Homeownership for beginners

Buying a home is an incredibly exciting, but incredibly daunting, prospect, and the process of securing a home loan can be highly confusing – especially if you’re a first time home-buyer. Because choosing the right home loan is just as important as choosing the right home, it’s important to know what to expect, and which questions to ask, every step of the way.

Here are the steps to take when buying a home. For more detail on each point, follow the attached link.

1. Prepare to shop

Not sure how to get started, how much you can afford, or what to expect when buying and financing a home? Set yourself up for success with a little bit of preparation.

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• Check your credit. Lenders use your credit report to determine your loan qualifications and interest rates, so check them early on to prevent surprises, correct any mistakes, and make the most of available budgeting and planning tools.
• Assess your spending. For most people, buying a new home means taking on new expenses. To decide what you can afford to spend, you’ll need to know how much you’re currently spending.
• Budget for new or changed expenses. With a clear picture of your spending habits, you can develop a forward-looking budget, letting you determine a target monthly home payment. Be sure to consider all the costs involved.
• Determine your down payment. Knowing what you can afford on a monthly basis, look at your savings and determine how much you can afford for a down payment.
• Decide how much you want to spend. Once you’ve determined your down payment, your credit score, and a few other details, you can use tools to estimate the interest rate you’ll pay for a mortgage, and the range of home prices you can comfortably afford.
• Create a loan application packet. Gather the documents you’ll need to provide lenders, including W-2s and tax returns from the last two years, bank statements, proof of ID, social security number, etc. Are you a service member or veteran? The VA can provide a certificate of eligibility.

2. Explore your loan choices

Don’t wait until you find a home to start thinking about how to finance it. Take time to explore your mortgage choices so that you’re ready when the right home comes along.

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• Understand the different kinds of loans available. A 30-year fixed-rate loan is a good and popular choice, but it’s not the only loan available. Depending on your circumstances and goal, a different kind of loan might suit you better.
• Contact multiple lenders. Different lenders can offer different terms, and different kinds of loans. Asking the professionals directly can help you determine the best choice for you.
• Get a preapproval letter. Though it is not a guarantee, a preapproval letter states that a lender is likely to provide you a loan, up to a certain amount, based on certain assumptions. Sellers frequently require a preapproval letter before accepting your offer.
• Select the kind of loan that fits your needs. Because there are many choices to make regarding a mortgage, it’s best to think through the tradeoffs in advance – things move quickly once you’ve found the right home. Choosing the kind of loan you want early also lets you apply with multiple lenders and do an apples-to-apples comparison.
• Find the right home. Once you’ve learned about the options, met with multiple lenders, received a preapproval letter, and selected the right kind of loan, there’s not much more to do except find the home you want to purchase.

3. Compare loan offers

Once you are ready to move forward with your home purchase, it’s time to choose a mortgage loan and a lender. Don’t choose a loan before you know it is a good one.

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• Request multiple Loan Estimates. A Loan Estimate is a standardized form that tells you important details about your loan offer, and requesting one is simple (no written documentation required). With Loan Estimates from multiple lenders, you can determine which deal is best.
• Review and compare your Loan Estimates. Consider the cost of the loan, the loan officer’s ability to answer your questions, and your confidence that the lender can meet your closing time frame. You can always go back to your lenders and ask for a different option.

4. Close on the deal

Once your purchase offer has been accepted by the seller and you have chosen a loan and a lender, it’s time for the closing process. Stay alert for requests and notifications from your lender, and be sure to voice any questions or concerns with all due haste.

• Submit documents and answer lender requests. Once you’ve decided to proceed, your lender will need to review your financial information carefully. You may need to provide additional documents to verify the information you previously reported.
• Schedule a home inspection. Do this as soon as possible, so you’ll have plenty of time to resolve any problems. Choose an inspector with a reputation for being honest and thorough: You want a complete assessment of the physical condition of the home.
• Shop for homeowners insurance. To protect you in case of accidental damage to your home, and because lenders typically require it, you need to purchase a homeowners insurance policy. You can choose the insurance company that’s best for you, so be sure to shop around.
• Look out for revised Loan Estimates. As your lender verifies the information in your loan application, you may receive revised Loan Estimates, indicating changes in conditions or costs.
• Shop for title insurance. Closing costs can add up to thousands of dollars, and estimates can vary widely among lenders; some are paid to third-party providers, which you can shop for separately. You can often save money by shopping around for closing services.
• Review documents. Closing can be stressful. Make things easier on yourself by reviewing the closing documents in advance. By law, you must receive a copy of your Closing Disclosure three business days prior to closing.
• Close the deal. You’re ready to sign for your new home and the loan to pay for it. Check out this closing checklist for guidance. Before you sign any papers, do a final walk-through of the home.
• Save your documents. Your mortgage is a big financial commitment. Keep your documents in a secure place so you can refer to them as needed.

Adapted from this piece by the Consumer Financial Protection Bureau website

FOR MORE INSIGHT

On buying a home
Consumer information on home loans (Federal Trade Commission)
Your mortgage calculator may be setting you up for a surprise (Consumer Financial Protection Bureau)
From here to homeowner: A roadmap to help you plan (Consumer Financial Protection Bureau)
Is it better to rent or buy? (The New York Times)
Interest Rate Explorer (Consumer Financial Protection Bureau)
Loan Estimate Explainer (Consumer Financial Protection Bureau)
Closing checklist (Consumer Financial Protection Bureau)
Closing Disclosure explainer (Consumer Financial Protection Bureau)
Guide to closing forms (Consumer Financial Protection Bureau)
Mortgage calculator (NerdWallet)

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