These days, it can seem like the real estate market is literally all over the place—still it’s booming in some places while cooling off in others. No matter where you live, first-time home ownership is a goal that is reachable with the right research and forethought. Here are some wise financial decisions and home-buying advice you can implement right away to get you started on the road to homeownership.
Advice for first-time homebuyers, 12 months or more in advance
Verify your credit (and work on it)
The better your credit score, the lower your mortgage interest rate will be.
Take out your reports
By requesting free reports from all three agencies, you can fully understand where your credit stands and why (Equifax, Experian and TransUnion). According to Ralph DiBugnara, president of New York City-based Home Qualified, an online resource for homebuyers, “look for any errors or past-due accounts that might have gone to collections.” “These obligations may present difficulties when you apply for a mortgage. If there are any issues, speak with the creditor to try and resolve them.
then, fix, and then watch your credit
Your available credit—the credit card limits, overdraft protection amounts, and any other credit lines you have—and how much of it you are currently using are major factors in determining your credit score. According to Lindsey Shores, assistant manager of Real Estate Originations at SchoolsFirst Federal Credit Union in Sacramento, “your credit utilisation ratio should be 30 percent or less in ideal circumstances.” For a lot of people, getting to that 30% mark will require planning ahead and working to pay down debt.
If you need to repair your credit, concentrating on debt repayment and maintaining low credit card balances is a great place to start. Additionally, you should make sure that you pay all of your bills on time because missed payments will lower your credit score.
Keep track of your credit using a variety of free services, such as those provided by Bankrate and many banks. And you might think about signing up for a credit monitoring service if you haven’t already. You will be informed if your credit score changes or if your report contains any suspicious activity, according to DiBugnara.
Six to eight months out, some advice for first-time homebuyers
- Establish a budget.
Consider not only how much house you can afford, but also how much you can shoulder in ongoing expenses after you’ve bought your home.
The three main monthly costs of homeownership are the mortgage, insurance, and property taxes, but you’ll also have to pay for utilities and possibly HOA dues. It’s also a good idea to set aside some cash on a regular basis to cover maintenance and unforeseen repairs.
According to Steve Sivak, a certified financial planner and managing partner of Innovate Wealth in Pittsburgh, “as a general rule of thumb, I tell clients to prepare to spend 1 percent to 3 percent of the value of their homes each year on house [expenses]”. If the home you ultimately purchase is larger, older, or has amenities that require a lot of maintenance, like a pool, you might need to set aside more money.
According to Lauren Lindsay, an independent financial planner based in Houston, “one lesson from the [housing] crash: Just because the bank approves you for a certain amount, it doesn’t mean you can afford it.”
Another thing to think about is that if you shop for homes below your budget, you may have some negotiating power to pay more than the asking price if there is a bidding war, which is not uncommon in the current market.
- Think about your wants and needs.
It can take much longer than you think to find the perfect address and location, so start exploring neighbourhoods as soon as possible.
Bill Golden, a real estate agent and associate broker with RE/MAX Around Atlanta, advises people to “drive and walk around that area at various times of the day and night.” This will enable you to discover your likes and dislikes.
Now is a good time to specify your preferences for the house itself along with the neighbourhood. What kind of a home are you seeking? What are you willing to give up? What are the stumbling blocks? Consider the aspects of your current home that you enjoy; this can help you make a list of your needs and wants.
3–4 month in advance, first-time homebuyer advice
- Set up resources
No matter your income level, you should be able to show prospective lenders that you have a reliable source of funding. According to Tom Hecker, a loan officer with Cherry Creek Mortgage in Greenwood Village, Colorado, “lenders will scrutinise your income and how much you earn monthly, who will look for a two-year employment history and want to see consistent income — whether you’re receiving a salary, hourly pay, or are self-employed.”
In addition to looking at your credit report, mortgage lenders typically review your bank statements from the previous two months to determine your liquidity and overall financial health. If you intend to make any deposits from other assets, such as a gift for a down payment, into your checking or savings accounts, do so before that 60-day window. This allows the money to “season.”
Additionally, DiBugnara says it’s best to hold off on taking out new loans or credit cards or adding to your debt load at this time. All of those actions might harm your credit report.
