If you’re in the market as a first time home buyer, this is one of the most intimidating and confusing experiences you could have if you haven’t done proper research. I can tell you that when we first purchased our home our emotions were all over the place because the process was very lengthy and bureaucratic.
It’s tough to make a checklist as simple as possible in this topic because nothing is simple about buying a home. Short of a blood sample, the lenders want every single documentation about your financial lives. So get ready!
In all seriousness, it’s not that bad but it is lengthy. Nonetheless, I’m going to break down the checklist into understanding your finances, research, and additional costs. Are you ready? Alright, check it out:
Understand your finances
Take this part seriously. It’s not just about how much money you make because there are a whole lot of factors that can make or break your chances of getting a mortgage. Since the economic crisis in 2008, the rules are tight and there are a lot of requirements for qualification.
Run through this financial checklist:
- Do you know what your Credit score is? Remember, credit scores will impact the interest rates you receive and can make loans more costly. If you have a poor credit score, you may need a co-signer. Here are related posts about using Credit Karma and understanding your credit scores.
- What are your assets? In other words, how much cash do you have in your checking, savings, retirement, investment accounts and do you have properties or vehicles? Make sure that you are able to provide documentation and proof of the assets you claim.
- What are your liabilities? For instance, do you have student loans, credit card debt, personal loans, are you financing or leasing a car? These debt obligations are extremely important to know for your debt to income ratio.
- What is your gross monthly income? How many income streams do you have? Are you salary based? Do you work based on commissions? Do you have a salary and commission? All of these questions are important to answer because they will be asked during the application and you will need to provide proof of income. Be prepared to also provide 2 years of tax returns and your most recent pay stubs.
- Knowing what your income and monthly debt obligation payments are, you can determine your debt to income ratio. This ratio demonstrates how much of your gross income is already committed to debt payments. As a rule of thumb, lenders will look for your debt to income ratio to be below 43%, including the new mortgage you will be applying for. To further elaborate, lets say you make $5,000 gross monthly and your monthly debt payments are $1,700 (mortgage), $200 (car payment), $250 (student loans). That means your monthly debt payments are $2,150, which is exactly 43% of the gross monthly income you receive. Therefore, you are below the risk factors lenders look in order to qualify you for a mortgage. If your ration is above 43%, you may encounter a roadblock and some stressful conversations about how you have too much debt.
- How much cash do you have for your down payment?
- How much home can you afford? Let’s say you’ve got $50,000 saved up for a down payment, this is 20% for a $250,000 home. However, you’ll then need to consider what the monthly costs will be: principal and interest, the taxes and insurance, and the HOA fees (if any). Also, will the new mortgage payments bring your debt to income ratio above 43%. If the monthly mortgage is too high, you may need to downsize your search. Or, you may need to pay off some debts to bring down your monthly debt obligations. See how this can get complicated?
Buying a home is almost like a science. You want to make sure you are buying at the right time and when it’s a “buyer’s market”. A buyer’s market is when there is plenty of inventory in the market place and the prices for homes are not a peak or they are very competitive. For instance, if you ask me now, we are definitely in a “seller’s market.” According to a study by Morgan Stanley, housing inventory is low and the home prices are sky rocketing. To give you an example, my home in the past 1.5 years has gone up by $32,000 in value (crazy!). Therefore, the market is in my favor.
Ask yourself the following questions and be patient with your research:
- Are you buying at the right time?
- What are the interest rates?
- How are home prices in the community I’m interested in?
- Is there enough inventory in the market? In other words, are there a lot of homes being sold or is it very limited?
- Which realtor is a good fit for me?
- Should I deal with mortgage lenders or mortgage brokers?
- Should I buy now or should I continue renting?
Just when you think you’ve had enough of this checklist, there is still a bit more…You’ve got to do more research on these additional costs. The costs will vary depending on who you work with and the community you select when you purchase your home.
So be on the look out for these additional costs:
- Home owners insurance
- Flood insurance
- Origination fees
- Application fees
- Appraisal fees
- Closing costs (to give you an idea, my closing costs were approximately $13,000. This cash comes from your down payment.)
- Private Mortgage insurance (in case your down payment is less than 20%)
- Title company fees
Once you’ve gone through this check list and you feel ready to move forward, go get pre-approved for a mortgage! This pre-approval will give you and the realtor the confidence to move forward with the house hunting.
As you visit homes you’re interested in just watch out for the hoarders and cat ladies…my wife and I visited 10 homes and I’ve been scared for life!