Buying a Home: A Timeline

Buying a home for the first time can be daunting, especially in today’s market. We’ll walk you through what you should do and when.

Anyone interested in purchasing a home has heard that it is now tougher and that buyers have to be more prepared than they were in previous years. With all of the information floating around, it may be difficult to determine exactly what you need to do and when you need to start.

MSN.com offers a timeline that kicks off a year before you are ready to buy; you can adapt it for less time, but you would be smart to go through all of the steps in order to make sure you accomplish what needs to be done and you are successful in your purchase.

A Year Before Buying (or ASAP)…

• Obtain your credit reports. Once a year, you can get free copies of your credit report from the three major credit bureaus – Experian, Equifax and TransUnion – at AnnualCreditReport.com. Errors on your reports can hurt your credit score, which is an especially critical indicator of your financial fitness in today’s climate. You may be forced to pay a higher interest rate or your chances of obtaining financing may be sabotaged. Once you have your report, look for accounts that aren’t yours, debts you don’t owe and any other negative marks that are older than seven years. If you discover errors, you should be able to dispute them with the credit bureaus and get them removed. If you aren’t able to do this, you may have to get an attorney to help make sure you don’t have to pay a false collection account to get your loan or pay unnecessary interest because of false errors. Check out the National Association of Consumer Advocates for referrals to lawyers with expertise in this area.
  
  
• Understand and improve your FICO credit scores. Your credit scores are three-digit numbers that are used to gauge your credit worthiness and will help determine the rates and terms you can get for a loan. FICO is the credit-scoring formula most commonly used by lenders. There is only one place where you can purchase your FICO scores for all three credit bureaus, and that is MyFico.com, where a package of all three scores and credit reports costs about $50. There are three main keys to better credit, according to MSN.com: “Pay all your bills on time, pay down your credit cards and other revolving debt and don’t open (or close) any accounts while you’re in the market for a mortgage.
  
  
• Consider credit-monitoring. Credit-monitoring services are usually a waste of time, but if you are in the market to buy a home, you may appreciate that it keeps your credit and credit scores extra-safe and gives you an early warning of any problems.
  
  
• Pay down debt. When thinking about the debt you hold, you generally don’t need to worry about paying down student loans, auto loans or other generally low-rate debt before getting a home loan. You do, however, want to blast “toxic” debt, such as credit cards and payday loans. Both of these signal to lenders that you are living beyond your means. Make sure you get your overspending under control before you make the commitment to the additional expense of a home.
  
  
• Save, save, save and then save some more. Cut out the gourmet coffee each morning. Start taking your lunch to work. Drop your gym membership and go for a run instead. Do anything and everything you can to curtail your spending and set aside as much money as possible. In today’s market, lenders like to see people have at least 5% for a down payment, but 10% will give you more financing options. You should also have enough left over to cover payments for two to three months, giving yourself a safety net.
  
  
• Take advantage of automatic payments. A single late payment can knock 100 points off your credit score and can take many, many months for it to bounce back. Be especially careful during this period that every bill is paid on time. If you struggle with this normally, consider setting up automatic payments, such as payments that are deducted from your checking account at a set time each month.

Six Months Before Buying…

• Understand your mortgage options. You’ve heard the stories of people who are losing their homes to foreclosures because they didn’t understand the terms of their loans, such as initially low rates that eventually skyrocketed. It is no one’s responsibility but yours to understand the level of risk of your mortgage and to select the right one for your needs. If at all possible, you are safest sticking with a traditional, fixed-rate mortgage. If it’s not feasible for you to commit to a 30-year loan, you can try a hybrid version with a rate that is fixed for the time you plan to own your home.
  
  
• Calculate what you can afford. Once you have found a type of mortgage that fits your needs and have an idea of the down payment you will have, you can use online calculators to figure out how much house you can afford. You should strongly consider buying less house than the absolute maximum you can afford. Keeping your housing expenses, including mortgage, taxes and insurance, to less than 25% of your pre-tax income will ensure that you have some money left over for retirement savings and vacations.
  
