The First-Time Homebuyer's Checklist
Posted Nov 4th 2021
The First-Time Homebuyer's Checklist
Buying your first home can feel like an insurmountable feat early on. In fact, without the proper guidance and planning, you could encounter roadblocks that’ll extend your purchasing timeline much further than you’d originally anticipated.
Organization is your key to getting toward that closing date on time. Use the checklist below to stay on track with your real estate investment and prepare for things you’ve got coming up.
1. Establish Your Budget
Unlike with other loans, real estate lenders will lend you what you can afford to repay. So, when it comes to buying that first house, your first step in the process should be determining your budget.
Lenders determine your eligibility for financing using your debt-to-income (DTI) ratio. There are four factors that impact this ratio, which include:
- The credit scores of everyone applying for financing
- Your household’s total monthly income
- Your household’s total recurring monthly debts
- The projected closing costs
When you begin to budget, look at your credit score, then calculate your DTI ratio. You can find your credit score for free through websites like Credit Karma and Experian. It's influenced by several factors, namely how long you’ve paid off debt, how much debt you have, and your timeliness with payments.
To calculate your DTI ratio, divide your recurring monthly bills (this excludes nonrecurring items like groceries) by your total monthly household income. It looks something like this:
Bills / Income * 100 = DTI ratio
Lenders are looking for low DTI ratios (50% or lower) and higher credit scores (600 or higher). Supplying a healthy credit score and low DTI ratio ensures lenders will give you what you need to invest in the home you really want. So, if your credit score or DTI ratio isn’t optimal, consider spending a year or so improving them before you decide to purchase a house.
2. Find a Realtor
Once you have an established budget, you’ll want to look for a realtor. Real estate professionals provide industry knowledge and experience to first-time homebuyers. They make purchasing a home much easier by helping you find properties within your budget, handling the paperwork at closing, and guiding you through the negotiation process.
You’ll want to pick a realtor based on experience and reputation. Most customers find their realtor by referral from family and friends, but online databases are also available to help you find your preferred real estate professional. Zillow and Realtor.com are great places to use for narrowing down your search.
3. Research Your Mortgage
Most first-time homebuyers look at one of the four mortgage options listed below. However, there are more financing options available than the ones listed below. Everyone's budget and circumstances are different. Here are the most common mortgages lenders will provide first-timers:
- Conventional mortgage: This is a homebuyer’s loan option that is not secured by the government. Lent by private companies, these mortgages require as little as 3% down for first-time buyers.
- Federal Housing Administration (FHA) loans: This mortgage is insured by the U.S. Department of Housing and Urban Development and distributed by FHA-approved lenders. They allow payments as low as 3.5% and flexible mortgage terms.
- U.S. Department of Agriculture (USDA) loan: This loan is specifically for homebuyers in rural areas and is secured by the federal government. Homebuyers often aren’t required to put in a down payment.
- Department of Veterans Affairs (VA) loan: This mortgage is for current or veteran military service members and is regulated by the Veterans Benefits Administration. Like USDA loans, VA loans don’t require a down payment.
Select Your Loan Term
In conjunction with loan type, you have options when selecting your loan term. Specifically, you’re offered the choice between a 15-year and 30-year term for your mortgage. Most homebuyers opt for a 30-year fixed-interest loan term.
Always keep in mind that your mortgage is an important financial decision that will affect your DTI ratio and credit score for many years. Do your research and investigate programs that may help alleviate the burden of your mortgage.
Look at First-Time Buyer Programs
One program designed to help lighten the load is a state-sponsored first-time homebuyer program. There’s a lot of incentive to buying your first home, and many states offer buyer assistance that helps you with your real estate decisions. Investing through this program can help you in a few ways. Namely, with:
- Securing low-interest-rate mortgages
- Offering down payment assistance
- Providing closing cost assistance
In short, these programs help you financially and keep you on track to get the house you really want. They’re a great option to invest some time in.
Get Preapproved Before You Start Looking
Loan preapproval gives you the most concrete idea of how much you can afford when you buy your home. It also lets sellers know you’re able to back your offer once you place it, which gives your home offer more weight.
Preapproval through your financer does require a credit check and is more significant than prequalification. Overall, it’s a great way to understand the financial end of things before you start shopping. It benefits everyone involved in the process, including your realtor, your lender, and the seller.
4. Now Comes the Fun Part: House Hunting
Made possible by your mortgage preapproval and expert budgeting, the house-hunting process is the highlight of your journey. This is where you and your realtor can really collaborate on your vision and narrow down exactly what you want.
When you start house hunting, expect to look at more than a few houses that aren’t the right fit. Use each walkthrough as a chance to communicate with your realtor on what you want in a home. Point out features that you really like and note anything you don’t like.
While you’re walking through a home, keep an eye out for key indicators as to the state of the house:
- Test the home’s plumbing and electricity by flipping lights and switching on sinks.
