First-time homeowners who aren't prepared for the financial realities can find themselves overwhelmed once they actually have those keys in hand -- and as the housing crash and Great Recession showed us in the late 2000's, the collective consequences of unprepared homebuyers can be devastating, both at a national (or even global) economic level and also very personally when homes are foreclosed upon at a large scale.
So we can agree that it's a good idea to fully understand and optimize your opportunity to make a smart home financing decision. You'll need to consider these four things to ensure you're covering all your bases.
Give yourself (good) credit
About that aforementioned recession: Due to layoffs in many industries and other circumstances beyond their control, many Americans emerged with somewhat battered credit profiles. So if that describes your situation, understand that you are not alone.
But also, understand that your credit score is going to have a direct influence on your mortgage loan rate and how much money you can borrow from any lender to buy a home -- or whether you can even qualify to buy a home. So if you've been taking the "ignore it and it will go away" approach to dealing with your credit score, it's time to roll up your sleeves and change tactics.
Do you know what your credit score is or have a copy of your credit report? This is the first step. Obtain it and comb through it, looking for any inaccuracies that you need to have corrected.
It's also wise to speak to a credit expert (most loan officers can connect you with at least one) and get a professional opinion about the best way to polish up your score, including which outstanding debts to tackle first.
And put yourself on a credit diet. If you're used to applying for cards every time someone at a checkout counter invites you to do so -- stop. Your old credit lines can help you out when you're getting ready to buy a home, but opening up a bunch of new ones is not a great idea. That said, because everyone is different, it's smart to get an expert opinion here; depending on how many credit lines you have and your current credit limits, it's possible that you might want to strategically open another credit line or two (especially if you're planning on waiting more than six months before you start seriously looking to buy).
Save like it's your job
You might have already considered some of the big costs of homeownership, like the down payment, which many financial experts recommend should cover 20 percent of the total sales price of the home -- not an insignificant amount of money.
But you should also consider other costs involved in buying a house. For example, you may be on the hook for closing costs, which can be an unpleasant surprise at the closing table. Some sellers might request a portion of your down payment upfront as earnest money, and you'll need to have that ready. There might be repairs that must be made to the home either before or after you move in, and then there's the move itself, which unfortunately probably will not be free.
There are other advantages to beefing up your bank accounts while you plot your homeowners' journey. If you've got a few months' worth of mortgage payments stashed away in the bank, a lender might give you some leeway in other areas where you might not be the perfect loan candidate.
And do yourself a favor and look for any down payment assistance programs that might be available for people in your age group or life situation. Some of them will grant you money if you enroll and complete a finance course -- a pretty sweet deal if you have the spare time and ability to take some classes. A good place to find those programs is downpaymentresource.com.
Get pre-approved for a home loan
We know that none of this sounds particularly fun, and securing your approval for a home loan might be one of the least fun parts of the process. You will have to submit a ton of paperwork, including tax statements, paystubs, bank statements, and more, so just know that going in: Your part-time job for several days will be tracking down your financial documentation.
But there are so many advantages to getting pre-approved that you really shouldn't skip this step. It will give you a clear number that you can literally take to the bank in terms of your home purchase -- the amount of money that the bank is willing to lend you, and therefore your own personal price limit. This will save you a ton of time when it comes to the home search because you can eliminate anything that exceeds your preapproved price range.
It also shows any sellers that you're a very serious buyer when you can submit a preapproval letter with your offer. They know that they won't be wasting their time considering your offer because you've done the hard work to nail down the financing. That can be a big point in your favor with many sellers.
Research your offer and confirm with an agent
Getting ready to make an offer on the home you love in your price range can be a nervewracking affair. You don't want to bid too high when the seller might have accepted your lower offer -- but you also want to make sure that the seller considers your bid to be reasonable and competitive within the market.
You can do some research online in to home sales trends in your area, but be aware that online home valuations that are available on many popular real estate websites are based on algorithms and sometimes-outdated data and information. They can be a good jumping-off point for your pricing education, but don't consider them to be etched in stone until or unless confirmed by a real estate appraiser.
A real estate agent can give you background information about the list-to-sales-price trends in the area. If homes are typically selling for more than the list price, and if you put in a bid that's $10,000 below what the seller is asking, then you shouldn't be too surprised if the seller passes on your offer. But if homes are selling for below the list price, then you also want to avoid bidding too high. An experienced agent can help you decide on an offer price that the seller is likely to at least consider and that you feel is fair market value for the home.
Financing is often the most stressful part of buying a home, especially for first-time homebuyers who have never gone through the experience. By taking advantage of these tips, you'll be giving yourself an edge -- and security in the knowledge that you're making a smart decision with your very first home purchase.