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Deep breath. We know this can be a complicated and sometimes overwhelming topic, and the path to homeownership may take some time.
By breaking the process into smaller focus areas, you can get a clearer picture of the steps you'll need to take to get from renter to buyer. Take a look at Trusted Referral Network's 5-step starter pack to help you prep for your very first home purchase.
1. Get Organized
General organization is an often-overlooked aspect of the home-buying process. To help you qualify for a home loan, your mortgage loan officer will likely ask you to supply them with numerous documents to verify your identity and overall financial status; these requests will probably be on a pretty tight turnaround to make sure your mortgage application is processed and approved as efficiently as possible.
So if you're feeling a little less than organized, get ahead of the game and take time to sort this part out. You may be asked to provide documents like:
Unexpired photo IDs for anyone listed on the mortgage application
Recent banking, investment, and retirement account statements
Recent pay stubs
W-2s, 1099s, or other completed tax forms
Alimony or child support declarations and proof of payment
And more… you can get a better idea of the possible documentation requirements here
Your ability to quickly respond to requests for complete and accurate documentation on demand will give you a distinct advantage in the home-buying game, particularly in a fast-paced or competitive real estate market.
Tidy Your Taxes
Have a debt with the IRS and wondering if you can still buy a home? While getting behind on your taxes might not automatically disqualify you from a home loan, some loan programs may require that you at least enter into an official payment plan with the IRS before you can be approved for a mortgage.
2. Consider Your Credit
Credit is one of the most critical yet least understood aspects of home financing. And trust us, if you don't know how credit and FICO scores work, it's not your fault. Nearly half of Americans, for example, incorrectly think that their income level directly affects their credit score.
Your ability to interpret and improve your credit score will significantly influence the loan programs you qualify for and the interest rates that come with them.
Consistency is Key
The Consumer Financial Protection Bureau (CFPB) provides a ton of resources on all things credit, from building up your score to requesting or disputing errors on your credit report. The CFPB is a reputable source if your credit needs some cleanup but you don't know where to start.
Adopting healthy and sustainable credit habits will help set you on the path to your best score possible. Healthy credit habits include:
Paying on your loans and lines of credit on time every time
Avoiding "maxed out" lines of credit by staying beneath your credit limits
Steadily building a reliable credit history over time
Applying for credit you need, but not going overboard to open any line of credit you're eligible for
Staying on top of your credit report and checking it for errors
3. Do Your Mortgage Math
When we estimate the monthly mortgage payment we can afford, we often think of the principal—the loan amount we have to pay back, divided into monthly increments; and we also think about the interest—what the lender is charging us to borrow their money for a home purchase.
But many first-time homebuyers don't consider the additional components of a monthly payment. And while not all of these components may apply to every situation or property, it's important to account for more than just principal interest in calculating what you can afford.
Understanding Your Monthly Payment
Depending on your situation, the monthly payment may also include the following:
Hazard and/or flood insurance
Property taxes
Homeowners Association (HOA) fees
Private Mortgage Insurance (PMI)—this may be applicable depending on the amount of your down payment.
When discussing your monthly payment budget with your mortgage lender, they must paint a realistic picture of your total expenses and help you accurately account for additional costs. Taking your time with this step can go a long way toward avoiding unpleasant budget surprises later, so don't be afraid to ask questions.
4. Stash Some Cash
Speaking of avoiding unpleasant surprises, here's another critical truth: to complete your home purchase, you will likely need to have more cash available than just a down payment.
Once again, not all of these necessarily apply in 100% of cases, but it's better to have some extra cash on hand than to run short at the finish line.
Upfront home purchase costs may include:
Home inspection
Property Appraisal
Fees and closing costs
Lender requirement for leftover cash reserves
Aside from these possible requirements, it's also essential to maintain an emergency fund for post-purchase repairs, moving costs, or other necessary expenses.
A Note on Down Payments
Let's briefly address a common mortgage misconception: is a minimum 20% down payment required to buy a home? Short answer: not necessarily! Depending on your loan eligibility, credit score, the state you live in, and multiple other factors, you could qualify for a lower down payment or even down payment assistance. In this case, ensure that your lender is providing education on how putting less money down upfront could affect your monthly payments, which could be higher.
5. Work With a Qualified, Trustworthy Lender
Last but certainly not least: take your time to find a qualified and reputable home lender. Ask for referrals, dig through online reviews, and don't feel pressured to work with your hairstylist's cousin's best friend just because you know them personally.
Buying a home is one of your life's most significant (and possibly most emotional) financial decisions, and you have a right to feel comfortable and ask questions every step of the way.
Start Early
You can also seek a consultation with a mortgage loan officer even if you don't feel 100% ready to begin the official loan application process. In fact, we recommend it. A good loan officer can look at your current financial picture and help create a clear, step-by-step action plan to prepare you for your home purchase.
Your lender should be a guide and educator - not just a paper pusher - and should be breaking down the big concepts like down payments, monthly payments, and what to expect throughout the loan application process. With the right expert by your side, the home-buying process can be a lot less intimidating.
You've got this. And don't forget to breathe.
Want to be a guest blogger with the #TRN Team? We are looking for writers to contribute. Reach out to jo@trustedreferral.org to get started.
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