The upcoming new year often leads people to start thinking about newer and bigger things, one of which might be the decision to become a homeowner.
As a self-professed house nerd, the home buying process fascinates me to no end. While some financial gurus say that home ownership isn’t worth the price (and in many cases they’re right) there is still something carnal in many people that yearns to own a home of their own.
However, buying your first home isn’t as simple as finding a house and signing the papers. There are many intricacies involved with first time home ownership, and the more prepared you are, the more likely you’ll walk into a great deal instead of having to spend the next several years learning from your first time home buying mistakes.
The checklist I’ve created below will help you to go into home ownership eyes wide open and personally prepared so that your home buying experience can be as awesome as you’ve imagined it will be.
1. Pull Your Credit Report
Every person is entitled to get one free copy per year of their credit report at www.annualcreditreport.com, sans their credit score. Knowing your credit score is important for the purposes of home ownership, so I would recommend paying the extra cash to get your scores from each of the three bureaus as well.
A good credit report is vital to home mortgage qualification, so look over your scores and see if they’re where they need to be. Here’s an idea of what is and isn’t a good credit score.
(Thanks to Experian for this image.)
As you look over your credit report, you’ll want to check each company reporting and scan for reportings of late payments or non-paid, collection or judgment items.
If You Have Bad Credit
Any non-paid items need to be cleared up ASAP if you want to buy a home, so contact the phone number on the credit report for the non-paid item and make arrangements to get it paid off quickly.
*Important: Whenever dealing with unpaid, collection or judgment items, it’s very important to document all correspondence with the coordinating companies, including:
- When you talked with them
- Who you talked with
- What was agreed upon
- Copies of any payments made
- Requesting a “paid in full” letter when the judgment or collection is satisfied
As you pay off any unpaid items and continue to make good credit decisions, paying balances down and paying on time, your credit score will slowly start to rise.
If You Have No Credit
If you don’t have any credit, you need to start building some ASAP. Start by getting a credit card in your name. If you’ve not had one before you’ll likely need to get a secured credit card (one that will allow you to charge an amount up to that you have in savings with them) or get a co-signer such as a parent to co-sign on a credit card with you.
*Note: our oldest daughter is a senior in high school who just turned 18. I recently went to the bank and applied for a joint credit card with her. She has instructions to make all of her small purchases on that card and then pay the card off immediately afterward from her personal checking account. I recommend this to parents provided you think they can handle the temptation of access to credit as it helps build their credit score right off the bat.
Use your new credit card often, but only for purchases you’d have made anyway within your designed monthly budget. Then pay off the purchases in full every month in order to start building your credit score and reputation.
If You Have Good Credit
GREAT! Just keep maintaining what you do and work on paying off any credit card balances or other loans.
2. Save Your Money
Having a down payment and money for closing costs is a necessity if you want to own a home. While there are ways around this such as gifts from parents and seller paid costs, I don’t recommend buying a home if you can’t discipline yourself to save up your own money for a down payment and closing costs.
And if your parents or other relatives insist on giving you a large chunk of cash toward a home purchase, commit to using it as an additional down payment on the home so that your mortgage payments are as small as possible and you’ve got substantial equity in the home right off the bat.
Saving money – unless you’ve already made a habit of it – is likely going to require some discipline on your part. Start by creating a budget and determining what all of your monthly expenses are.
Check out my article on zero sum budgets for more info on budgeting.
After you’ve created your budget and determined about how much money you can put in savings each month, it’s vitally important to PAY YOURSELF FIRST.
Yep, before you pay any of your bills, put your pre-determined amount into your savings account and LEAVE. IT. THERE. No matter what.
If you do so you’ll build up a fabulous down payment in no time.
3. Start Researching Smart Home Ownership
There are many websites out there devoted to helping people buy smart as they look for their first home. Here is one example. Find these types of sites (many are state specific) and start educating yourself on what it means to buy and own a home.
It’s smart to know exactly what you’re getting into as you begin this process. Don’t rely solely on the professionals you hire on your behalf. Be your own advocate so you know how to make smart decisions and spot potential issues as you work with the professionals you hire.
Also, start scouring real estate web sites in your area so you can get an idea of what type of home you want to own. Do you want a one-story or a two-story? A ranch style home or a split entry? How many bedrooms do you want? How many baths?
Which neighborhoods would you like to live in? Which would you like to avoid?
Start learning about the signs of problems within a home as well. While real estate licensees are required by law to point out any material facts (i.e. problems that could change a decision about buying, such as watermarks on a ceiling) as they show you a home, you’ll want to be competent enough regarding home repair to be your own advocate in this area as well.
Think Long Term
One of the best pieces of advice we got as we looked for our second home was to ask ourselves one question: Could you live here forever if you had to?
