No, it’s not leaping into buyer mode by picking out a real estate agent who has pretty homes, setting up a home inspection, and then moving in your sectional couch.
Real estate agents agree that long before you peruse listings or check out open houses, you should talk to a lender about your credit score, so that you can secure a mortgage.
“Talk to your bank or a reputable mortgage company to see what you qualify to purchase,” explains Rosanne Nitti, a Realtor® with RMN Investments & Realty Services, in Laguna Beach, CA.
Here are more step-by-step home-buying details, including information about down payments, closing costs, mortgage rates, pre-approved mortgages, and more. Once you’ve figured out this (seemingly) long-term financial process, a real estate agent can help you become a home buyer with these next steps, like choosing between apartments or single-family homes, home inspections, and so on.
Step 1: Why financing is the key to buying a new home
While figuring out the financing might not sound like the most exciting way to embark on your house hunt, it’s essential for home buying. Unless you have enough cash lying around to buy some real estate outright—and let’s face it, few do—first-time home buyers will need a loan first, not a real estate agent.
Furthermore, lenders don’t just hand out loans to everyone who walks in their door. Rather, they’ll need to review your financial history, which includes your credit score, to determine how much money they’re willing to fork over for your real estate venture.
This info, in turn, will help you decide how much of a down payment you, the future buyer, can make, and which homes are realistically in your price range.
“Without that step, you have no idea what your purchasing power is,” explains Nitti.
Step 2: Qualify for a home loan or loan pre-approval
If you’re still in the window-shopping phase, with no immediate plans to buy, you might want to opt for mortgage pre-qualification, which gives you a ballpark sense of your purchasing power without promises of a loan. But if you are actively house hunting, you probably want to seek loan pre-approval, where the lender performs an in-depth exploration of your finances, followed by a solid promise of a home loan of a certain amount.
To be pre-approved for a loan, expect to be asked to disclose your income, the amount of money you have in savings, your credit score, and your credit history, which will help lenders determine how much money they’re willing to loan you (and what kind of down payment you can afford).
Consider this pre-qualifying step akin to getting a full medical checkup before you train for a marathon. In this sense, a lender can tell you whether you’re fully ready to embark on this home-buying journey or whether you should take a step back and do some prep work first.
For instance: “If you do not have any savings available for a down payment [on a home], then your first move is to save every dime you can,” says Debra Kroon, a Realtor with Yosemite West Real Estate, in Yosemite, CA.
If you have blemishes on your credit history or if your credit score has taken a hit (e.g., for late or missing credit-card payments), you may need to take steps to clean up your credit report before you can even qualify for a loan from a lender.
You could also explore easy-to-use online tools and credit-reporting bureaus to determine how much house your take-home pay can cover for mortgage payments on your first home.
Step 3: Learn how a loan officer can help
If your financial profile reveals issues that throw a wrench in your ability to buy a home, your loan officer can recommend to you how to make improvements to it. Alternatively, if you’re deemed to be ready, and you’re raring to start house hunting now, a loan officer can give you a heads-up on what to expect on the finance front.
“The loan officer will be able to let you know which loan programs you qualify to use, what your purchase price limit is, what your projected monthly payments will be, and how much cash you will need to have on hand for a down payment, closing costs, and reserves,” says Kroon.
To get started, you can explore realtor.com/mortgage to find lenders in your area, to check mortgage interest rates, and to figure out such questions as how much home you can afford, your debt-to income ratio, the difference between fixed-rate and adjustable-rate mortgages, and mortgage insurance.
Once you’re ready to become a first-time buyer, you can arrange for a home inspection (by hiring a home inspector), schedule a walk-through, and get ready for move-in day as an official homeowner!
