A Checklist for First-Time Homebuyers

What do first-time buyers need to purchase their dream home? You might be tempted to start hitting open houses, but first you need to get your money in order.

Talk to a mortgage lender to line up financing, then work with a real estate agent to get your offer accepted before you head to closing.

Read on to see your first-time homebuyer checklist and lay out the plan to buy your first home.

1. Reach Out to a Mortgage Lender

As you prepare to buy a home, your first step should be meeting with a mortgage lender, even if you’re not ready to apply. A mortgage lender can tell you if you’re financially prepared to buy a home and what ballpark of home prices you should consider. If you aren’t in a good place to get a mortgage yet, the lender can tell you what steps you need to take.

“The first thing to do is talk to a mortgage person, even if it’s at a local credit union,” says Mary Snyder, director of operations with Selling With the Snyder Group in Cypress, Texas. “That’s more helpful than looking at homes you might not be able to afford.”

Why reach out to a mortgage lender first? It’s better to get professional advice from the start than to make assumptions about what you should do. You can easily assume wrong and misdirect your efforts.

“You might think you have a lot of debt, but from a mortgage standpoint, that might not be the case,” says Dave Krichmar, a mortgage banker in Houston. “Be careful not to overthink your situation before talking to a lender first.”

For example, you could spend months paying down debt that wouldn’t have stopped you from getting approved — and that money could have instead gone to your down payment or closing costs. A mortgage lender can assess your financial situation and give you a road map of your steps to approval.

[ Read: Best Mortgage Lenders. ]

2. Prepare Your Finances for a Mortgage

Once a lender has advised you on how to get your finances in shape for a mortgage, follow the plan. You may need to:

Improve your credit. Generally, you’ll need at least a 620 FICO score to get approved for a conventional loan. But some government-backed loans offer approval to applicants with credit scores as low as 500. The higher your credit score, the lower your mortgage interest rate may be, so it pays to have good credit when you apply for a mortgage. You can improve your credit by disputing inaccuracies, addressing major issues like credit utilization rate and collection accounts and avoiding opening new accounts while making on-time payments with older ones.

Pay down debt. Your debt-to-income ratio influences your mortgage approval. This amount of your income that goes to debt payments matters when lenders decide how much of a monthly mortgage payment you can handle. Usually, lenders want to see a debt-to-income ratio of no more than 43%. That is, no more than 43% of your income should go to debt payments, including your mortgage, each month. If your debt puts you over that guideline, be ready to pay it down first.

Save more for your down payment or closing costs. At closing, you’ll have to bring cash to the table. Expect to put down at least 3% for your down payment, though 20% is best if you want to avoid private mortgage insurance. And don’t forget about closing costs, which will be about 2% to 5% of your home’s purchase price, or about $6,000 to $15,000 on a $300,000 home.

3. Explore Your Mortgage Options

Your mortgage options will depend on your financial situation. While some first-time homebuyers may be barely scratching by and looking for the absolute minimum down payment, that’s not always the best choice, says Krichmar. He recommends talking to a mortgage lender to choose the loan that’s best for you, which isn’t necessarily the loan that gets you into a house with the least amount of down payment

You may qualify for a conventional loan, some of which have first-time homebuyer programs. Other options are Federal Housing Administration, Veterans Affairs or U.S. Department of Agriculture loans, which offer low- or no-down-payment options.

At this point, you should also look into assistance programs that offer down payment and closing cost funds you don’t have to pay back.

“If you qualify for an assistance program, your down payment may be covered,” says Snyder. “So you might be closer to your goal than you think.”

Snyder points out you can also use gifts for your down payment or closing costs. “If mom and dad can help you out with $10,000 to $15,000, you’ve got closing and down payment,” she says. “If you make enough money to support the monthly payment, you can buy a house with that gift.”

[ Read: How to Get a Mortgage With No Down Payment. ]

4. Get Preapproved for a Mortgage

A mortgage preapproval can answer a lot of questions about where you stand with buying your first home. It will tell you your spending power, which mortgage programs you qualify for and give you a preapproval letter that adds substance to homebuying offers.

