A Checklist for First-Time Homebuyers

Prepare for this major purchase by getting your finances in order.

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A Checklist for First-Time Homebuyers
Juice Images/AlamyBefore you're handed the keys to your first home, you need to tend to your debt and make sure your budget is in good shape.
By Geoff Williams

The spring homebuying season is in full bloom, and odds are, if you're reading this, you may be thinking it's time to finally start looking for your first house. But before you dive in, it's important to get your finances organized and know what you can afford. Here's a checklist to get you moving toward this major purchase.

Pay down your debt. And while you're at it, check your credit score and look over your credit report. "Before you start the process, you should make sure your credit score is OK," says Michael Eisenberg, a certified public accountant and personal financial planner with Eisenberg Financial Advisors in Los Angeles. "If you don't have a good credit score, you may not get the best [interest] rate. In fact, you may not get a loan, period."

So before you do anything else -- with any luck, long before you do anything else -- focus on paying down your credit cards, paying your bills on time and raising your credit score. (A score of 720 and above is generally considered good, and 750 to 850 is excellent). You want your future mortgage lender to like what it sees when it comes time to request a loan for a house.

Have money in the bank. Most experts suggest that you have at least 20 percent of the house's purchase price saved as a down payment. You can certainly buy a house without that -- and many people do -- but there are plenty of good reasons to put down at least 20 percent. For starters, you'll almost certainly avoid paying private mortgage insurance, or you won't have to pay it for long. PMI is typically 1 to 2 percent of the value of the loan, split into monthly payments. It may not seem like much, but if it adds, say, $100 to your monthly mortgage payment, you can see why you'd like to avoid it.

In other words, if you happen to have $20,000 in a bank account, and you're thinking of buying a house in the not-so distant future, hang onto it. This isn't the time to buy that motorcycle you've always wanted or invest in a coin collection.

Fine-tune your budget. Regardless of what you have in the bank now, this is a long-term, year-after-year, month-after-month expense you're going to take on. "So the first thing I would say to anyone buying a home is, 'Let's see how much you can afford to spend,'" Eisenberg says. "Everyone thinks about the mortgage and interest, but there's more to it than that. What about the property taxes? Will you have homeowner association fees? Are you renting now, and will your house be much bigger? That means you'll pay more for utilities. Are there amenities that you're going to have to take care of? Does the house have a pool? You need to plan much more than by asking yourself if you can afford the mortgage."

Pej Barlavi, a real estate broker in New York City, agrees. "I always recommend to work your numbers backwards," he says. "First, know your budget or set a monthly budget that you will be comfortable with paying that will not put you under a difficult strain should you not be able to work for several months."

That might sound a little grim, but think about it. If this is going to be a house you'll live in for years, there are going to be good and bad times ahead. You want to be prepared.

Think about how you'll pay for the house. Yes, with money. But will you take out a fixed-rate mortgage or an adjustable-rate mortgage?

ARMs had a terrible reputation after the Great Recession, and for good reason. With an adjustable-rate mortgage, you'll get the lowest rate available -- but then it will adjust after several years, often based on an index, like the Cost of Funds Index. The main point here is that your payment with an adjustable-rate mortgage won't stay the same.

"During the economic meltdown of 2007-2009, many homeowners lost their jobs and then discovered the interest rates on their mortgages were going up," says Diana Webb, an associate professor of finance at Northwood University. Small wonder she says: "Adjustable rate mortgages are the scariest mortgages that I see."

But the interest rate for an ARM is low, and if you believe you aren't going to live in your house for long, it might be a good fit for you. Some ARMs also have a limit on how much they can adjust, which may make them more appealing.

Still, some financial experts are wary. "These ARM's are basically predatory," says Doug Leever, a mortgage sales manager at Tropical Financial Credit Union, which services South Florida. "First-time homebuyers also may not know mortgage brokers are paid a higher commission for an ARM than on a fixed-guaranteed loan."

Consider the length of your home loan. Most homeowners go with a 30-year mortgage. Others try for a 15-year loan or somewhere in between.

