Lately the real estate market has been all over the map—still super-hot in some areas while cooling off in others. Regardless of where you live, first-time home ownership can be an attainable goal, especially with advance research and planning. Here are some smart money moves and home-buying tips you can use to assist you on your exciting journey to homeownership.
12+ MONTHS OUT
Review your credit (and work on it)
The higher your credit score, the better the interest rate on your mortgage. So even if
you're happy with your score, it's always beneficial to continue working on getting that number up.
Pull your reports
Thoroughly understand where your credit stands—and why—by pulling free reports from all three agencies (Equifax, Experian and TransUnion). Look for any errors or past-due accounts that might have gone to collections. It's not unheard of for things end up in collections that you have no idea about. These liabilities can create roadblocks when you apply for a home loan. A lot of times all it takes is a phone call to a creditor to get it all sorted out, and oftentimes, the negative mark will be removed from your report.
Fix and then monitor your credit
Your credit score is largely based on your amount of available credit—credit card limits, overdraft-protection amounts and any other lines of credit you have—and how much of that you’re currently using. The ideal credit utilization ratio should is 30% or less.
A great place to start if you need to improve your credit is to focus on paying down your debt and keeping credit card balances low. You also want to make sure you’re paying all your bills on time, as late payments will also impact your credit score.
Keep periodic tabs on your credit through any number of free services, including those offered by many banks and credit unions. And if you’re not already signed up for a credit monitoring service, you might consider doing so.
6-8 MONTHS OUT
Nail down your budget
Think about not just how much house you can afford, but how much you can take on in recurring costs once you’ve purchased your home.
Mortgage, insurance and property taxes are the three primary monthly expenses of homeownership, but you’ll also need to cover utilities and possibly even HOA fees. Plus it’s a good idea to put aside a bit of money on a regular basis to account for maintenance and unexpected repairs. One way to set yourself up for a smooth financial transition into homeownership is to make sure you can afford about 1-3% of the home value each year on house expenses.
If nothing else - the housing crash of 2008 taught us all one very important lesson: Just because the bank approves you for a certain amount, doesn't mean you can afford it. Be aware of what you can handle - your peace of mind is worth it!
Another thing to consider: If you shop for houses below your budget, you’ll actually have some leverage to go above asking price in the event of a bidding war, which isn't an uncommon occurrence in the current market.
Consider your needs and wants
Finding the ideal location and address can take a lot more time than you expect, so begin scouting neighborhoods early in the process.
Drive and walk around that area at different times of the day and night. See what's going on, and think about how you feel while you're there.
Along with pinpointing the neighborhood, now is a good time to narrow down your preferences for the home itself. What type of house are you looking for? What can you compromise on? What are the dealbreakers? Think about the things you enjoy where you currently live and what has been less than ideal for you.
3-4 months out
Get assets in place
Regardless of level of income, you need to be able to provide documentation to potential lenders that proves you have a stable and steady source of earnings. Consistency is key — whether you’re receiving a salary, hourly pay or are self-employed.
In terms of your liquid funds and overall financial health, in addition to reviewing your credit report, mortgage lenders typically look at your bank statements from the last two months when assessing your application. If you plan to make any deposits into your checking or savings accounts from other assets — such as a down payment gift — do it before that 60-day window. This gives the funds time to “season.”
It’s best to avoid opening new credit accounts or loans, or racking up more debt, at this stage. All those activities could temporarily lower your credit score, and there's no worse time for that than during the home-buying process.
2 months out
Shop multiple lenders
Things are getting real. At this point, you should know what monthly payment you’re comfortable with, what areas you can afford and how much you can put down. Now it’s time to shop for a mortgage.
Compare mortgage rates from different types of lenders, as well as different types of mortgages, to help you decide whether this is a good time to lock in your rate. Consider your experience with the lender, as well.
It’s also a good idea to focus not just on the rates you’re being quoted, but all the terms of the mortgage. What are the late fees? What are the estimated closing costs? Is there a prepayment penalty? If you’re able to get a mortgage with the bank where you already have accounts, will you get a better deal? Sometimes it makes sense to choose a loan with a slightly higher rate if the other terms are more favorable overall.
Once you settle on a lender, get pre-approved for a mortgage. Unlike pre-qualification, which is a projection of the possible loan size you’ll be able to get, a pre-approval is an official letter from a lender stating exactly how much they will loan to you. A pre-approval will put you in a much stronger position when you’re making an offer on a house and it will ease the process once your offer has been accepted and you’re actually applying for your loan.
Pre-approvals usually expire after 90 days. If you’re a first-time homebuyer with significant debt or so-so credit, you might want to apply for a pre-approval as soon as possible to zero in on issues to fix.
Once you have a preapproval in place, keep sticking to your budget and savings plan and continue to pay all debts on time. Try not to make any extraordinary purchases or take on extra debt.
Look for down payment assistance
There are many first-time homebuyer and down payment assistance programs at the local, regional and national level, that can help cover your down payment or closing costs. These programs are typically limited to borrowers with an income below a certain level (based on location), and can impose a cap on the home’s price, too. Talk to your loan officer and explore your options to see what you might be able to pair with your mortgage.
1 month out
Put contingencies in writing
When you find a contender and prepare to make an offer, be clear about any contingencies that’ll allow you to walk away from the deal. These can include the home inspection revealing costly issues or your mortgage approval falling through. If these terms are spelled out in writing with deadlines, you’ll have a way out if the transaction doesn’t go as planned — and get your earnest deposit back, too.
If there is a problem with the home, get estimates from contractors on any repairs or upgrades it might need before you close. Doing this research can help you plan for those expenses and buy you time to have the work done before moving in.
Keep the status quo
A mortgage preapproval doesn’t mean things are set. Lenders recheck your credit, bank statements, income and employment just before closing to make sure you’re still able to handle the repayment. Making big purchases, taking out new loans or lines of credit or even closing accounts can delay the closing or kill your loan altogether.