June is National Homeownership Month; it began in the 1920’s as a “Real Estate Week”, and expanded in 2002 to a national, month-long event. This is a time to celebrate and promote homeownership, and to educate and encourage Americans to take advantage of the many benefits that homeownership brings.
Homeownership Month is a great time to start working toward your first home. There are many resources available online to help you get started the right way. If you’re not yet a homeowner, or are thinking of returning to homeownership after some time away, here are 10 steps to take toward your first home during Homeownership Month:
1. Assess your readiness
It does you no good to go out and buy a house you can’t afford, or move into a home months before you’re forced to relocate for work. Start the journey to homeownership by taking stock of your situation and deciding if you’re ready to own a home. Ask yourself a few preliminary questions:
- Can you afford to own a home? If you can afford your current rent, you probably can afford a home—in many places, the monthly payment will actually be lower. But homeownership comes with other obligations, like maintenance costs, that you’ll have to be ready for.
- Are you ready to stay put? If your kids are starting school soon, you probably don’t want to relocate them, so you might be ready to settle down. If your career is likely to have you moving soon, you may need to wait until you’re established to buy a house. You should expect to stay in your first house for a few years at least, though you could rent it out and let someone else make your house payment if you are forced to relocate.
- Is your credit in good shape? You want to look attractive to a mortgage lender, so you’ll need to have decent credit and not have too much debt. If you’ve got credit problems or have been the victim of identity theft, you might need some kind of credit monitoring or credit report review to ensure your credit looks as good as possible to lenders.
- Is the market right for buying? Right now, mortgage interest rates are very good, so it’s a good time to buy. If you are thinking of buying a home when interest rates are sky-high, or property values have gotten out of control, then it might not be the right time. This shouldn’t be the sole factor, but you should include market conditions in your decision-making process.
2. Start saving
You will need to set aside money for a down payment, closing costs, moving expenses, and more. This will be a good test of your financial readiness; if you are able to save up a down payment, you’ll be able to afford homeownership. Many people try to save up 20% of the purchase price of a home, but that’s not necessary. Financially, you may be better off getting into a home sooner with a small down payment—like the 3.5% down payment an FHA loan allows—than to wait until you’ve saved the full 20%.
3. Get first-time home buyer education
You can take a First-Time Home Buyer Education course from a HUD-approved housing counseling agency. This course can be taken online or in person, and they award you with a certificate of completion that will demonstrate to lenders that you’ve taken the time to learn about the home buying process. This certificate also qualifies you for special programs to assist first-time home buyers in achieving homeownership.
4. Shop for a loan
It’s important to talk to multiple lenders and do so within short time periods. Depending on the FICO (Fair Isaac Corporation) scoring model, your credit score will consolidate multiple inquiries for mortgage credit during a 14 or 45-day time span and treat it as one inquiry. For FICO Scores calculated from older versions of the scoring formula, this shopping period is any 14-day span. For FICO Scores calculated from the newest versions of the scoring formula, this shopping period is any 45-day span. So as long as you do your mortgage loan comparison shopping within that time period, multiple inquiries shouldn’t negatively impact your credit score by much. In addition, FICO Scores ignore inquiries made in the 30 days prior to scoring.
You don’t have to decide about your mortgage loan at this stage; simply shop around and get pre-qualified. That way you know you’re likely to be approved for a loan, and how much you’ll be able to borrow. Do this step before shopping for a property, so you don’t fall in love with a home you won’t be able to afford.
There are services that compare different mortgages for you and offer you choices, so you won’t have to do all the legwork yourself. First-time home buyers will have a road map to follow if they got the education early in this process.
5. Get a real estate agent
A real estate agent will help you avoid pitfalls and traps in the buying process, and a local agent will know the history of the area in which you’re buying. There are a lot of factors to consider, and your agent will help you avoid missing anything important. You’ll also benefit from your agent’s assistance when negotiating a sale price, getting inspections, and doing all of the paperwork that goes with a home purchase. And as a buyer, your agent is paid out of the sale proceeds, so it costs you nothing to hire a buyer’s agent.
6. Finalize your loan
Now that you’ve been pre-qualified and gotten a real estate agent, it’s time to make your final decision about your mortgage and get pre-approved. This gets the paperwork moving for the final loan process, triggers your official credit check, and provides you with a final loan interest rate and loan amount.
7. Shop for a home
Now that you know how much you have to spend and have professional help, you can start looking for the right home for you. Don’t expect perfection if you’re a first-time home buyer; your first home doesn’t have to be your dream home. A good starter home can help you build equity and be ready to move to the perfect place a few years down the road.
When you make an offer on the home, you’ll be negotiating about the price; rely on your real estate agent for guidance as you get home inspections, appraisals, etc. The amount you offer will likely change based on what your inspector finds and what your bank’s appraiser thinks of the value you’ve agreed upon.
When it comes to your inspection, here are HUD’s 10 important questions to ask your home inspector. Also, ask your local agent if there are any extra inspections that are recommended—is your area prone to certain infestations, collapsed drain pipes, etc.?
9. Close the loan
After the negotiation process is complete, and you’re satisfied with the inspections and appraisal process, you’ll be ready to close on the loan. You may work with a title company at this point, rather than your lender.
You may have some additional fees at this point—you should get a disclosure that will clearly explain all of the fees and what they’re for.
Avoid doing anything that will cause a nasty surprise at this step—don’t go buy a new car during the home buying process! Anything unexpected on your credit report at this point can derail the process.
The closing can be the most overwhelming part of the process. If you took advantage of home buyer education up front, you’ll be better prepared than most. You can always talk to a home buying coach at any step of the process if you have questions that aren’t being answered to your satisfaction.
10. Move in
Even though the loan has closed, and you’ve been handed the keys, the hard part isn’t over yet. Moving into the home is time consuming, strenuous, and if you hire movers, potentially expensive. You’ll also have to make sure all of the utilities are on and have been switched to your name.
You’ll probably want to do some cleaning and maintenance before you bring all of your belongings into the house; your real estate agent will be able to help you plan for all of the little tasks you might overlook, like re-keying your locks and reprogramming the garage door opener.
It may seem like too much work to get through these 10 steps, but it’s not as hard as it looks, especially if you have dedicated professionals helping you along the way. Start with first-time home buyer education and work with a home buying coach, and there will be no challenges you can’t overcome.