If the answer is “no” you might want to look further. You may consider your first home a starter home, but future circumstances could prevent a move.
Also, when buying a house you need to think in terms of resale. As an example, while you might be happy living on a busy street, many potential homeowners are not. Therefore it might be best to avoid considering houses on busy streets in order to make reselling your new home easier and faster.
Same with other potential buyer inhibitors such as railroad tracks, unsightly neighboring houses or odd home layouts. When you’re looking to buy a home, you should also be thinking about when it will be time to sell that home and what features about it could put off potential buyers.
4. Hire Trusted Professionals
You’ll need to look for two main professionals to help you with the home buying process:
- a licensed real estate agent
- a mortgage lending agent
You’ll want to hire a mortgage lender at the beginning of this process and get pre-approved for a mortgage before you even start looking at houses.
Having a pre-approved loan will help you be at the top of the list sellers consider when offers start coming in.
Hiring a trusted real estate agent is important too. Choose someone who loves the service part of real estate and knows the job.
Ask around for referrals from family and friends and find out who they trust to help them with their home buying needs. Interview two or three different people for each position and then go with your gut.
There are bad real estate agents and mortgage lenders just as there are bad guys and girls in every other business industry.
Don’t get stuck with someone who doesn’t know what they’re doing or won’t fulfill the legal and ethical obligations to act in your best interest and put your needs above their own pocketbook.
Also, start looking for home inspectors. Again, there are good ones and bad ones so choose carefully, and only use the ones your realtor recommends if you really trust your realtor.
5 .Get Advice from Loved Ones – But Don’t Let Them Run the Show
First time home buyers often rely on the guidance of loved ones who’ve been down the home ownership road before. This is great and I highly recommend it.
Sometimes those well-meaning advice givers try to run the show and can make a good home buying experience into a bad one. Don’t let that happen to you. Ask for advice, take the good advice and leave the bad advice, remembering that the final decision on what home you purchase is up to you.
6. Be Prepared to Jump
Often times when first time home buyers find their dream home, they get cold feet when the process actually starts happening and they commit to signing the purchase agreement.
New stuff – especially new stuff that results in taking on large debt – is always scary. If you know you’re ready to take the plunge into home ownership, and you’re certain the house you’ve found is “the one”, just do it.
Buying your first home can be a fun and exciting time. Make it all that it could be by prepping ahead of time and planning for times ahead and not just what you want now.
All good tips, Laurie. Buying a home is a difficult and confusing transaction, it seems for even people who have done it several times. It’s a fairly opaque process all the way through the signing (e.g. – getting the documents, at best, a couple days before you have to sign them all).
Re: a large gift for a downpayment, I’d certainly advise people to put 20% down to avoid PMI and to create what I think is a reasonable down payment. But beyond that figure, I think most people would be better off keeping any cash they have available and, ideally, investing it, rather than putting those extra funds down. Just my $0.02 though — different strokes!
Hey, DB40! Always good to hear from you. 🙂 Yeah, you know me; I’m the polar opposite of you when it comes to risk tolerance and investing so I’m going pay down the mortgage all the way. 🙂
The tip about not being too influenced by family is priceless!
Have you heard anything about the company Churchill Mortgage? It’s the one Dave Ramsey recommends where you don’t need a credit score. I’m sure there are other ways one must prove he or she is mortgage-worthy though.
I’ve not heard of that company, Mrs. Groovy – I’ll have to check them out. I would think that a company he recommends would be trustworthy…….
Good advice, Laurie. Also agree with “done by forty” about the 20%. I think trusting professionals and doing smart research are by far the best tips. Purchasing our first home was incredibly stressful but I think well worth it. I got advice from people I trusted as well as talking with a loan officer at a highly recommended and well respected local bank. Not rushing the process and thinking in terms of resale value also helped us a lot.
Thanks for sharing your experience, Suzie!! Yes, it can be a really stressful time, but also wonderful. 🙂
Wow! You are clearly passionate about real estate and the whole process of first time home-buying. I heard someone on the radio recently say that when people buy a home, logic so often goes out the window as there are many psychological factors at play. I can attest to that! I hope that many people considering their first purchase of a home take your grounded advice to heart.
As for 18-year-olds getting a credit card to build a good credit score – that worries me – just given the track record of many young debtors and the fact that the human brain is still developing at that age. I understand the thinking behind it, but home ownership doesn’t usually come on the radar until people are well into their 20s or early 30s, so there’s no rush. I’m sure you’ve thought of all this too though – hence the joint account : )
Thanks for the comment, Ruth!! Yeah, if Maddie wasn’t so darn responsible we may not have considered this route for her. Luckily, she’s very wise with her money and is great about saving and not spending. Also, because it’s a joint account I can log in to our online banking account and check charges every day, just in case. 😉
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