If you are looking to buy a home, the process may seem overwhelming. Planning well in advance can save you time, money, and stress. Whether you’re ready to start preparing or just wondering about the home buying process, we’ve created a list of important steps to lead to a smooth home purchase:
18 months before your home purchase
Check your credit score: Each of the credit bureaus – Experian, Equifax and Trans Union – offer one free credit report a year. Check your report for any errors and dispute them if you find any. This free credit report does not include your actual credit score; a payment is usually required to see your FICO score. Check your score, and if necessary, meet with a financial advisor to improve them. To secure the best interest rates, you’ll want a score over 700. To request a free credit report or for more information, click here.
Downsize living expenses: Eliminate as many monthly debt payments as possible. Doing so will only increase your borrowing capacity. Pay off and consolidate as much of your consumer debt (credit cards, student loans, auto loans, etc.) as you can prior to applying for a home loan.
Consider where you want to live: This is an important factor you’ll face when it comes to preparing to buy a home. The location you decide on will impact the type of home you choose, cost of living, the social scene, and even access to public transportation. Take into consideration everything that is important to you in a new location. Make sure you can see yourself living there for years to come.
Create a budget and savings plan: Now that you have an idea of where you want to live, you can make a budget. Determine how much you will have left after all your monthly expenses for mortgage payments, homeowners’ insurance, home repairs, and other housing-related expenses. See how much properties are selling for in your ideal location. This will give you an idea of how much you will need to save for a down payment. It’s a good idea to have saved at least 3-5% of the sales price of a home in your price range. For example, if you want to buy a $300,000 home, plan to save about $9,000-$15,000. Regardless of your budget, it’s never too early to start saving!
12 months before your home purchase
Meet with a lender: It is best to learn how the mortgage process works early on, especially for first-time buyers. Your lender is there to ensure you have all the information you need. Even if you have gone through the home buying process before, be sure to ask your lender for a checklist of items to take care of ahead of a home purchase.
Learn the market: Now is the time to hire a real estate agent.* Your lender should have some suggestions of realtors if you don’t know where to start. Your agent is there to represent you and will provide you with vital information about the market. Ask your agent if they can set you up with email notifications of new houses that hit the market in your budget or preferred neighborhood. Even though you are not necessarily pulling the trigger yet, when it is time you will know what your home buying power is and exactly where you want to move to. Keep in mind that you’ll be working with your agent for a while, so make sure you choose someone you trust. For more information about choosing a real estate agent, click here.
Gather your documents: The lender will typically require two years of information. While this can be a tedious process, it is vital. To stay organized, create a secure folder on your computer to save all your pay stubs and bank statements, in addition to tax returns and W-2 forms.
6 months before your home purchase
Learn how to break your lease: Your current lease might not end when you are ready to move into your new home, so it is important to find out your break lease terms and month to month terms with your current landlord. Having some flexibility on your lease is helpful and knowing your exact parameters can take off some of the pressure. That way you are aware of and prepared for any fees or having to find a new tenant.
Learn the tax implications of buying**: Owning a home may considerably lower your taxable income. This typically allows you to claim less on your withholdings. Be sure you know what changes will occur so you know what to expect when tax season comes around. For more information about how home ownership will affect your taxes, click here.
Simulate a mortgage payment: To make sure you’ll be able to afford having a larger monthly living expense, live as though you are already paying your budgeted mortgage payment. For example, if your rent is $1,500 and you can afford $2,000, pretend you are currently paying $2,000. See how this impacts your normal budget so, if needed, you can make adjustments.
Send your lender updated documents: Keep your documents updated! The home buying process takes time and it is likely you’ll have a document or two to add or change. If a new tax return was filed or a new W-2 was given, be sure to send these items to your lender as soon as possible.
3 months before your home purchase
Know your buying power: When you are very close to buying, you should know your numbers to get to the most important part of buying a house—your mortgage amount. You’ll need to provide your lender with numbers such as how much you have for a down payment, your debt-to-income ratio, and your assets in order to get pre-approved. Once your lender has these numbers, they will pull your credit and identify the loan type and amount that you qualify for. Once you know what your price range is you can finally start looking at houses.
Look closely at houses: At this point you may be able to officially begin the home buying process. If you love something that you see online or that you drive by, contact your agent to arrange a visit. Take full advantage of the visit by taking note of what you like and dislike. Do you like the neighborhood? Is it conveniently located to places of interest? What is the traffic like? Touring will also allow you to get a feel for what kind of house you can expect to find in your price range. Be prepared to tour a lot of houses! It can take a while before you find the place you want to call home.
* NFM Lending is not affiliated with any real estate companies. You are entitled to shop around for the best lender/real estate company for you.
** NFM Lending is not a Financial Advisor or Tax Consultant. Please make sure to consult your own Financial Advisor or Tax Consultant regarding the use of your personal tax refund.
Over the past several months, we have answered the top questions about the top mortgage loan options. Our final blog in this series will answer the top 5 questions about United States Department of Agriculture (USDA) loans. If you are considering buying a home, read on to find out whether a USDA loan might be the right choice for you.
USDA Loans USDA home loans are insured by the United States Department of Agriculture. This loan program allows low- and moderate- income households to purchase homes in eligible rural areas. Home buyers who do not qualify for a conventional mortgage may be able to purchase a home with a USDA loan.
Who is eligible for a USDA Loan? Low- to middle- income home buyers looking to purchase houses in eligible rural areas may qualify for a USDA loan. Other USDA requirements can be found here. Your lender may also have other eligibility requirements, including a minimum credit score.
How do I know if I meet the income requirements for a USDA loan? Income requirements for USDA loans vary by county, and are also based on the number of persons in your household. You can see what the income limits for your area are by visiting the USDA website.
How can I find out if a property is in a USDA eligible area? The USDA website allows you to search property addresses to determine whether they meet Rural Development rural area requirements. What qualifies as rural may vary from place to place, but includes factors such as the area’s population and development.
Can I purchase a second home with a USDA loan? USDA loans are designed to help eligible home buyers attain a primary residence, and cannot be used to obtain a second home.
What are the benefits of a USDA loan? The chief benefit of a USDA loan is that it allows home buyers to obtain 100% financing* for the home, with no down payment required. Additionally, the USDA does not have loan limits in place, so your purchasing power may be higher than it would be with another loan program. Your lender will be able to help you determine how much you qualify for.
*100% financing, no down payment is required. The loan amount may not exceed 100% of the appraised value, plus the guarantee fee may be included. Loan is limited to the appraised value without the pool, if applicable.