First-time homebuyers who need to whip their finances into shape may have more success if they start planning early. Here are some smart money moves you can make today to get on track.
First-time homebuyer tips
- Step 1. Check your credit (and work on it).
- Step 2. Determine a budget.
- Step 3. Get your assets in place.
- Step 4. Shop multiple lenders.
- Step 5. Hire a real estate agent.
- Step 6. Put contingencies in writing.
- Step 7. Keep the status quo in your finances.
12+ months out
Check your credit (and work on it)
The first thing potential first-time homebuyers should do is pull their credit report and scores to see where they stand, says Ralph DiBugnara, president of Home Qualified Lending in New York City.
As you check your credit scores and reports, look for any errors or past-due accounts that might have gone to collections. These liabilities can create roadblocks when you apply for a home loan. If anything is amiss, contact the creditor to see if you can sort it out, DiBugnara says.
Use myBankrate to keep tabs on your credit for free. You can get a free copy of your credit report each year by visiting annualcreditreport.com. Some banks may also have tools to help their customers track and improve their credit. Chase, for example, has a program called My Credit Journey for account holders.
Don’t just check one credit bureau’s report; you could get a false sense of confidence. Instead, get information from all three agencies, and keep periodic tabs on your activity, DiBugnara advises.
“If you’re not already signed up for a credit monitoring service, this is a good time to do it,” DiBugnara says. “You’ll get notified if your credit score changes, or if there’s suspicious activity on your report.”
6 to 8 months out
Determine a budget
When you’re buying a home for the first time, setting a budget is key, says Lauren Lindsay, a Houston-based independent financial planner.
“Look at your monthly spending to see what you can afford for principal, interest, taxes and insurance,” says Lindsay. Factor in maintenance and emergency savings for repairs, too. “One lesson from the [housing] crash: Just because the bank approves you for a certain amount it doesn’t mean you can afford it.”
In addition to household expenses, consider other financial obligations that lenders won’t see on your credit report. Your cell phone, utility, daycare/tuition, grocery and car insurance bills are other fixed monthly expenses that factor into how much house you can afford.
Don’t max out your monthly income on mortgage payments and wind up house poor, or you might regret it later, says Steve Sivak, a certified financial planner and managing partner of Innovate Wealth in Pittsburgh. Don’t forget that homeownership comes with unforeseen expenses.
“As a rule of thumb, I tell clients to prepare to spend 1 to 3 percent of the value of their homes each year on house [expenses],” Sivak says.
3 to 4 months out
Get your assets in place
When you start shopping for lenders, they’ll look at your bank statements from the last two months. If you plan to make any deposits into your checking or savings accounts from other assets, do it before that 60-day window. Otherwise, you’ll have to explain where any significant deposits came from in detail, DiBugnara says. It’s best to avoid opening new credit accounts or loans, or racking up debt, from this point on, he adds.
2 months out
Shop multiple lenders
Things are getting real. At this point, you should know what monthly payment you’re comfortable with, what areas you can afford, and how much you can put down. Now it’s time to shop for a mortgage.
Compare mortgage rates from different types of lenders and assess whether this is a good time to lock in your rate; look at loan fees and customer service. Preapprovals usually expire after 90 days, DiBugnara says.
“In this market, you can find competitive rates and service, but you want to pay close attention to lenders’ responsiveness and communication,” DiBugnara says.
If you’re a first-time homebuyer with significant debt or so-so credit, you may want to apply for a mortgage preapproval even earlier to zero in on issues to fix sooner rather than later.
While you shop, it’s a good idea to focus not just on the rates you’re being quoted, but all the terms of the mortgage. What are the late fees? What are the estimated closing costs? If you’re able to get a mortgage with the bank where you already have accounts, will they give you a better deal? Sometimes it makes sense to choose a loan with a slightly higher rate if the other terms are more favorable.
No matter what you do, preapproval is a good idea because it will show sellers that you’re serious with your offer in this competitive housing market.
And, with interest rates still near all-time lows, you’re likely to get a good deal on your loan no matter what.
Hire a real estate agent
After you have your financing squared away and a preapproval letter in hand, your next step as a first-time homebuyer is to hire a real estate agent.
An experienced real estate agent who knows the area you’re looking to buy in especially well can advise you on market conditions and whether homes you want to make offers on are priced properly. Agents can identify potential issues with a home or neighborhood you’re unaware of, and they’ll go to bat for you to negotiate pricing and terms.
“As a buyer, it costs you nothing to work with a Realtor, but they can save a lot of time and hassle [in your search],” Lindsay says.
One month out
Put contingencies in writing
Typically, a real estate closing is scheduled 30 to 45 days after first signing the purchase contract. In your offer, be clear about any contingencies that let you walk away from the deal. These may include the home inspection revealing costly issues or your mortgage approval falling through.
If these terms are spelled out in writing with deadlines, you’ll have an out if the transaction doesn’t go as planned – and get your earnest deposit back, too. Get estimates from contractors on any repairs or upgrades the home might need before you close, DiBugnara says. Doing this research can help you plan for those expenses and buy you time to have the work done before moving in.
Keep the status quo
A mortgage preapproval doesn’t mean you’re in the clear. Lenders recheck your credit, bank statements, income and employment just before closing to make sure you’re still able to handle repayment. Making big purchases, taking out new loans or lines of credit, or even closing accounts can delay closing or kill your loan altogether, DiBugnara says.
“Any skeletons you have in your financial closet will be found, so it’s best to be as honest and upfront as you can,” DiBugnara says.