that a letter of pre-approval does not imply your commitment to one lender. Instead, you can ask several lenders for their help and they can compete for your business, which only helps even more when finding a loan that will be the perfect fit for your finances.
Once you choose a lender, you can ask for a mortgage pre-approval letter, which is a document or email from a loan officer stating that you can afford to buy a house.
When you find a home that you would like to purchase, the pre-approval letter ensures everyone else in the buying process that you’re a serious potential buyer.
5. Choose a Real Estate Agent You Trust
Having someone more experienced to help you during this process can make you feel much better about finding the best neighborhood for your wants and needs.
A real estate agent can provide crucial information about market conditions and show you comparable sales so you can know whether a house is worth its asking price or if it has been sitting unsold for a considerable amount of time. They can also help you prepare your offers and counteroffers while guiding you through any obstacles that come along the way.
If you are new to the area, your real estate agent can suggest available homes in the neighborhood according to your specific needs.
To find an agent, the best thing to do is ask around for recommendations. The agent who helped your friend find their dream home could do the same for you, so make sure to contact agents with glowing reviews.
6. Shop for Homes
You probably already have an idea of what type of home you’re looking for, but it’s also beneficial to be open to other homes that your real estate agent may suggest.
But what if options are severely limited in a hot market? Don’t sweat; there are fantastic tips out there for surviving this overwhelming process!
When it seems like homes are selling out, it’s a seller’s market. That means you likely won’t have much bargaining ground to stand on. If you have a list of demands, you’ll likely lose the house to people willing to acquiesce to the seller’s preferred terms. It’s handy to keep this in mind when submitting your requests for negotiation.
Another way to get ahead when looking at a home is to check homes out on the weekdays, not the weekends. Certain days during the week give you a much better chance of landing your ideal home—just be sure you put in your offer day-of in those super-hot markets.
When you’re putting that offer in, you’ll want to speak to your agent about pricing that offer competitively. In some really competitive markets, homes are regularly selling for $50 to even $100K over asking. You want your offer to start competitively (more on that later).
Depending on your strategy, you can navigate the hot market and get the deal you’re searching for.
7. Gather the Required Paperwork
Now we’re down to the real nitty-gritty: the paperwork.
But it can be a relatively painless process if you prepare! The best thing you can do to get started on this step is to submit your financial documentation to your lender. So as soon as you find the perfect place, your financial documentation will already be in order.
So which documents are the most important to gather? Typically, the best paperwork to gather for preparation is:
Your government-issued ID, driver’s license, or passport.
The last two months of pay stubs and proof of income.
The last two years of your tax returns, bank statements, brokerage, and investment account statements.
Proof of funds for your down payment and closing offer.
A letter of recommendation from your previous landlord.
Your lender might have other requirements for documentation, but getting these primary documents out of the way will save time during the process.
8. Make an Offer and Negotiate
When the market is hot, how do you make your best offer? There are a few things to keep in mind, like being ready for a potential bidding war. Here are a few tips for negotiating an offer.
Remember that an offer comes with a few steps, from the first offer to counteroffers to any other bargaining that may take place.
First off, when making your initial offer, don’t bid too low because it could be rejected, especially in a super hot market, as we mentioned. It’s a tight balance because you don’t want to go too high, or you may be spending more money than the property is worth.
So how do you find the sweet spot? Listen to your real estate agent. They’ve got the experience and advice that you need to make your initial offer. If they tell you to go higher or advise you to lower your offer, take their word for it.
Here are more tips specifically catered for extremely hot markets (like the one we’re seeing here in Texas):
* Make a Clean Offer: Preparing your documents will make your offer process go more smoothly. The next step is to complete the entire loan process with your lender before making an offer. When you put your loan contingency down, it’s less risky, and you may not have to compromise on your contingencies like your loan, appraisal, or inspection.
* Don’t Ask for Special Favors: If you want a piece of property to stay in the home you’re bidding for, avoid asking for extra favors. There could be similar offers to yours who aren’t asking for these items, so your offer might get rejected for asking.
* Offer Competitively: You shouldn’t go too high or too low with your offer, but making a competitive offer can increase your chances of getting the home. It doesn’t have to be that much to show the seller that you’re serious about your offer. In less competitive markets, $2,000-3,000 can make your offer more solid. You may be forced to go as much as $50K over asking in super-hot markets.
* Make a Larger Down Payment: Whichever type of loan you’ve decided on, it’s always a good sign when you offer to put more on your down payment. Just like preparing your financial documents and showing proof of income, proving that you are financially capable of paying the loan offers the best first impression.
* Add an Escalation Clause: Perhaps one of the best techniques in a bidding war is adding an escalation clause, which will increase your bid in response to a higher bid up to a specific price.
However, an escalation clause isn’t foolproof: a counteroffer can be issued by the seller, which is in place of accepting the clause. Also, the seller could raise the list price instead of giving a counteroffer or taking the clause. But if an escalation clause is something you choose to do, have a lawyer write up the contract to include the clause.
9. Hire a Lawyer (If Needed)
Although Texas doesn’t require you to have a real estate lawyer, it can still be a good idea to consider.
What if the current tenant is still living in the home, or you have concerns regarding the title or easement? Not to mention foreclosures that a real estate lawyer would be more knowledgeable on and give you the best advice.
10. Schedule a Home Inspection
Before you close on a home, you want to get an inspection done to ensure you aren’t also buying into a huge problem. Although you will pay for the inspection, your realtor can provide you with reputable inspectors.
A standard home inspection can help find potential issues with the electrical, plumbing, or house foundation. If a problem is found, you can decide to back out of the deal, ask for repairs, or agree to the home and pay for the repairs yourself.
Specifically, a house inspection includes looking at the roof and the foundation, the attic, windows and doors, walls, ceilings, floors, the interior plumbing, electrical systems, the visible insulation, and the heating, ventilation, and air conditioning (HVAC).
A pest inspection is also recommended before you close. Some home inspectors offer these services, but sometimes you have to contact a separate exterminator to do the job.
According to the US Department of Housing and Urban Development, a house inspection will cost you between $300-500. It can be costly, but it will be worth it when your home is in the best condition possible when you close and move in.
11. Schedule an Appraisal
Getting an appraisal, which estimates a home’s current market value, will also be a helpful step to take. A licensed appraiser takes this estimation and calculates it alongside the recent sales of homes in the area.
This estimation assures lenders that buyers aren’t overpaying for the home. It also protects lenders if the borrower stops making their payments.
12. Close On Your New Home
Once you’ve finalized purchase agreements, had a professional inspection done, and contingencies met, and financing is ready to go, the process is nearly over.
The next step is to sign the paperwork to get the keys to your home. But to make this final step go smoothly, there are a few more things to do.
Before the final day, be prepared to pay your down payment and closing costs with a certified check or a wire payment. Ensure your homeowner’s insurance is all in order with a written binder, also known as an insurance binder. This protects the collateral’s value and your capability to pay back your loan.
The home buying process is long and arduous, but remember that it can run smoothly when you have the right strategy.
Follow these 12 steps as best as you can and say hello to your beautiful new home. For more tips on finding your first (or next) house, check out more advice on our blog!