Buying a home is a huge financial committment and lifestyle change. Before you start looking for potential homes to purchase, there are several things you, as a homebuyer, should cover, including current financial standing, credit, and home affordability.
1. Meet with a Mortgage Lender
Getting a pre-approval or loan commitment is the most important piece of the homebuying puzzle. In fact, many real estate agents will require one or the other before they'll write a purchase offer for clients.
To get a pre-approval, your lender will run your credit score and compile a loan application with the information you provide regarding income, employment history, assets, etc. The lender will analyze this information and issue a decision on whether or not you are eligible for a loan. If you are qualified, the lender will issue a pre-approval that states your qualification, subject to verification of the information you provided and the purchase property.
2. Set Your Homebuying Budget
Mortgage affordability is dependant on multiple factors, including income, mortgage rates, mortgage insurance, home type, credit history and score, fees and closings costs, etc. While your lender will use ratios, like debt-to-income, to determine how much you can borrow, it's important to determine what you are comfortable spending monthly on a mortgage payment.
3. Consider All Homeownership and Homebuying Costs
While setting your own home purchase point is important, you'll also need to account for other expenses involved with owning and purchasing a home.
4. Gather Your Paperwork
Once your pre-approval is compiled, your lender will ask for various documents that support the information you providing regarding employment, assets, finances, etc. Gathering your paperwork ahead of time and giving it to your mortgage banker in a timely manner will help keep your loan application moving forward. Dcouments needed include:
- Last two years W-2's and federal tax returns
- Last 30 days paystubs
- Last two months bank statements for all financial accounts, including investments
- Loan payment information
- Two-year residency history
For a more extensive list of required documents, check out our loan application checklist.
5. Know Your Credit Score & Keep It in Good Standing
Credit score is a large factor in the loan approval process, so credit awareness is essential. In fact, people who know their credit scores feel significantly more prepared to buy a home than those who don't know their score (70% vs. 54%), according to a recent Experian survey.
Lenders use your median FICO score from the three credit agencies - Experian, Equifax and TransUnion - to represent your score throughout the home financing process. Avoid making any major credit decisions prior to or during the loan process, including:
- Closing old accounts
- Paying off old collections
- Opening new credit accounts
- Making a large purchase on a line of credit
6. Pick the Right Real Estate Agent
Like choosing a mortgage lender, picking the right real estate agent is also essential. Pick an agent with experience and knowledge and someone who aligns with your homebuying goals. Look for an agent who has experience in your price point and neighbor, as well as several upstanding referrals.
7. Start Saving But Know Your Down Payment Options
A large amount of U.S. consumers still believe you need a 20% down payment to buy a home. Contrary to that common belief, there are several low to no down payment options available. Be prepared to talk with your mortgage banker about which option fits your financial needs and goals.
While a large down payment can offset the costs of your monthly mortgage payment and could get you out of paying for private mortgage insurance (PMI), completely depleting your savings may not be the best option in the long run.
Regardless, having savings is a smart move for any homebuyer, as home maintenance issues tend to arise unexpectedly.
For more information about buying and financing your first home, download our free Mortgage 101 Handbook, a great resource for first-time homebuyers.