You know that it makes sense to invest your money, and you acknowledge that part of that is not wasting money on monthly rent when you could be building equity in a home of your own. Decorating how you want… green thumbing in the backyard… avoiding rising rent prices year after year. It’s an exciting prospect! But you’re not ready to pull that trigger now… so how can you prepare for a purchase one year from now?
12 Months from Purchase
Get your credit score! You can get a copy of your credit report at annualcreditreport.com. Each of the three credit bureaus are required to give you one free report a year, that will not impact or ‘ding’ your credit score. It is a great idea to know what is on that report, report any errors, and work to correct mistakes and improve your rating.
Think About a Budget
Lenders will look for a total debt load of no more than 43% of your Gross Monthly Income. This is called your debt-to-income, and includes your future mortgage, car payments, student loans and credit cards. If you believe that you are pushing your limits monthly, begin to reign in those expenses.
Brew Up that Down Payment
The larger your down payment, the less your loan costs will be and you’ll end up getting a better rate. FHA loans require only 3.5% down payment, but will require mortgage insurance that drives up your monthly costs a bit.
Keep in mind that banks like for your hard earned money to be “seasoned,” meaning stable funds in an account for at least 60 days before applying for your loan. You can use a financial gift from a family member, but try to get the cash deposits in to accrue good standing and longevity with your account.
9-6 Months from Purchase
Begin to think about your priorities in a home purchase. Coworkers raving about their cute bungalow in Oak Cliff, but you’ve never visited? Make a few drives to become acquainted with the areas that might be of interest. Now is the time to discuss with any significant others the things that matter most to you so that you can avoid hiccups later.
Feel Free to Browse
Open Houses can be fun! You’ll have plenty of agents that want to talk to you, but if you use open houses as an opportunity to solely see floorpans, construction styles and neighborhood amenities, you’ll be ahead of the crowd when you are ready to buy.
Budget for the Other Stuff
In addition to your down payment, you can expect some other out-of-pocket expenses when the wheels hit the road. You’ll need to think about option fee, earnest money deposits, a home inspection (or two), appraisal fee, etc. Costs and ‘norms’ vary by area and lender, but you should expect to pay at least a thousand in costs before you get to the table.
3 Months from Purchase
Become your own treasurer and begin to pull together all of those loan documents. The Lender will demand quite a bit of paperwork, and it’s not a bad idea to get started early, to avoid headache. You will want, at minimum:
- W-2 or 1099 Forms for two or three years
- Tax Returns
- Pay Stubs
- Credit Statements
- Bank Statements
- Addresses and Landlord information for the last 5-7 Years
- Retirement information, like 401(K) statements
Start Interviewing Realtors!
It’s a personal relationship for you, and a business decision for your wallet. You need an agent that will work in your best interest to find you the right home, negotiate for you, walk you through the process and be an experienced sounding board with your Loan process and questions. They will also be able to put you in contact with a great and reputable Lender.
2 Months from Purchase
Get Your Pre-Approval going… your credit score, paperwork and down payment should be beefing up nicely. Time to make an appointment with a local loan officer that will sit with you and discuss options for your purchase based on your monthly budget and income. They will run a credit check and give you a great idea of what to expect now and on closing day.
The fun part begins when you and your Realtor begin targeting neighborhoods and shopping inventory. This can last anywhere from 2 weeks of looking to 3-4 months of steady browsing. It’s all about your priorities and price range.
From here, it’s fast Acting!
You’ll eventually make an offer and negotiate the terms of purchase on the home of your dreams. You’ll need to get your home inspection, too, to uncover anything that might be deficient or needing replacement in the home, so that you can prepare to take care of those or request the Seller too. Meanwhile, you’ll be working with the Lender to provide clarification on any loan documents needed, as well as shopping for home insurance.
By using this 12-month timeline, I hope you will avoid common mistakes, like paying too much interest or getting stuck with the wrong house.