The process of being a first time home buyer is an exciting part of life, but the experience will be like no other. The freedom and financial benefits of homeownership are tantalizing, especially if you’ve spent a few years as a renter. However, there’s some legwork to be done before you get those shiny keys!
Here’s exactly what you’ll need to do to go from hopeful to homeowner:
Step 1: Assess your budget
It is crucial as a first time home buyer to know exactly how much you can spend on your new home. A careful look at your budget can prevent you from becoming “house poor”—having no expendable income left over after your mortgage is paid.
Fortunately, there are plenty of great tools online to help you analyze your finances. First, use a budget worksheet to get a clear picture of your income and financial obligations. Include factors like your income, loan payments, and expenses to determine the maximum monthly mortgage you’d be able to pay without compromising your financial security. It’s up to you—not your lender—to determine what mortgage payment you can comfortably afford.
Next, use a mortgage calculator to see what home price range fits into your budget based on the monthly amount you’ll be able to pay. This will give you some idea of what to expect during the house hunting process.
Step 2: Check Your credit
Your credit score, also known as your FICO score, is a three-digit number that helps lenders assess the likelihood of a borrower repaying their loan on time and in full. Your credit score is influenced by a variety of factors, including your loan payment history (on things like cars and credit cards) and whether you have unpaid obligations (which usually appear in the form of collections).
It’s important to be familiar with your credit score because these three digits will majorly impact your loan approval. Your score will also determine how much you pay in interest and other costs once you’re approved for a loan. To check your score, you can request a credit report for free from one of the three major credit reporting agencies: Experian, Equifax, or TransUnion.
Once you have an understanding of your credit score, you can look for ways to increase it. It may be well worth the delay while you work to maximize your score...these improvements could save you thousands throughout the term of your mortgage.
Step 3: Research loan types and requirements
There are many different mortgage programs and loan types, and some are specifically for first-time home buyers. While all lenders will look at core factors such as your credit score and income, the specifications for different kinds of loans can vary.
For example, those with a lower credit score can still qualify for a Federal Housing Authority (FHA) loan with a higher down payment. With a conventional loan, down payment amounts are flexible as long as you include Primary Mortgage Insurance (PMI). Check out the basic requirements for each major mortgage loan type to understand what might work best for you, and what preparations you’ll need to make in order to qualify.
Step 4: Save and stay stable
The required down payment amount will vary depending on the type of loan you secure, but you’ll still need a chunk of change to make it to moving day. Along with your down payment, lenders will require a couple of months’ worth of mortgage payments in your bank account, called reserves. You’ll also want a little cushion to provide for any last-minute closing items and for moving costs.
While you can continue to buff up your bank account, try not to make any major employment changes. Lenders will want to see that you’re likely to retain employment long after your home is purchased. Savings and stable employment are two key elements to qualifying for a loan as a first time home buyer.
Step 5: Shop for a lender
All mortgage lenders are not the same. Visit several to make sure you’re working with the right lender and securing the type of loan that works best for you. If you’ve done the prep-work, the lenders will be able to match you up with the right loan for your status as a first-time home buyer. Shopping around for the best lender will ensure that you get the most bang for your buck!
Step 6: Get pre-approved
This is where all the hard work on your credit and savings really pay off. During pre-approval, a lender will look closely at your credit and financial standing to determine how much of a loan you qualify for as a first time home buyer. You’ll need to provide an array of documents and information, which your lender will scrutinize closely.
A pre-approval is NOT a loan guarantee, but it shows that you’re ready to start house hunting, and that any offers you make on a home can be taken seriously.
Step 7: Start shopping
Before you set foot in a single open house, you should have a list of “must-haves” and “must-nots” prepared. Narrow your hunt down by commute, school districts, and quality of neighborhoods. Create a list of priorities and share it with your licensed realtor.
Although you’ll surely be tempted by homes just outside your financial limits, it’s important to stick to your budget. Stay within your predetermined payment range to avoid living on the edge and having to stretch to make your mortgage payment each month.
The road to homeownership may take some unexpected twists and turns, but with the right planning and preparation, you’ll make it to your destination: home sweet home. Best of luck, and happy house hunting!
References
- Aly J. Yale (May 2, 2018). Shopping Around for Your Mortgage Loan Can Save You Big — Here’s How to Do It
- Mikey Rox (May 15, 2017). Do You Really Need a 20% Down Payment for a House
- Amy Livingston (Undated). How Much House Can I Afford?
- TransUnion for Mint.com (September 5, 2018). 3 Not-So-Secret Ways to Raise Your Credit Score (And 1 Bonus Tip to Help Keep It High)