"The immediate benefit of a 15-year loan is that it's a shorter-term loan, and you typically get a much lower rate than a 30-year loan," Leever says. For instance, according to mortgage buyer Freddie Mac, if you were to take out a 15-year mortgage now, the average rate is 3.25 percent; for a 30-year mortgage, it's 4.14 percent.

If you can do a 15-year loan, it's a no-brainer that you'll spend less on your house than you will with a 30-year-loan, but plenty of people can't swing that. "The payment will be higher, and you need to make sure you're comfortable with the higher payment," Leever says.

Start gathering paperwork. Not everything about buying a house involves calculating numbers. You'll also want to start looking at paperwork with numbers on it. Yep, the fun never ends.

So start gathering your federal income tax records for the past couple of years, recent paycheck stubs, canceled checks for rent or utility bill payments and any other paperwork a mortgage lender might want to see, like credit card and student loan information.

Scout out where you want to live. It isn't enough to think you want to live in a certain geographical area, like the west side of the city. You really need to drill down.

"Many neighborhoods are different and change from one block to another, so the purchaser should be aware of what their money will get in their favorite neighborhood," Barlavi says.

Tax rates will be different in different communities, of course, so that's another consideration. There are some neighborhoods you may not be able to afford, so it's good to get a sense of that early on to avoid experiencing a huge letdown. Of course, you can wait until after a lender approves you for a mortgage, and you may want to wait until you've found a real estate agent to show you the ropes.

But once you truly know you can afford to buy a house, driving around a neighborhood will start to make the idea of homebuying real -- and besides, it'll provide you with a much-needed break with a more enjoyable set of numbers: street numbers. It's far more fun imagining yourself living somewhere than envisioning how you'll pay for it.


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no1hounddog2u

I would also add check your surrounding area. Since this is where you're going to be living how far is the grocery store what is the inside of the grocery store look like are the bathrooms clean if they're not that's a symbol of the area that you're going to be moving into. I spent almost a year researching areas before I bought my house. Downsize is that I had to drive a little further to get to work. But I come home to a clean well groomed neighborhood. And everybody on my street owns their House.

May 28 2014 at 7:31 PM Report abuse rate up rate down Reply
suannesb

Do not buy a house built on slab (no crawl space) unless you are provided a detailed plan showing where ALL the water lines, etc., are within the house. You are more likely to be provided a detail floor plan, without even asking, if you're buying a new home. But a used home is another story.

May 28 2014 at 4:16 PM Report abuse rate up rate down Reply
1 reply to suannesb's comment
RMS

Good advice, but, in many parts of the country, homes are almost always built on a slab, such as Florida. If you have an engineer inspection done prior to buying the home, the person doing the inspection might be able to shed some light on where pipes are located. From a resale point of view, avoid a home built on a slab in parts of the country where that is NOT the norm. Lack of basement is lack of storage or potential extra living space. Homes with basements are easier to remodel and work on.

May 28 2014 at 5:51 PM Report abuse rate up rate down Reply
RMS

As a realtor for 20 years, I can add the following: Be sure to hire a real estate attorney to handle the contract and closing, even if you live in a state where the realtors draw the contracts and closings are handled by a title company. Also, have an engineer inspection done on the home, even if you are buying a condo. If you are paying cash for the house, have an appraisal done or a broker price opinion of the house you are buying to make sure you aren't overpaying for the house or the area. If you are getting a mortgage, ask for a copy of the appraisal, in most instances you are paying for it so you are entitled to see it. Avoid homes on streets with a double yellow line, corner properties, and properties bordering schools, parks, or other public places. This will cut down on the possibility of future problems, and a property on a cul de sac or private location will hold its value better and make resale easier. Question the current homeowner about the neighbors, or, if possible speak to some neighbors before buying. If you are putting down at least 20% or more, ask the lender if you can pay your own taxes and homeowner insurance instead of having the lender escrow for it with your monthly payments.

May 28 2014 at 3:25 PM Report abuse +1 rate up rate down Reply
David S.