  
• Expect other expenses. The costs of owning a home reach beyond just the mortgage. You will also have to pay property taxes and insurance, as well as possible homeowners’ association fees. You will also probably face higher utility bills, and will definitely need to plan for maintenance and repair expenses. You may also have other expenses, depending on what you’re bringing into the home: do you have window coverings? Will you need new furniture? All of these things are important to consider.
  
  
• Keep saving. You may already be planning on boosting your savings so that you can shell out a larger down payment. Or you may just want some extra cash on hand for emergencies and unexpected home expenses. Whatever you decide to do, keep saving at this point and consider saving even more since you are getting closer to buying a home.

Three Months Before Buying…

• Use credit less. The FICO scoring formula is affected by how much of your available credit you use at one time. As you might expect, the less, the better. According to MSN.com, “It doesn’t matter if you pay your balances in full every month; the figure the scoring formula typically uses is the balance that shows on your most recent statement.” Make every effort to keep your balances less than 30%. If this isn’t possible, maybe because you have a certain level of work-related expenses each month, consider making a payment before the statement’s closing date so the amount due is less. Just also be sure to make a second payment after the closing date so your payment isn’t viewed as late!
  
  
• Don’t open or close accounts. Until you complete the lending process and are moved into your first home, avoid anything that could adversely affect your credit, such as opening or closing credit accounts.

Two Months Before Buying…

• Figure out the interest rate you can expect. Obtain a new set of FICO credit scores (checking them doesn’t affect them) and start talking to lenders to find out what kind of rates you will qualify for. Don’t apply yet or give permission for your credit to be pulled – just get a feel for what you can expect.
  
  
• Know how mortgage-shopping affects your score. To get the best rate and terms possible, you will have to shop around. Understand that this is going to affect your credit score. Every time you give permission for a lender to pull your credit, a “hard inquiry” appears on your report and that can affect your score slightly. Fortunately, the FICO formula lumps all mortgage-related inquiries in one period into one and ignores any inquiries made in the 30 days prior to that period. This means that you want to do your shopping in a concentrated period of time, typically after your offer on a home is accepted.
  
  
• Get pre-approved. Pre-approval means that a lender is giving a commitment to make you a loan. It differs from pre-qualification, which means that a lender gives you the size of the mortgage you can afford without any commitment. You aren’t stuck with the lender who gives you pre-approval, but getting it means that you will be in a stronger position with sellers and will be able to show that you are serious.
  
  
• Consider a mortgage broker. Once your offer on a home is accepted, you can shop for a loan on your own, but if you are inexperienced with the process or your credit is less than stellar, you may want more expert guidance to make sure everything goes smoothly. Seek out an experienced, ethical mortgage broker by asking friends and family for referrals. You can also check out the National Association of Mortgage Brokers.
  
  
• Start looking for a home. Now is the time when you can finally start researching possible neighborhoods and looking for a Realtor to represent you! Find an experienced guide to help refine your search, attend open houses and use all of your available resources to find a great place to live.

Once You Have Found a Home and Had an Offer Accepted…

• Shop for a mortgage. All of the pre-work you did will now pay off. There are thousands of mortgages available, and you may want to include some of the biggest national lenders, local lenders and online brokers. Your Realtor may be able to give you a good recommendation, as might a friend or family member. Once your offer has been accepted, you will need to secure a loan fairly quickly, as the full process can take four to six weeks.
  
  
• Get an appraisal, home inspection and walk-through. An appraisal is required for your loan to be approved; an inspection isn’t required, but is highly advisable since it can alert you to potential problems before closing. A walk-through is usually performed within 24 hours of closing, so you can make sure that the sellers performed any agreed-upon repairs or improvements and that the home is in move-in condition.
  
  
• Secure homeowners’ insurance. Your lender will require evidence of this coverage at closing.
  
  
• Confirm the amount of money needed at closing. Closing payments can include your down payment and your share of legal fees, property taxes, title insurance and paperwork costs.

Last step: Enjoy your new home!

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