So, you’ve decided it’s time to buy a home.
The first step is to get your finances in order. Before you go finding your dream home, before you talk to a lender, before you work with a real estate agent, you’ll want to make sure you are ready for the process.
Step 1 – Finances
Set your own budget. Understand your current expenses and what you are paying for housing now. Make sure you add in an emergency fund. You are on the hook to repair and fix your own home, you are your own landlord, so make sure you can afford to take care of problems when they come up.
This dollar amount will become very important when talking to a lender. Just because you were approved for a certain amount, doesn’t mean it’s how much you want to be paying.
As part of this organization process, you will want to get all of your financial docs ready and ideally in a PDF format on your computer in an organized place so it’s easy to upload or email.
Typical docs you will need:
- Last 2 pay stubs
- W2s from the last 2 years
- Taxes from the last 2 years
- Last 2 bank statements
- Ensure you have any legal documents available, such as divorce decrees or bankruptcy docs.
- If you have cash, now is probably a good time to make sure it’s in your bank account and not in a safe in your house. You may have to wait 60+ days to use that as part of your home buying process.
Know your credit, I suggest going to myFico.com and paying to get all three reports monthly. Look at the mortgage numbers, the middle score of the three is what will be used. Make sure there isn’t anything on the report that is inaccurate. If you are below 620, you’ll likely need to work on your credit.
Don’t expect to see a huge difference in rates because of your credit score. It’s not the same as buying a car, you aren’t getting 2% with an 800 FICO and 10% with a 600. Often you are more limited in programs and have to come in with higher down payments with a lower credit score.
Step 2 – Talk to a lender
There’s some debate about talking to a lender first or to a real estate agent first. If you have a trusted real estate agent, talk to them about referring you to a lender that they’ve done multiple deals with. Most agents aren’t going to want to work with you until you’ve shown the commitment to working with a lender or are already pre-approved with one.
The lender will either take your application over the phone, in person, or through an online application. They’ll ask for the documents I mentioned above, and then based on your income and expenses, will issue you a pre-approval letter.
A pre-approval letter isn’t a guarantee that you will get the loan. Not until you have an offer accepted will they have all the information they need to ensure you meet all the requirements.
The real estate agent will usually need the pre-approval letter in order to get you into private home showings. Open houses are open to the public and typically don’t require you to have any kind of representation or a pre-approval letter.
Step 3 – Get a Real Estate Agent
If you don’t know any agents that you already trust, definitely ask your lender if they have any they can refer. Often times they have a few they work with often and can refer you to. Consider posting on Facebook to your network if anyone has a realtor referral. You can also do an online search and find ones in your area.
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Once you’ve talked to an agent and feel comfortable with them, they’ll help you in your search. Make sure to be very honest about what’s most important to you, what’s important but not a deal breaker, and things in a home that you would like but would just be a bonus.
The rest of the process involves touring homes, making offers, and going through the loan process.
To get a walkthrough of all of the steps from start to end – visit our Basics of buying a home from start to finish