Many sellers want to see you’re preapproved before you make an offer. Without a preapproval, sellers may not consider your offer. After all, a preapproval tells them you’ve got funds to buy the home. Without this assurance, your offer doesn’t hold much weight.

You’ll typically need to provide extensive documentation to get preapproved for a mortgage. Be prepared to submit:

— Tax returns from the last two years.

— Recent pay stubs.

— Bank statements for the last few months.

Lenders may ask for additional documentation if you’re self-employed, such as business bank statements and business tax returns.

5. Choose a Mortgage Lender

You should apply for mortgage offers with at least three lenders before you commit to a loan. That way, you can compare quotes to choose your best option. Be sure you’re applying for the same type of loan with each so you can compare apples to apples.

Worried about dinging your credit with multiple applications? Don’t. Any mortgage applications you make will only count as one inquiry if you do them all within a 45-day period.

If you’re working with a real estate agent, ask for a preferred mortgage partner the agent has worked with and trusts.

Each lender should provide you with a loan estimate, which allows you to compare your offers based on the interest rate, monthly payment, closing costs and other details.

6. Begin Your House Hunt

With preapproval in hand and a budget in mind, you’re ready to get serious about home shopping. Find a real estate agent if you haven’t already and work with him or her to set your priorities for your home search.

“We will determine what are your must-haves and nonnegotiables versus what are your wants and concessions,” says Snyder. “Like main bedroom downstairs, not less than 2,500 square feet, would like a pool but willing to concede for the right house.”

7. Make an Offer

Once you’ve found a home you’d like to buy, it’s time to submit an offer.

“Be prepared that the market is different than what your parents faced or even your friends a couple years ago,” says Krichmar. “Focus on what makes you look strong with your offer.”

Your real estate agent and lender can advise you on what makes your offer look strong, but in general, Krichmar says cash is king: Be ready with your down payment, closing costs and reserves.

Krichmar says you may be advised to use a loan that isn’t necessarily the best loan for you, but one that gets you the home. For example, he says an FHA loan may mean you’re getting a better interest rate, but a conventional loan is what gets your offer accepted.

Snyder says when you make an offer, you’ll need to be ready with what she calls ASAP money. ASAP money is the earnest money you put down when you make an offer. It also includes your option fee, inspection fee and sometimes an appraisal fee. The timing on the inspection fee is key, Snyder says, because you should expect to pay for an inspection within three to five days of making an offer.

8. Appraise and Inspect the Home

Snyder and Krichmar say appraisal and inspection is a key point in the homebuying process, especially in today’s competitive home market where you may submit an offer that comes in above the home’s appraised value.

An inspection can reveal major issues in the home that could affect whether you want to move forward or change your offer, so you want to complete an inspection as soon as possible. You’ll get a list of items that are damaged or need a safety upgrade.

With an appraisal, a third-party appraiser will determine the home’s fair market value based on the characteristics of the home and the market. If the appraisal comes in at or above the offer you made, you can move forward to closing. But if the appraisal comes in for less than what you’ve offered, you’ll face a problem with your lender: You can’t get a loan for more than the house is worth.

Krichmar says you have three options in this situation:

— The buyer pays the difference.

— The buyer and seller split the difference.

— The seller comes down in price.

“In this market, buyers have to be prepared that the home may not appraise,” says Krichmar. “They may think they need $20,000 for closing but the seller won’t budge on the price after appraisal, so they now need $30,000.”

Support from your real estate agent is crucial if you’ve offered over appraisal, as you’ll need to negotiate the price.

“You don’t want to buy a house for $275,000 that appraised for $250,000,” says Snyder. “Your real estate agent should go back to the seller to get a win for everyone.”

9. Get to the Closing Table

With a mortgage approval, accepted offer, inspection and appraisal, you’re ready to close. Krichmar says you’ll typically need to come to the closing table with:

— Money for your down payment and closing costs.

— Loan documents, such as your closing disclosure.

— Proof of homeowners insurance.

— Identification, such as your driver’s license or Social Security card.

Update 12/01/21:

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