Somehow, you just know it’s the right time to buy your first home. But where do you start? Do you immediately jump into the real estate deep end and start swimming with all the other buyers out there?
Please don’t do that.
Here’s some advice we’ve developed from helping thousands of first time home buyers. We’ve boiled it down to the four most important steps to having an offer accepted. Ready?
The Best Way To Buy Your First Home
Step 1: Get Yourself Financially Ready
Many home buyer hopefuls struggle with this first step by overthinking it until they’re stuck. Try breaking it down like this:
- Savings. What do you have at this moment? Start by organizing your latest statements and keep them in a place you can easily access. Add up all the balances.
The accounts you should look at include checking + savings accounts, retirement accounts (like 401k and IRA), and investment accounts. Next, if you receive annual bonuses and know approximately how much the next bonus will be, add that into your savings, if you receive it in time to use it for your home purchase.
- Budget. A home buying budget is different from having a budget to live on. And, no matter how that word makes you feel, you need to know where your money is allocated every month. That’s how you can balance the mortgage amount you qualify for and what you can truly afford.
All you need to do is break down the items you must pay each month. Rent, utilities, food, minimum monthly credit card payments, car payment, insurance payments, student loan payments, and savings. Out of these, rent, utilities, and savings will change once you own a home, while the rest are your continuing obligations.
- Credit. The last piece of your financial picture is your total debt and your credit history. This will have an impact on the size of loan you can qualify for and the interest rate you can get.
First, take the credit card payments from the budget you made and note the balance due for each card. Do the same for your car loan and, if you have them, student loans.
Now review your credit history by accessing a consumer credit report. Some credit card companies offer this to their customers or you can get one from any of the major credit agencies, including Experien and Equifax.
Ignore the credit score for now because a consumer credit report is scored differently than a mortgage credit report. The information in the report is all you need at this point.
Review the report for any late payments or other derogatory information you may not have known about. Do research on what you find by contacting the companies that reported the negative information.
If you need to work on any incorrect information, postpone your home buying journey until this step is completed. It may take 30-90 days to unravel and correct anything that should not be on your report. In the meantime, keep saving.
Document everything. You’ll need to provide complete documentation to your lender, along with a written explanation of what occurred and why.
Step 2: Get Pre-Approved
Now you’re ready to find and meet with a loan officer. While this article isn’t about how to do this, we recommend looking for someone knowledgeable, with competitive rates, and who makes you feel comfortable. This is the first member of your home buying team.
When meeting with your loan officer (LO), request a full pre-approval, but start the process with a quick pre-qualification. Provide the LO with copies of all the savings documents you’ve collected, along with your most recent pay stub, and a copy of the last two years W-2’s. If you’re self-employed, ask the LO what income information they’ll need.
This documentation provides all the details about your income and assets, but they’ll need a credit report to confirm your debts and get your credit score. Armed with this information, your LO will map out your best next steps.
Don’t be discouraged if the mortgage credit report reveals derogatory information not included on your consumer credit report. If that happens, create a strategy with your loan officer for dealing with it in the best way.
Now you’re ready for a critical step - formal Pre-Approval. Loan approval covers both the borrower and the property. When you’ve been pre-approved, especially if an underwriter has reviewed your file, sellers will see you as a “sure thing” when you make an offer to buy their home.
With a formal pre-approval, as long as nothing changes in income, debt, or credit to jeopardize it, a seller has minimal risk by accepting your offer.
Step 3: Add A Real Estate Agent to Your Home Buying Team
Just as you did when you chose a Loan Officer for your home buying team, finding a real estate agent is a similar process. Many people start with personal recommendations from their family and friends. You can also get recommendations from your LO - remember, they work closely with real estate agents every day.
Find a real estate agent that’s knowledgeable about the areas you’re interested in - who makes you feel comfortable. Most home buying journeys include some bumps and surprises along the way. You can’t avoid them altogether, so try to work with a team of professionals that are excellent in resolving problems.
This is probably the most important view point you can adopt when you’re buying a home.
Communicate as much as you can to your real estate agent about what you’d like in your first home. Introduce them to the loan officer on your team so they can meet and discuss all the details of your pre-approval.
Step 4: Find a Home and Make an Offer
No matter how long it takes to find a home and have your offer accepted, if you’ve followed our advice up to this point, it will happen. As you begin to actively search for a home, contact your LO right away if any changes come up in your financial situation.
You may find it necessary to reconnect with your LO and adjust your pre-approval after a bit of house hunting. Or, based on the pre-approval, you may be able to make adjustments to your home search criteria.
Knowing exactly where you stand financially - including a budget of your monthly expenses - and being pre-approved will make writing an offer easier. Your real estate agent can present you to the sellers and their agent in the strongest light possible.
There’s a lot that goes into having an offer accepted, but following these four steps is our best advice for cutting to the head of the line. And our first time home buying clients don’t have time to wait in long lines!