Buying your first house can be scary. It’s a huge investment – quite possibly the biggest one you will ever make in your lifetime. And unless you grew up with parents who were real estate agents, you are probably a little intimidated by the whole process.
How do you know if you are buying the right house? Who do you trust? What do you need to know about your credit score? When should you get pre-approved?
These are the kinds of questions that are probably racing through your mind. Hopefully my guide will help you navigate these unchartered waters … making your first home-buying experience pleasant and memorable.
1. Check Your Credit Score
Let’s start from the top. You aren’t going to be able to buy a home unless your credit is squeaky clean. So, now is the time to clean it up before you start the home buying process.
What you don’t want are a bunch of surprises showing up on your score down the road when you are ready to buy a house. Many homebuyers have been stalled – even defeated – by their own credit score. Best to gauge your credit score health now – even if you are absolutely certain your score is good. You never know what could be on it.
You can get a copy of your credit score from the three major credit agencies:
2. Evaluate Your Credit Cards
When it comes to credit cards, you need to think wisely about closing some of them because having too many credit cards open could affect your credit score negatively.
Only keep the oldest credit cards open since agencies like to see long-standing relationships. You can safely close newer credit cards you don’t use. However, if you close too many credit cards quickly, you could trigger a flag. Be strategic.
3. Create a Budget
Before you ever buy a house you should create a monthly budget based upon what you would pay if you already owned a house.
This exercise has a number of advantages. First, it teaches you to live within your housing budget when it isn’t as risky to do so. Living for three or four months on a restricted budget will give you an idea if your expectations are realistic. In other words, it will teach you what you can truly afford. Better to find out when you have the income than when you already have the house but don’t have the money.
In addition, you’ll be able to save more money toward your down payment (which you should have been building for a number of years by now), pay off any remaining debt (like credit cards or car loans), save money for any moving expenses, and build an emergency fund.
The goal of this exercise is to pay above anything that you pay as a renter. So on top of your normal housing bills, start to pay an additional amount based upon items like:
- Home mortgage
- Mortgage insurance
- Annual property taxes
- HOA (home owner association) fees
- Home furnishings
- Maintenance and repairs (even if you are moving into a new house, expect something to break down)
Ask your landlord for all of the fees that he pays, and include those in your monthly budget. This budget is useful, too, when it actually comes time to make an offer on a home – you can present this budget to your lender for additional evidence that you can afford the loan since mortgage lenders like to see bank and credit card statements.
This is a great time to start collecting pay stubs and all financial statements in a folder that you will keep current as new information comes through the door.
4. Find a Lender
Next to your real estate agent, the mortgage lender is the other most important professional you’ll want to meet when it comes to buying a new home. Usually a good real estate agent can introduce you to a good lender.
How do you spot a good lender? Make sure you interview several candidates, check references, and don’t allow anyone to run your credit score until you’ve picked a lender. If several people try to access your score over a short period of time, your credit score can suffer.
By the way, avoid choosing a lender based on points (especially if we are talking about just a quarter or two of points). In fact, you might be tempted to work with an online lender because of low rates. Don’t. Online lenders – and their underwriters – are usually hard to contact and are not in control of the situation.
Get pre-approved, especially if you are in a competitive seller’s market (meaning there is a surplus of buyers, not homes). A good lender will help you understand all of your financing options (caps on certain types of financing), in addition to the pros and cons of each option.
This process will also help you align your budget (the one that you’ve been working on for the past four months), and give you a practical idea of what you can and cannot afford.
Once you’ve chosen a lender, sit down with him and have him walk you through your credit report.
5. Find a Real Estate Agent
A real estate agent serves a very unique role: objectivity. Think of the agent as that little angel sitting on your shoulder asking if that house with the infinity pool is really within your budget.
Of course a great agent will guide you through the buying process. She can show you homes in neighborhoods that fit your requirements … and she should know the market and lead you to new listings before they even get on the market.
Of course most home buyers start their search online … but you’ll more than likely work with an agent you know through a recommendation from family and friends. It pays to ask early for recommendations and vet soon. Even if you are six to nine months out from buying, finding a good agent can take a long time, so the sooner you look, the better.
Great agents can also help you bid if things become competitive, and bargain with the seller, especially if they are requesting buyers without inspection or appraisal contingencies – two things that will be the first to be dropped if you are in a competitive market. That can be disconcerting figuring you may put an offer on a house that might not pass inspection or appraise for less than you are offering.
Other obstacles in the buying process are FHA financing, which takes longer to close and is prone to issues … sellers would prefer to accept a lower offer with a conventional mortgage than accept a higher offer with less certainty that the transaction will go through smoothly, if at all.
6. Be Ready
Once you’ve evaluated your credit score, worked on a new budget, contacted a real estate agent, and found a lender, it’s now time to start looking at houses.
If you are in a seller’s market, you’ll now understand why I recommend that you do everything above first: you must be ready to pounce on a great house when you find it. If you don’t have your down payment, budget, and pre-approval, you might miss it.
It’s important during this time (it could take anywhere from three to six months) to keep your financial record clean. Don’t make any major purchases and keep on top of your bills. You don’t want that final look at your finances to be disrupted.
Before you make an offer on a house, however, do the following:
- Call the utility providers (electric, water, sewer) to find out average monthly billing
- Find out the homeowner association fees
- Look at the property taxes
Now, add all of those extra expenses to your budget, and ask yourself an honest question: can you still afford the house?
Here’s the bottom line: don’t fall for a beautiful home if the expenses are going to drive you over your budget. Don’t let anyone push you to go into the upper ends of your budget … or over your budget. Even if you could afford the house, if you don’t have any money left over, you are not going to be able to take care of the house.
Also avoid spending all your available cash on the down payment and closing costs. Otherwise, if you run into emergency repairs and unexpected costs, you might find you don’t have enough money to take care of the house.