Buying a home is simultaneously daunting and exciting, especially for first-time buyers. A home is a lot of money, and it is hard to come up with those funds to pay for a home in cash. That’s why most homeowners in the country get a mortgage loan. Whether you’ve bought a home in the past or are a first-time buyer, we created this 8-step checklist for getting a home loan.
The down payment is by far one of the most important parts of getting a home loan. It allows you to put some money forward to show buyers that you are serious about buying their home. The bigger your down payment, the more attractive your offer looks, and the less money your loan will be. The best part is: it’s never too early to start saving. Take a look at your budget and find out how much money you can put away from each paycheck. The more you can save, the better. For example, two people each saving 200 per paycheck will save $9,600 per year!
There are down payment assistance programs that are designed for first-time homebuyers that your lender can help you with. More on lenders later in this checklist. For many first-time buyers, a 20% down payment is a high bar to reach. As such, a lender will add private mortgage insurance (PMI) to the loan if the down payment is under 20%. This is another layer of protection for the lender in case the buyer defaults on the loan.
A common question that our agents get is: What credit score do I need to buy a house? Your credit score is a massive factor in determining your approval for a loan as well as how much you will be approved for. The rule of thumb is to have a credit score above 750. Before going to a lender, get a free copy of your credit score from your bank or credit card company. If you don't have that magic number, you can work to boost it. Focus on paying your debts on time and at least the minimum balance. If you can pay more than the minimum every month on your car payment, student loans, or credit card bills, that’s even better. These are the easiest ways to raise your credit score. When a debt is paid off, use the extra funds to pay off other debts or funnel them into savings.
Keep in mind, your credit score doesn’t jump by 20 points overnight. Keep up on your payments with more than the minimum and your score will gradually increase.
A real estate agent is the single best tool you can have as a home buyer. A great real estate agent will work solely on your behalf to find the perfect home for you based on your preferences and cost range. Look for an agent that has the best home search resources and has up-to-date information about the current real estate market. A well-informed agent will help you be a well-informed buyer, which will give you confidence that the house you are buying is perfect for you.
Now your credit score is in good shape, you have a bunch of money squirreled away for a down payment, and have started home shopping with a real estate agent. Now, start talking to mortgage lenders. Your agent will likely have a preferred lender that they work with a lot. That preferred lender is a good start, but be sure to shop around. Each lender will have slightly different terms and rates for your monthly payments, interest rate, length of the loan, and closing costs. Ask each lender about their fees, such as: loan origination fees, discount points, underwriting fees, and documentation fees. Definitions of these and more loan closing costs can be found in the most recent link about closing costs.
Important tip: A lender will do a hard check on your credit report to determine your financial ability to pay a loan and credit history. Normally, too many hard checks will hurt your credit report. However, when multiple lenders pull your credit history in a short time (2-4 weeks) it only gets reported as one hard check, so your credit score won’t take a hit. Because of this, do not be afraid to go to multiple lenders.
Once you have chosen a lender, get pre-approved for a loan. Home loan pre-approval is an in-depth look at your financial life. Your lender will request your most recent W-2 form, recent pay stubs, bank and brokerage statements, and tax returns from at least the last two years. All of this information, combined with your credit score and credit history, will determine the amount of money you can get a loan for. Once you are pre-approved, you will be able to start seriously shopping for a home. The pre-approval letter will generally be valid for 60-90 days, giving you plenty of time to find a home.
Realtor inside tip: Getting pre-approved is one of the best ways to get an offer accepted in a hot market like Boise. It shows the buyer that you have financing secured and the offer you are submitting is serious.
Once you are pre-approved for a loan, it is important to keep your financial situation in good standing. Maintain your credit score by continuing to make steady monthly payments. Don’t make any large purchases like furniture, new cars, or pinball machines. Incurring new debt or getting more pulls on your credit report can damage your credit score.
Hear us out on this next point. Do not change jobs. Your loan qualification and pre-approval are based on your current employment status and finances from the past two year to the present. Getting a new job could affect your financial standing—for better or worse depending on the new job. Getting a new job could cause the lender to re-evaluate your pre-approval and adjust your loan ability, costing you valuable time in your home search. Sometimes, especially with the coronavirus and a recession, job changes or job loss is out of your control. If you do lose your job due to circumstances beyond your control, talk to your lender about your options going forward. They will work with you to evaluate your options.
At this point, your agent has found an amazing house and you think it's perfect, so you decide to make an offer. Talk to your agent about how much you should offer based on your loan approval amount and the current market. If there are multiple offers, be prepared to increase your offer and down payment, but make sure not to over-exert your spending power. Spending too much on your mortgage every month is how you end up cash poor very quickly. If bidding gets too expensive, be prepared to walk away.
Your offer was accepted! At this point, your lender will double check your financial situation to make sure you can afford your payments based on the purchase price. As long as your financial situation hasn’t changed and is stable, you will be a homeowner after a couple of signatures. Congratulations!
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