2 months out: Advice for first-time homebuyers
- Compare several lenders
Reality is setting in. You should now be aware of your comfort level for monthly payments, the geographic areas you can afford, and the amount you can put down. It’s now time to look around for a mortgage.
To determine if now is the right time to lock in your rate, compare mortgage rates offered by various lenders and types of mortgages. Likewise, take into account your relationship with the lender.
Although you can find competitive rates and services in this market, DiBugnara advises that you should pay close attention to the responsiveness and communication of the lenders.
It’s also a good idea to concentrate on all of the mortgage’s terms, not just the rates you’re being quoted. What late fees are there? What is the anticipated cost of closing? Is there a fee for early payment? Will you receive a better deal if you can obtain a mortgage from the bank where you currently have accounts? When the other terms are overall better, it can make sense to select a loan with a slightly higher interest rate.
- Receive preapproval
Obtain a mortgage preapproval after choosing a lender. A preapproval is a formal letter from a lender outlining the precise amount they will loan you, as opposed to prequalification, which is a projection of the potential loan size you’ll be able to get. When you submit an offer to purchase a home, having a preapproval will give you a significant advantage. It will also make the process easier once your offer has been accepted and you are ready to submit your loan application.
Ask your lender how long your preapproval will be valid for; DiBugnara notes that preapprovals typically expire after 90 days. Apply for a preapproval as soon as you can if you’re a first-time home buyer with a lot of debt or average credit so that you can identify problems to fix.
Once you have a preapproval in place, Hecker advises staying on track with your spending and savings goals and making timely payments on all of your debts. Try to avoid making any unusual purchases or accruing additional debt.
- Investigate available down payment aid
There are numerous first-time homebuyer and down payment assistance programmes, both locally and nationally, that can assist with your closing costs or down payment. These programmes can also place a cap on the price of the home and are typically only available to borrowers with incomes below a certain level (based on location). Discuss your options with your loan officer to determine what you might be able to pair with your mortgage:
programmes for first-time homebuyers by state
grants for first-time homebuyers
- Collaborate with a realtor
The next step for a first-time home buyer is to work with a real estate agent after they have their financing sorted out and a preapproval letter in hand.
You can get advice on market conditions and whether the homes you want to make offers on are priced fairly from an experienced real estate agent who is particularly familiar with the area you’re looking to buy in. Your agent can also represent you in price and terms negotiations by pointing out potential problems with a house or neighbourhood that you are unaware of.
Working with a Realtor is free for buyers, but they can save a lot of time and hassle during the search process, according to Lindsay.
You can start by requesting recommendations from friends, family members, or coworkers.
Despite the competitive market, “new listings come up every day, and a good Realtor will be on top of that and get you to see new listings as soon as they become available,” advises Golden. “Don’t just pick [an agent] blindly — make sure it’s someone who works in the general area you’re looking in and whom you feel comfortable with.”
One month out, some advice for first-time home buyers
- Document contingencies
When you locate a potential buyer and get ready to submit an offer, be specific about any conditions that would permit you to back out of the deal. A costly issue was discovered during a home inspection, or your mortgage application was denied. You will have a way out if the transaction doesn’t go as planned if these terms are specified in writing with deadlines, and you’ll also get your earnest deposit back.
Get estimates from contractors for any repairs or improvements the house might require before you close, advises DiBugnara. By conducting this research, you can prepare for those costs and buy yourself some extra time to have the work completed before moving in.
A real estate lawyer can review your purchase contract and represent your interests, which is a smart move at this point in the process.
- Maintain current course
Even with a preapproval for a mortgage, nothing is guaranteed. Just before closing, lenders recheck your credit, bank accounts, income, and employment to make sure you can still make the payment. According to DiBugnara, making large purchases, taking out additional loans or lines of credit, or even closing accounts, can cause your loan to be completely killed or delayed from closing.
The best course of action, advises DiBugnara, is to be as open and honest as you can. “Any skeletons you have in your financial closet will be found,” he adds.
Shores concurs, “so don’t make any large purchases, like a new car, before closing on your loan, don’t get talked into applying for new retail store credit cards, and avoid making any new charges once you have been preapproved for your mortgage.