Unless you’re a total math whiz, purchasing a home as a first-time homebuyer is no party.
On one hand, designing a home and starting a new life can be a fun and exhilarating experience. On the other hand, there are finances and loans to figure out and getting there can take some time and patience.
To help guide you through the purchasing process, we’ve put together this homebuying checklist for the first-time homebuyer. Take a look, print it out and check off items along the way. With this map by your side, there’s no way you can get lost.
Step 1: Determine How Much You Can Spend
Before you get started anywhere else, you should first get an idea about how much you can spend on your new home. After all, you don’t want to find the home of your dreams only to be disheartened when you find that it’s lightyears over your budget.
To determine how much you can spend, identify the source of money you’ll be using to pay for your home — down payment, interest, mortgage and all. Will you be drawing into your savings, investments or gift money from mom and dad?
Now’s also a great time to request your credit report, as this plays a huge role in how much loan you can receive. To learn more on credit, check out our article, Understanding Your Credit Score.
Next, take a moment to gather your monthly expenses and sources of income. A quick analysis of your total finances can help you get an idea of where you stand on monthly payments toward your home.
Step 2: Schedule a Lender Consultation
After you’ve got that figured out, take your findings to a trusted lender or financial institution of your choosing. While you may have done all that number crunching yourself, it’s always best to get a second opinion.
In some cases, builders may suggest a preferred lender and offer incentives if you go with their selection. Either way, it’s your decision, so shop around and choose what suits you.
In addition to accessing your finances, your lender can also help you find insurance and loan options and down payment assistance programs to help you out through the buying process. There are a sea of options out there, so don’t forget to add that to your discussion to-do list to save some time.
Step 3: Discuss Mortgage Loan Qualifications
While you’re with your lender, it’s also important to discuss mortgage options.
In the process, you’ll need to provide your credit and job history, income, debts and assets to discover your debt-to-income ratio. Ultimately, this will lead to your preapproval, one of the most important steps in the homebuying process.
At this time, be prepared to provide other documentation like tax returns, bank statements, W-2 forms, recent paystubs and other information about your employment. They’ll also ask for your credit score, many seeking a score of 620, if not higher, for approval.
Your lender will use all of this information to determine the maximum amount you can borrow and then you’ll discuss your available assets for the down payment and closing costs to determine the total sales price.
Step 4: Discuss Other Financing Options
In addition to builder preferred financing, there are other options you will want to keep in mind.
One instance can be found in construction financing. If you’ve selected a custom homebuilder or are working as your own general contractor, you may need to arrange special construction financing by looking for a lender that offers specialized construction loans.
Step 5: Budget for Home Options and Upgrades
Finally we get to the fun part, budgeting for options and upgrades!
Arguably the best part of buying a new home is customizing it to your heart’s content by selecting features to make your house a home. Yet, you still need to budget wisely to make sure you don’t go overboard.
When you buy a newly built home, your purchase price includes both the base price and any optional features you select. In most cases, you’ll sign a purchase agreement for the house and arrange preliminary financing and then choose your options. Your final loan amount won’t be set until you’ve finished making all changes to your home; however, this won’t exceed the amount you have been preapproved for by your lender.
So before you start making customizations, you might want to grab a calculator. Go back to that monthly budget you created earlier and determine which options keep you within your budget and which options push it over the limit.
Step 6: Determine How Much Cash You’ll Need
As you move along the process, you’ll quickly discover there are most costs involved than just what you see on your home’s price tag. You’ll want to make sure you know exactly how much cash you’ll be spending in the end.
Here are a few lesser known costs you might not have been aware of:
- Earnest money deposit: This shows your builder you’re a serious buyer and holds your lot. Later, this goes toward your down payment.
- Down payment remainder: When the home is complete, you’ll need money for the remainder of your down payment (the amount of your home’s total price that you pay up front and do not include in your mortgage).
- Closing costs: Getting the title to your home is a great accomplishment, but it doesn’t come without a fee. Check out our article, Buyer’s Guide To Builder Closing Cost Incentives, to learn more about closing costs.
- Moving costs: After you’ve factored in packing materials, hiring a moving company, renting a trailer and tipping movers … well, it just adds up.
- Emergency cash reserves: Some lenders require cash reserves to approve you for a loan, and many financial planners suggest keeping three to six months of expenses in the bank as your emergency fund.
Step 7: Lock In Your Mortgage Rate
Most experts recommend locking in your mortgage rate closer to your settlement date, which takes place after your home is complete and ready for you.
A normal interest rate lock is 60 days or less, but you can lock in a rate for 90, 120, or even 180 days, although a longer loan lock will typically come at a higher price.
One of the benefits of working with an experienced lender in the homebuying industry is that they generally understand the timeline of the construction process and can better gauge the best time for you to lock in your rate. They might also offer a free “floatdown” to help you out if mortgage rates drop after you have already locked in. To learn more about the mortgage process, read The Mortgage Process: A Step-by-Step Look and Checklist.
Step 8: Establish an Escrow Account
Like many first-time homebuyers, you’ve probably heard the word “escrow,” but never really understood what it means. We can help.
Many lenders will require you to pay for your property taxes and homeowners insurance when applicable by making payments year round, rather than when the bills are due. With each mortgage payment, you’ll pay one-twelfth of the annual premium for your insurance and one-twelfth of your annual tax bill. These payments will be held in an escrow account and paid by the lender when the bills are due.
The reason lenders do this to protect themselves in case you were to default on a payment.
By law, lenders are required to require a cushion of extra funds in your escrow account equal to one-sixth of the amount paid out of the account. The amount held in escrow can shift from year to year with insurance premiums and tax bills. It is also required of your lender to provide you with escrow statements annually, which lists your bills and their payments.
Step 9: Choose a Home Insurance Plan
Home insurance isn’t always mandatory, but it is almost always recommended.
To help you make the right decision and to find the right plan for you, it’s best to seek out the guidance of an insurance agent. They will work with you to estimate which coverage plan is best for your needs. So shop around, get quotes and make the apples-to-apples comparison.
While you’re at it, don’t forget to ask about deductible options to help reduce your premiums. In addition, explore options on personal property insurance, liability coverage for the construction process or flood insurance. In some cases, you may need them all. Your agent is your best resource to decipher your best option.
Step 10: Negotiate and Finalize Contract
Although most builders hold firm on base prices, sometimes things like closing costs and other fees may be negotiable. Other times, builders may offer other incentives programs to help ease affordability.
Then, before you sign the contract, take the time to make some final reviews:
- Home plans and specifications: Make sure you take a look at the floor plan and exterior you’ve chosen. Does everything match up to the selections you have made?
- Price: The base price should be specified. You can still add your options later.
- Timeline: Your builder should provide an estimate for your home’s completion date.
- Default provision: This should list what happens if you don’t fulfill your end of the contract by arranging financing or if the builder doesn’t fulfill their end.
- Notice provision: This should explain how to officially communicate any problems with your builder.
- Dispute resolution: This section should tell you how any disputes between you and the builder will be handled.
If a second opinion is desired, ask for a copy of the contract to share with your Realtor or attorney. Take it home, mull it over and sign only when you’re ready.