Ready to take the plunge into home ownership? Making a move from renting to owning? Re-sizing your lifestyle? Whatever your motivation, buying a home is exhilarating and rewarding. But many rookie – and returning to the market – home buyers find the process trickier to navigate than they expect or remember.
A 12-month timeline can help you sidestep many common mistakes and anxiety.
12 Months & Counting
Review your credit report. Get a copy of your credit report at www.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. Work diligently and quickly to correct any mistakes as it can take a 30-day cycle or two for errors to be corrected.
Determine how much you can afford. Figure out much house you can afford – and want to afford – in a monthly house payment. This can be significantly different. Lenders typically look for a total debt load of no more than 43% of the gross monthly income of the borrower(s), called the debt-to-income ratio, or DTI. This figure includes your future mortgage and all other debts, such as a car loan, student loan(s), and revolving credit cards. Shoot for a lower DTI ratio; it is unwise to pursue a strategy of “house-rich, cash-poor.”
There are calculators on the web to help you determine what you can afford. If you’re pushing the limits, start reducing your DTI ratio now. And keep in mind that with home ownership comes new expenses that you may not have – such as maintenance, repairs, and home emergencies.
Make a down payment plan. Most conventional mortgages require a 20% down payment. Your loan costs will be much less, and you’ll get a better interest rate. If you can swing it, do it. However, if you’re not quite able to save this amount, there are options that can help make a down payment as low as 3%. They will require mortgage insurance premiums, which will push up your monthly payments.
Keep in mind that lenders like you to “season” your down payment 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.
9 Months & Counting
Prioritize what you most want in your new home. What’s most important in your new home? Proximity to work or family, recreation or schools? A big backyard or none? An open floor plan on one level? Being on a quiet street? Walk out basement? You’ll make a much better decision on what home to buy if you focus on your priorities. If it’s a joint decision (husbands, who are we kidding, right?), now is the time to work out any differences to avoid frustration and wasted time. Know what trade-offs you’re willing to make. Use this worksheet to help determine your priorities.
Research neighborhoods. Now the fun begins. Explore areas and neighborhoods. Use property listing sites, such as www.REcolorado.com and www.DougMovesYou.com to get an idea of what kind of homes are in your price range. Good websites to research schools are www.coloradoschoolgrades.com and www.greatschools.org. A helpful website to answer questions and many others about particular communities is www.city-data.com for info about public transportation, crime, and cost of living.
The countdown continues shortly….
6 Months & Counting
Collect your loan paperwork. Lenders are very particular these days when it comes to mortgage loans. They demand a lot of paperwork. What they want typically includes:
- W-2 forms — or business tax return forms if you’re self-employed — for the last 2-3 years
- Personal tax returns for the past 2-3 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 paperwork each month will also help you stay focused on saving for your down payment and keeping your DTI ratio low.
Research REALTORS® and lenders. Start interviewing Realtors®, especially those who are buyer’s agents. A buyer’s agent will work in your best interest to guide you to the right houses to look at that fit your priorities, schedule showings and help you evaluate each one, prepare a purchase contract for the house you want, advocate for you and negotiate with the seller’s agent, and shepherd you through the complicated process to a smooth closing. Your agent can also be instrumental in suggesting lenders who are a good fit for you and won’t derail the process. And the coolest part is, you typically don’t pay the agent anything for his/her time!
3 Months & Counting
Get pre-approved. At this point, your credit score, paperwork, and down payment should be on track. You’ve done your research on neighborhoods, agents and lenders. Now it’s time to start working with them.
Make an appointment with your lender and bring all your paperwork. They will do a credit check, evaluate your income and debts, and tell you how much of a loan you’re approved for. As suggested earlier, it often makes sense to borrow less than the maximum the lender allows so you can live comfortably and within your budget that accounts for mortgage payments, insurance, maintenance, and everything else going on in your family’s life.
Start shopping for your new home. One you’re pre-approved, your chosen agent will 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.
Make an offer on a home. It can take more than one offer to get a house under contract, and then 30 days or so to close and take possession. So if you have a firm move-out date, allow enough time to deal with any hiccups along the way.
Under Contract & Counting
Get a home inspection. One of the first things you’ll want to do after your offer is accepted is have a home inspector look at the property. A home inspector takes the time to closely evaluate the property in areas of health and safety, and typically finds something that needs repair.
Do the Due Diligence. Review HOA documents, Title, and Survey information. Arrange for property insurance via an insurance carrier and advise the lender.
Last Few Weeks and Counting
Update the lender with all your financial documents and anything else required. If you’ve been keeping your documents up to date and your down payment is in reserve, these final steps are easy. Reviewing the mortgage documents and final settlement paperwork is now easier than it used to be, and your agent will help guide you through them.
Do a final walk-through. Do a final walk-through of your new home within about 24 hours from closing, to make sure the home is in the shape you and the seller agreed upon at contract and any subsequent agreements.
Get a cashier’s check or bank wire for cash needed at closing. Get the exact amount of cash needed for closing. You’ll get this 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.
Seal the Deal. The day has arrived! You meet at the closing office to sign all the transfer of ownership and loan documents. Woohoo!! Congratulations, new home owner!