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The SMART First-Time Homebuyer's No-Nonsense Checklist for Purchasing Your First House
If you are reading this article, you’re probably contemplating home ownership—and if you’re like most Americans, have been dreaming (and, to a certain degree, dreading) the prospect for a while. Read onward for a straight-forward, no-nonsense checklist crucial for every SMART first-time homebuyer.
First-Time Homebuyer Smart Step 1: Conduct Real-World Research (and Dream)
This step can be the most exciting . . . or discouraging. There is nothing like a drive through your “dream” neighborhoods to remind you of how far you are from where you would rather be. Still, this is arguably the most significant portion of your journey. Drive through neighborhoods and peruse listings online. Set your eye squarely on your goal.
First-Time Homebuyer Smart Step 2: Save for the Down Payment . . aiming for at LEAST 20% of the value for the house
First and foremost, save for your down payment. While it is possible in some circumstances to purchase a home with a small down payment, this “short-cut” to home ownership comes at a high price. Mortgage insurance is generally required for homes purchased with a down payment less than 20%, and when combined with your home mortgage’s interest rate, can add up over time.
First-Time Homebuyer Smart Step 3: Check Your Credit Score
First-Time Homebuyer Smart Step 4: Consult Mortgage Calculators
A number of banking, mortgage, and real estate sites, like Trulia and Zillow, offer mortgage calculators to see banks’ customized loan offerings side-by-side. Keep in mind that these estimates tend to be optimistic, while underwriters, for the most part, err on the side of caution. Put another way, regard the loan estimates as rough home mortgage cost-estimation guides.
First-Time Homebuyer Smart Step 5: Check Additional Monthly Housing Costs
The mortgage payment isn’t everything. What might seem like a manageable monthly payment on the mortgage calculator at first glance might only be the principal, or principal and interest. In actuality, your monthly payment would normally be comprised of the mortgage’s principal, interest, homeowner’s insurance and property taxes. That’s not even counting potential HOA fees or additional utility costs. In the ideal scenario, the total monthly payment would amount to 27% or less of your total household income.
First-Time Homebuyer Smart Step 6: Select a Real Estate Agent
Some of the best local real estate agents can be found by word-of-mouth, but be sure to check your potential real estate’s reputation against any information about their track record available online. Have they worked with many first-time homebuyers? Have they aided the sales of many homes within your dream neighborhoods, or is their savviness exclusive to another area of town? No matter who you choose, most real estate agents will promptly urge you to your next step—seeking a letter of prequalification.
First-Time Homebuyer Smart Step 7: Secure A Pre-Qualification Letter
A bank’s pre-qualification essentially says, “We see nothing wrong with you yet.” It does not guarantee that they won’t reject you later on. Even so, pre-qualification letters serve four key purposes:
- It gives you an opportunity to “feel out” a potential banker. If you get don’t mesh well with the first person you speak with, you can go ahead and seek out another bank.
- You will find out whether you have sufficient credit history. If you have not used credit cards long enough to qualify for a mortgage, this is the time lenders will let you know.
- Few listed properties are open for tours to potential buyers without a pre-qualification letter ready to go.
Even so, snagging that pre-qualification letters from some lenders can seem like a real hassle. At some point, you will need to prove that you are employed, have been employed and are a loyal tax-payer. If you're fairly disorganized, prepare to set aside at least an hour in order to get all your ducks in a line.
First-Time Homebuyer Smart Step 8: Identify Your Dream Property—and Check for Undesirables which Could Impact Home Value
The first portion of this step is self-explanatory. It’s time for you to tour houses a la HGTV until you lay eyes on your dream home!
However, once you find “the” house, pause to rationally assess factors which may eventually impact your home’s value.
- Is the house in a flood zone?
- Is it near a major power line?
- How are local schools performing? Are they annually improving, or sliding downhill?
- Have there been any recent spikes in crime?
- Is the property backing commercial property, or property which is zoned for commercial development in the future?
- Is the building located near train tracks, a quarry, busy road or other sources of noise?
First-Time Homebuyer Smart Step 9: Request a Quote—and Watch Closing Costs
Now it’s time for the mortgage company (or mortgage companies, if you sought multiple pre-qualification letters from competing competitors to increase your ability to bargain) to show their true colors. In response to your request, they will give a sheet featuring a precise cost breakdown for the house in question. Especially keep an eye on the APR and closing costs. Loans with lower closing fees tend to have a higher APR. On the flip side, a loan with an exceedingly low interest rate might have inflated closing costs.
First-Time Homebuyer Smart Step 10: Get a Home Inspection
You’re 100% ready to buy? Not so fast. This is a step that will differentiate you as a smart first-time homebuyer.
Hire a qualified home inspector to ensure that there are no structural issues hiding beneath the surface. Home inspections can cost around a 1,000, but the information a qualified home inspector provides is invaluable for the bargaining process.
First-Time Homebuyer Smart Step 11: Sign the Dotted Line
At this point, there will be contracts to sign, blank spaces to initial, and nail-biting fears that the process will fall through completely. But eventually, at long last, you will make it.
Get started today. Your dream home awaits!