Buy Your First Home in One Year: A Step-by-Step Guide
January 17, 2019
A real yard. Closets bigger than your average microwave. The freedom to decorate however you darn well please! Making
the switch from renting to owning is exhilarating, but many rookie
homebuyers find the process trickier to navigate than they expected.
This is why we created our First-Time
HomeBuyer Checklist. The 12-month timeline will help you sidestep common
mistakes, like paying too much interest or getting stuck with the wrong
house. (Yep, it happens!)
12 Months Out
Check your credit score. Get a copy of your credit report at annualcreditreport.com.
The three credit bureaus (Equifax, Experian, and TransUnion) are each
required to give you a free credit report once a year. A Federal Trade
Commission study found one in four Americans identified errors on their
credit report, and 5% had errors that could lead to higher rates on
loans. Avoid last-minute bombshells by checking your score long before
you’re ready to make an offer. And work diligently to correct any
mistakes.
Determine how much you can afford. Figure out how much house you can afford and want to
afford. 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 calculators on the web
to help you determine what you can afford. If you’re pushing the
limits, start reducing your debt-to-income ratio now. To get a reality
check on what you may actually be spending every month, use this worksheet.
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. But they require mortgage insurance premiums,
which will drive up your monthly payments. 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 near the time you
buy.
9 Months Out
Prioritize what you most want in your new
home. What’s most important in 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. If it’s a joint decision, now is the time to work out any
differences to avoid frustration and wasted time. Perhaps most
important: Know what trade-offs you’re willing to make.
Research neighborhoods and start visiting open houses. But now’s when the fun begins, too. Use property listing sites, such as realtor.com, to find out about neighborhoods, public transport, and cost of living.
Start visiting open houses to get an idea
of what kind of homes are in your price range and what neighborhoods
appeal the most. Seeing potential homes will also keep you motivated to
continue reducing your debts and saving for your down payment.
Budget for
miscellaneous homebuying expenses. Buying a home has some miscellaneous
upfront costs. A home inspection, title search, propery 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. They demand a lot of
paperwork. What they’ll want from you includes:
- W-2 forms — or business tax return forms if you’re self-employed — for the last two to three years
- Personal tax returns for the past two to three years
- Your most recent pay stubs
- Credit card and all loan statements
- Your bank statements
- Addresses for the past five to seven years
- Brokerage account statements for the most recent two to four months
- Most recent retirement account statements, such as 401(k)
If you start collecting these documents
now, it’ll lessen the stress when it’s time to get your loan. Bonus:
Looking closely at your loan documents each month will also help you
stay focused on saving for your down payment and keeping your
debt-to-income ratio low.
Research lenders and REALTORS®. Start
interviewing REALTORS®, specifically buyers’ agents. 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.
3 Months Out
3 Months Out
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. This way you
won’t be wasting time looking at homes you can’t afford.
2 Months Out
Make an offer on a home.It usually takes
at least four to six weeks to close on a home. So if you have a firm
move-out date, allow enough time to deal with any hiccups that can delay
closing.
Get a 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.
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! If you’ve been keeping your
documents up to date, and your down payment is in reserve, these final
steps are the easiest. Reviewing the mortgage documents is probably the
most difficult. Your agent can help guide you through them.
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. You’ll get that number a few days before closing so you
can secure a cashier’s check or arrange to have the money wired. Regular
checks aren’t accepted.
That’s it. Congratulations!
Source: "Buy Your First Home in One Year: A Step-by-Step Guide" HouseLogic.com, Jennifer Nelson
