The homebuying process can be lengthy and intensive, but becoming a first-time homeowner may be easier than you think. Tackling each step one by one can help you build understanding, grow confidence and land your dream home.
Here are the 12 most important steps that make up the mortgage process:
Check your credit score
First things first, request a copy of your credit report from TransUnion, Equifax and Experian. While you’ll use the numerical score to qualify for a home loan, it’s also important to ensure that everything else on the report is accurate. Comb through each report and work to resolve any errors long before it’s time to make an offer.
If your score isn’t quite where you’d like it to be, keep in mind that getting a mortgage despite bad credit is possible, according to Forbes. But remember, the improvement process can be time-consuming and complicated. And believe us, we understand that some groups of Americans have easier access to “good credit” than others. All that’s to say, it’s best to get started as soon as possible.
Determine how much you can afford
Most mortgage professionals calculate something called debt-to-income ratio (DTI) to help determine how big of a home loan you can qualify for. DTI compares the money you earn to the money you spend. The spend side of the equation includes all recurring debt expenses, such as housing costs (for the sake of determining how much house you can qualify for, they use your projected mortgage payment), car payments, student loans and credit card debt. Your debt expenses are divided by your gross income (that’s what you make monthly before taxes) and the resulting decimal is multiplied by 100 to create your DTI percentage.
(Monthly debt payments ÷ gross monthly income) × 100 = DTI
Many loan programs will require a DTI of 40% or lower. If your DTI is higher than 40%, you still may be able to get approved for a loan, but you could pay a higher interest rate. On the other hand, some people prefer to stay well below a 40% DTI to save more money for all the other expenses that come along with being a human.
Create a budget based on your DTI, also accounting for food, transportation, insurance, utilities, down payment and closing costs. Have a candid conversation with your loan originator about your finances and budget to finalize an ideal mortgage amount for your goals and lifestyle.
Make a down payment plan
While 20% is something of a magic number in the home buying world, it’s certainly not set in stone. Larger down payments might be better in terms of lower interest rates and spend over time, but there is no hard and fast rule. The necessary down payment amount varies depending on loan type, so do some research and determine which loan might be best for you. Did you know that most conventional loans allow you to put as little as 5% down and Federal Housing Administration loans go as low as 3.5%? It’s true. But, a down payment of less than 20% could require you to pay mortgage insurance (usually a fee added to your monthly home loan bill).
Prioritize must-haves
Which aspects of your dream home are most important? Perhaps the number of bedrooms, proximity to work, or hardwood floors? Make a list of non-negotiables as well as a list of concession points, or aspects that would be nice to have but you’d be willing to leverage for must-haves. Use this list to guide your search moving forward.
Research and visit
Take to the web and research school details, public transportation and cost of living for prospective areas. Then, hit the pavement. See for yourself what homes in your price range look like and which neighborhoods are most appealing. If you’re able, try and visit the areas you are most interested in a few different times, on different days, or in different seasons. A neighborhood may be very appealing on a weekday morning but could turn into a hub for nightlife over the weekend.
It’s also important to consider the fact that – according to Investopedia – many first-time homebuyers are blindsided by hidden costs post-purchase, from property taxes to HOA fees. While costs will vary by location, any unexpected charges after such a large investment can be disheartening. Consider opening a specific account now to get a head start on your homeownership journey. Your future self will thank you!
Collect necessary paperwork
Begin gathering all necessary documents now to smooth the process in the long run. Depending on your situation, this may include income documentation, proof of assets, personal documents, pay stubs, tax returns, bank statements, IDs, previous addresses and social security numbers.
Review and study all documents as you collect them to further familiarize yourself with your financial situation and motivate your down payment savings plan.
Find the right real estate agent and mortgage professional
Start interviewing for a real estate agent. This person will operate with your best interests in mind, finding you the right property, negotiating on your behalf and guiding you through closing. Explore mortgage brokers in your area who can work with multiple lenders and recommend the best option to fit your personal situation. Banks and online mortgage services are worth connecting with too, though they probably won’t be able to shop loans from different lenders.
Get pre-qualified
Make an appointment with a loan originator, which can be done online or in person. The loan originator will run a credit check and tell you how much you are pre-qualified for. Keep in mind that many homeowners borrow less than the maximum to account for other expenses and opt for lower monthly payments. Revisit your financials with these new numbers in mind and, if necessary, make any final edits to your budget and payment plan.
Start seriously shopping
Once you’re pre-qualified, your real estate agent can work toward finding homes that meet your priorities and fall within your price range. Make a point to avoid homes you can’t afford, as subsequent homes within your budget could pale in comparison. Regularly refer back to your list of priorities and concession points to find the perfect home.
Make an offer and get an inspection
The closing process can be lengthy, so you may want to extend an offer well before your desired move-in date. Shortly after the offer is accepted, have a home inspector survey the property to avoid any trouble down the road.
Tie up loose ends
Review all lending documents, secure insurance, do a final walk through and get a cashier’s check or bank wire for cash needed at closing. Then, all that’s left to do is transfer the ownership and complete the mortgage loan transaction. Congratulations, new homeowner!
Understanding the mortgage process
The thought of purchasing your first home should inspire joy. Instead, it can often feel confusing, intimidating and stressful. By taking the time to understand the process and chart out these twelve critical steps, you can approach the situation prepared and empowered.
Published on May 2, 2022
