What to Do a Year Before Buying Your First Home
12 Months Out
Check your credit score.Get a copy of your credit report at annualcreditreport.com. The three credit bureaus (Equifax, Experian, and TransUnion) are each required to give you a free credit report once a year. A Federal Trade Commission study found 1 in 4 Americans identified errors on their credit report, and 5% had errors that could lead to higher rates on loans. Avoid last-minute bombshells by checking your score long before you’re ready to make an offer. And work diligently to correct any mistakes.
Determine how much you can afford. Lenders are happy to lend you as much as your debt load allows. But will that amount make you house poor? Ask yourself, how much house do I really want to afford?
There are plenty of calculators on the web to help you determine what you can afford. If you’re pushing the limits, start reducing your debt-to-income ratio now. To get a reality check on what you may actually be spending every month, use this worksheet.
Make a down payment plan. Some mortgages require a 20% down payment, some as little as 3% down. Sometimes it makes financial sense to put 20% down - your loan costs will be much less, you’ll get a better interest rate, and you won't have to pay mortgage insurance which can add quite a lot to your monthly payment. If, however, you’re not quite able to save the full amount, there are many loans that have lower down payment requirements. It would be a useful exercise to work up various down payment scenarios to see how your monthly payment changes (ie, at 3% down, 5% down, etc). Ask your lender about the Home Possible Advantage program with 3% down, or about the FHA program with a 3.5% down payment. These loans do require mortgage insurance premiums. The U.S. Department of Housing and Urban Development (HUD) provides a list of nonprofit homebuying programs by state. Also check with credit unions; and your employer might even have an assistance program.
As you’re planning your savings strategy, keep in mind that banks like you to “season” your money. That is, they like to see that you’ve had stable funds in your account for 60 to 90 days before applying for a loan. Don’t worry: You can still use a financial gift from a family member or bonus received near the time you buy.
9 Months Out
Prioritize what you most want in your new home. What’s most important in your new home? Proximity to work? A big backyard? An open floor plan? Being on a quiet street? You’ll make a much better decision on what home to buy if you focus on your priorities. If it’s a joint decision, now is the time to work out any differences to avoid frustration & wasted time. Know what trade-offs you’re willing to make.
Research neighborhoods. Use property listing sites, such as realtor.com, to find out about neighborhoods, schools, amenities, public transport, and cost of living.
Budget for miscellaneous homebuying expenses. Buying a home has some miscellaneous upfront costs. A home inspection, title search, and property survey are examples. Costs vary by locale, but expect to pay at least $1,000 upfront prior to closing on your home. If you don’t have the cash, start saving now.
Start a home maintenance account. Speaking of saving, start the good habit now of putting a little aside each month to fund maintenance, repairs, and home emergencies. It’s bad enough to have to call a plumber. It’s worse if you’re paying credit card interest on that plumbing bill.
6 Months Out
Collect your loan paperwork. Banks are very particular when it comes to mortgage loans. They demand a lot of paperwork, such as:
- W-2 forms — or business tax return forms if you’re self-employed — for the last two to three years
- Personal tax returns for the past two to three years
- Your most recent pay stubs
- Credit card and all loan statements
- Your bank statements
- Addresses for the past five to seven years
- Brokerage account statements for the most recent 2 to 4 months
- Most recent retirement account statements, such as 401(k)
If you start collecting these documents now, it’ll be less stress when it’s time to get your loan. Bonus: Looking closely at your loan documents each month helps you stay focused on saving for your down payment & keeping your debt-to-income ratio low.