Here’s a secret for first-time home-buyers: No two home-buying experiences are the same. Even with a Zillow sneak peak, a shopper never really knows what homes will look like until they see them in person or what snags they’ll encounter once mortgage lenders and home inspectors get involved.
For some people, it’s the unpredictability of the experience that makes it most exciting. Others prefer to go in armed with as much knowledge as possible. If you fall in the second camp, and you’ve been eyeing open houses, this nine-step guide can help you prepare for your first time buying a house.
Figure out if buying Is a good idea
Some first-time homebuyers don’t know that homeownership isn’t right for everyone. There are several scenarios in which renting might be a better option, according to financial planner Katie Brewer, such as the following:
•You plan to move to a new area in the next few years. The costs associated with buying a home can total between 5 and 8 percent of the purchase price of a new home. It can take at least four years — or more in a down market — to recoup that cost in increased market value.
•You like having location flexibility. If you’re in a bustling part of town but think you might want something quieter when you settle down, then homeownership might cramp your style — for now.
•You don’t want to deal with home maintenance. When the toilet breaks and you’re renting, the landlord sends someone to repair it. If you’re the owner, you have to be prepared to make your own repairs — and to pay for them, too.
Check your credit
Even the most meticulous bill payers can be surprised to find dings on their credit reports. Bills get sent to old addresses, and creditors sometimes make mistakes. You might find someone else’s credit mistakes commingled with your history if that person has the same name or a name similar to yours. Worse yet, you might unwittingly be the victim of credit fraud or identity theft.
“Make sure you don’t encounter any surprises when you’re applying for loans,” says Brewer. She suggested pulling your credit reports from AnnualCreditReport.com or directly from each of the three major credit bureaus — Equifax, TransUnion and Experian — to check for errors or other problems.
Fix any errors and improve your score
“Improving your credit score, even by just a few points, can help you get better financing terms when shopping for a mortgage,” says Ross Anthony, a real estate agent in San Diego. “Interest rates, points and even city-funded first-time homebuyer assistance programs can all be influenced by your credit rating.”
To improve your credit score:
•Contact each of the three credit bureaus and report any errors.
•Pay down your credit card debt.
•Pay off any small balances.
•Make sure to pay all of your bills on time.
Your lender might have more ideas and options for enhancing your credit score, says Anthony. “Give yourself at least six months to see results,” he says.
Find a lender
Most buyers spend several months working closely with their chosen lender. You want to make sure you’ve picked someone who understands your financial vision and won’t push products that aren’t in your best interest.
“Many unprepared homebuyers wait until they find their perfect home before seriously sitting down with someone to work through the numbers,” says Anthony. This can be a huge financial mistake. If you haven’t lined up a lender, and you find the home of your dreams, you might feel rushed into picking a mortgage provider.
“Pick a person you trust after talking on the phone with them,” says Matt Oliver, a senior loan consultant in Glendale, Ariz. “You can pick one person to do the prequalification and then shop rates and fees when you get a purchase contract.” It might require a couple of extra steps, but it’s the best way, he added.
Anthony suggested interviewing at least three lenders and getting a prequalification or even preapproval, which holds more weight, before starting your home search. “The more you’ve done upfront, the stronger your offer will be when you get to the negotiating table,” he says.
To get preapproved, you’ll need at least the following:
•Bank statements for the two most recent months
•Verification for the source of your down payment
•Tax returns from the last two years
•A copy of your driver’s license and Social Security card
Set your buying budget
“Most folks underestimate how much their costs will be until they meet with me,” says Casey Fleming, mortgage advisor and author of “The Loan Guide: How to Get the Best Possible Mortgage.” Think about how much cash you have to pay the upfront costs, which will include your down payment and closing costs, as well as what you can afford to fork over each month in mortgage, tax and insurance payments.
“All of your fixed expenses — including the mortgage, student loans, car loans, utilities, cellphone, day care, subscriptions and any other fixed expenses — should be no more than 50 percent of your take-home pay,” says Brewer. “The mortgage company only looks at your income and your loan payments, and not at the rest of your expenses, to determine how much they will lend to you.”
In other words, it’s up to you, not your lender, to figure out how much mortgage you can comfortably afford.
Make a list of must-haves
Decide ahead of time what your ideal house includes, what your deal-breakers are and where you’re willing to compromise. “At the risk of sounding pessimistic, it is highly unlikely you will find the perfect home with every feature you want in your ideal price range,” says Anthony. “It just doesn’t happen very often. There will be compromises.”
Anthony suggested each spouse or partner rank his or her top five needs, along with the reasons for each. “If you can establish the ‘why,’ you’ll find it’s often more important than the ‘what,’” he says.
When emotions run high during the home search, as they inevitably do, a prepared list can provide added clarity to your decision-making process.
Find an agent
When searching for a real estate agent, consider the agent’s industry expertise, of course, but also how willing he/she seems to jump in and help you when things get messy. First-time — and sometimes second- or third-time — home-buyers can get emotional and make mistakes, some of which can fracture a deal or cost a lot of money to correct.
“Realtors are usually compensated (by) the seller of a property,” says Brewer. Make sure you’re working with someone who can see past the compensation structure and keep your needs at the forefront of the home search.
Brewer suggested that homebuyers interview several real estate agents. Don’t settle until you find the one who’s a good fit for you.
Prepare for emotional ups and downs
Home shopping online can be a blast. The reality of pounding the pavement in search of the perfect house can sometimes be a drag.
“You might not get the first house that you put an offer on,” says Brewer. “You might fall in love with a house online but find out that it doesn’t look as great in person.”
Even after a contract has been signed, there can be problems closing the sale. Your home inspector might find mold in the basement. The home might not appraise for the expected value. Your name could be spelled wrong on the title documents.
All of these glitches could delay your settlement date or even cause your deal to fall through. Get excited about buying your first home, but always remember that it’s not a done deal until you’ve been handed your new keys at the closing table.
Get ready for a settlement
Settlement is when your new home becomes yours officially. You’ll sit down with your title agent or attorney — or possibly both — and sign a mountain of paperwork. Be prepared with a cashier’s check for the down payment, says Oliver. “It will need to match the bank name from the statements you provided to your mortgage lender. It can’t come from an account that’s been undisclosed.”
Finally, settlement is when you’ll be handed the keys to your new house. It’s time to break open a bottle of champagne and celebrate — but probably not in the title agent’s office. Do that in the comfort of your new home, instead.