How to Build a Financial Checklist for Your First House
If you’re a first-time home buyer with dreams of a white picket fence and Saturdays spent sipping lemonade on the front porch, you may be in for a shock.
That’s because the number of first-time house hunters is dropping, signaling a difficult landscape for those looking to go from renting to owning. In 2010, first-time home buyers made up half the market; by 2016, that number had shrunk to 35%.
The good news is that if you start the process armed with a checklist for your first house, you’re more likely to enjoy a smooth process. That’s because you’ll be following a number of “to-do”s aimed at having your paperwork, cash and other prerequisites buttoned up ahead of time.
1. Check your credit score and, if it’s not up to snuff, work on raising it.
This is important because, if you’re planning on financing the purchase of your home, your lender will be looking at a number of factors — including your credit score — in deciding to approve or reject your application for a loan.
There is no set-in-stone minimum score you need to meet, since lenders move the needle depending on the state of the economy; when the economy is in a downturn, for example, or during or after a recession, they may tighten their standards. There are thresholds, however, when it comes to applying for a Fannie Mae- or Freddie Mac-backed loan, and that’s 620. The lowest credit score needed to secure an FHA (Federal Housing Administration) loan is 580.
What if you’re below these numbers? By paying down debt, and paying your bills on time, you may be able to raise your credit score and put yourself in a better position to secure a mortgage at a good interest rate. Start this process before you even start on the rest of your checklist for your first house.
2. Have 20% of the expected home price in cash savings to lower your monthly mortgage payments and avoid PMI.
The math is simple: The more you can put toward your down payment, the less you’ll have to pay on your mortgage. If you are not going for an FHA loan or a government-sponsored loan, you’ll likely want to have at least 20% of the purchase price on hand in cash. The reasons: you’ll be more apt to qualify for a loan, get a better rate and have more equity in your home from the get-go.
What’s more, you’ll be able to forego PMI, or private mortgage insurance, meant for folks who might be a lending risk, which results in monthly fees being added to your balance.
3. Revise your budget to account for mortgage payments and other extras like property taxes.
If you know how much home you can afford, and what your down payment is, then you’ve likely budgeted your monthly mortgage payment.
But there are several other “extras” that could come into play, including potential homeowner association fees or, if you are buying a condominium or apartment, monthly maintenance charges, as well as expenses you may not pay now, including property taxes, utilities and property upkeep outlays like landscaping or pool maintenance.
Plus, there undoubtedly will be emergencies, such as a boiler breaking or a window cracking, that you may want to consider including in your budget.
4. Identify the type of mortgage you’ll need and the length of time you’ll want it.
When it comes time to secure financing, you’ll need to choose between a fixed-rate loan and one that charges you an adjustable rate. The former offers a rate that stays the same for the length of your loan. The latter typically offers a lower-than-average rate that resets a few years down the line.
If you don’t plan on living in your home for many years, an adjustable-rate mortgage might make sense for you. If this is going to be a life-long investment, you may opt for a fixed-rate mortgage so you don’t run the risk of being unable to meet the obligations of more expensive monthly mortgage payments in the future.
You’ll also need to decide the length of the mortgage: A 15-year mortgage will offer a lower interest rate — and be paid off sooner — while a 30-year mortgage will give you lower monthly payments. There is no one right or wrong choice; for many buyers, which duration is better is a function of your cash flow situation and other financial priorities.
5. Round up paperwork, such as tax returns and credit card and student loan information.
If you’re among the more organized, you likely have these documents at your fingertips. If not, spend some time gathering and filing them so you can submit them to your lender when asked, rather than wasting precious days hunting for them when it comes time to make an offer.
Purchasing your first home represents one of the largest financial decisions you’ll make. With a good checklist for your first house in hand, you’ll be better prepared at every step along the process.