- Look at the gutters, proximity of trees, and chimney (if applicable).
- Ask whether radon, asbestos, lead paint, and carbon monoxide inspections have been conducted. If they have, you can request copies of the reports.
- Evaluate each home’s amenities. Do you want a pool? Or is that too much work?
- Consider the neighbors, neighborhood, and the commute to your job, schools, etc.
- Figure out if you want to invest in a fixer-upper and estimate the costs you’d have to pay for the updates in the home.
The key here is to communicate openly and honestly with your realtor. With each viewing and gathering additional feedback, your realtor will be able to narrow down the search and get you to your future home that much faster.
5. Make an Offer
Once you’ve found a property that checks all the boxes, put in an offer. When determining what that offer should be, make sure to listen to the advice of your realtor. They’ll be able to tell you what’s reasonable and they can include any stipulations you may want the sellers to review.
What You Can Include in Your Offer
In your offer, you can include the following:
- Your offered price that you’re willing to buy the home for.
- Any repairs you’d like made before you purchase the home.
- Any upgrades you’d like to be installed before the purchase (this will probably increase the sale price of the house).
- A contingency that makes your offer dependent on a successful home inspection.
The Seller’s Response
After you’ve submitted your offer, the seller can respond in one of three ways.
- They can accept the offer.
- They can reject the offer.
- They can return with a counteroffer.
If the seller rejects your offer or responds with a counteroffer that’s outside your comfort zone, remember that patience is key when it comes to buying a home. In the same vein, don’t get discouraged if your offer is rejected. See it as another chance for you to find a house that fits exactly what you want.
If the seller accepts your offer, or if the counteroffer is something you and your realtor agree on, then congratulations! You just may have purchased your first home.
6. Invest in a Home Inspection and Appraisal
After reaching an agreement with the seller, you’ll move on to getting the home inspected and appraised. This is something a realtor or first-time homebuyer program will assist you with, but we’ve also covered a bit more about inspections and appraisals below.
When you decide to get an inspection, home inspectors conduct an objective physical examination of the home and the structures within it. Most home inspections will cover the following:
- Visible insulation
- Attic space
- Electrical systems
- Interior plumbing
- HVAC system
A home inspection goes a long way in determining what kind of shape the house is in. However, home inspections typically don’t determine the state of the septic system, air ducts, pests (such as termites), invisible odors, and irrigation.
Once you’ve obtained an inspection, you’ll next have an appraiser come to the house and estimate the value of the home. Most appraisers consider a few things before issuing an appraisal:
- The home’s condition (which is determined by the inspection).
- Comparable sales of homes in the vicinity.
- The total square footage of the home.
- Any amenities included with the house (like a swimming pool).
- The home’s general appearance and wear.
Most lenders require that the home be appraised before issuing your mortgage, so you’ll likely have to get the home appraised anyway. However, if the home is appraised for a value lower than the purchased price, you’re able to make changes to your offer.
What You Can Do with Your Appraisal
If the appraiser determines that the value of the home is less than the sale price, you can do one of four things:
- Renegotiate the purchase price with the seller.
- Invest a larger down payment and lower the amount of money you’ll have to borrow.
- Request a new appraisal (this typically happens if the seller disagrees with the current one).
- Cancel the sale, especially if the inspection and appraisal bring to light undisclosed wear and tear on the house.
The home inspection and appraisal processes ensure that both parties agree to the sale of the home in the condition it’s currently in. This step is extremely important and is usually your last chance to back out of purchasing a house.
7. Close on Your Property
Finally, once you’ve found your house and all the lights seem to work properly, you and your realtor will enter the closing process. At this point, you’ll oversee signing a lot of paperwork and taking control of the property. You’ll also pay the closing costs to your lender.
Of all the “initial here's” and “sign there's”, there are four documents you need to be sure you read thoroughly and keep copies of for your records.
- The deed: This document spells out the legal transfer of ownership from the seller to the buyer. Be sure to retain a copy of this, as you’ll need it to prove homeownership for selling the house down the line.
- The settlement statement: This includes all the final fees and charges you’re expected to pay before taking control of the property.
- The promissory note: This is a legal contract with your lender that includes home loan terms, payment dates, and where your payments will be sent. A lot of this information should be contained in your lender’s online payment portal.
- The deed of trust/mortgage: This is a lender-specific document in which you agree that a lien has been placed on your property and that you’ve provided security of repayment on your home loan.
House = Purchased
Purchasing a house seems like an endless process when you first start out. And by the time you’re signing your closing paperwork, you’ll likely feel like you’ve conquered the unconquerable.
As a first-time buyer, the process should be educational and exciting. Make sure to always keep in contact with your realtor and send any questions or comments their way as you progress. Additionally, refer to this checklist as you go to make sure you’re on track to buying your dream house.
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