All good advice.....make certain you clear up any consistencies in your credit history too. I had to do that when I bought a home 20 years ago. It was a nightmare; there was stuff on there that had been resolved years earlier.

May 28 2014 at 2:02 PM Report abuse rate up rate down Reply
1 reply to David S.'s comment
RMS

Good point. Errors on credit reports are rampant. The first car loan I took out on my own when I was 24 years old had a car loan on it that was my father's. We lived at the same address and had the same name.

May 28 2014 at 5:53 PM Report abuse rate up rate down Reply
alspoolhall

Remember that you can pay ahead on your mortgage loan but be careful that you pay ahead on the principal and not on the interest. Each monthly payment is made up of a principal amount and an interest amount. Obtain an amortization print out sheet from your lender, showing your exact payments (over the length of the loan) and how much of each and every payment is what. The total payment is the same each month, but the principal and the interest amounts change . . . with the interest part getting smaller and the principal part getting larger. Pay one full payment each month and add the principal from the next payment. Keep your amortization chart marked accurately.

May 28 2014 at 12:51 PM Report abuse rate up rate down Reply
mannyandteresa

We could debate the "best way" to buy a house until you're blue in the face. Home ownership is NOT for everyone. This article has some good points but leaves out a wealth of Caveats. Interview your agent. You don't have to beat them up but it does help to weed them out. IF you want straight talk on home buying in the LA County or OC County areas of So-Cal send me a note at teamresults@aol.com and I'll be happy to provide a FREE consultation no gimmicks no strings forms to fill out and no obligation email me @: (teamresults@aol.com)

May 28 2014 at 12:46 PM Report abuse rate up rate down Reply
WONDERFUL RON

When you buy a house. It is best to pay cash and save a bondle in the long run.
And yes if you and your spouse work together you can do just that. WE did.

May 28 2014 at 12:03 PM Report abuse rate up rate down Reply
1 reply to WONDERFUL RON's comment
David S.

Ron, good for you. But what young couple has $200,000 in cash or more (depending on where you live) unless they inherited it?

May 28 2014 at 2:01 PM Report abuse rate up rate down Reply
JOANN BRADFORD

Everyday people make a mistake by not hiring a real estate attorney. I am so glad you posted this valuable piece of information.

May 28 2014 at 11:37 AM Report abuse rate up rate down Reply
rde5237

Hire a realestate attorney not a realitor, the attorney works for you the realitor works for themself!!! not you.

May 28 2014 at 9:40 AM Report abuse rate up rate down Reply
1 reply to rde5237's comment
mannyandteresa

Sorry to hear you feel that way Rde52. Sounds like you have had run-in's with some very in professional Agents who probably were not actually Realtors. (Yes there is a difference) I have been a Realtor for 22 years and almost 100% of my business has been referral. IF my clients felt that way I wouldn't get referrals. You know it's like any profession out there... there are people that will take advantage of those who don't know any better. It's sad but - have you ever heard of a crooked attorney??!!!
Best bet is to actually take the time to interview several agents and call there past client references. IF the agent doesn't have any ...then keep looking.

May 28 2014 at 12:39 PM Report abuse rate up rate down Reply
1 reply to mannyandteresa's comment
mannyandteresa

unprofessional agents out there (sorry for typo)

May 28 2014 at 12:41 PM Report abuse rate up rate down
halt1025

obomacare

May 28 2014 at 9:03 AM Report abuse -2 rate up rate down Reply
1 reply to halt1025's comment
Mary Ann

Yea destroying the dream of owning your own home. BUT hey the communist dems are helping you buy your home. IF your communist. OBAMACARE is a scam UNIONS are in on it too. The Unions were losing members so they pushed the obamacare so the union still would be in business. NOW they are claiming they didnt know it would cost their members so not they are rallying their sheeps who cant think for themselves on making companies pay for their obomacare. THEY NEW WAY BEFORE IT GOT PAST DUMB UNION MEBERS you played into the unions hands like sheeps

May 28 2014 at 11:59 AM Report abuse -3 rate up rate down Reply