Today we will start talking about the steps to becoming a homeowner for the first time, or at least for the first time in several years. It turns out you can qualify to be a first time borrower even if you have had a mortgage before. It generally needs to have been at least three years since you last owned a property to be viewed as a first-time homebuyer again. Many lenders have special programs just for first-time homebuyers. It’s time to get pre-approved for a home loan. Here’s the government’s Housing and Urban Development definition:
In order to help lenders properly identify first-time homebuyers, we are clarifying the definition of what constitutes a first-time homebuyer. A first-time homebuyer is an individual who meets any of the following criteria:
- An individual who has had no ownership in a principal residence during the 3-year period ending on the date of purchase of the property. This includes a spouse (if either meets the above test, they are considered first-time homebuyers).
- A single parent who has only owned with a former spouse while married.
- An individual who is a displaced homemaker and has only owned with a spouse.
- An individual who has only owned a principal residence not permanently affixed to a permanent foundation in accordance with applicable regulations.
- An individual who has only owned a property that was not in compliance with state, local or model building codes and which cannot be brought into compliance for less than the cost of constructing a permanent structure.
This post is not going to cover all the steps on your checklist to becoming a first time homeowner. In fact, I’m just scratching the surface on step one.
Step 1: Get Your Loan Pre-Approved
Note that I did not call it prequalification. Prequalification is not the same. Prequalification is just a quick estimate of how much you should be able to afford. Pre-Approval means you have gone to a loan officer, submitted financial documents and that loan officer has determined what you can buy based on your income, debts and credit scores. You absolutely need to be Pre-Approved by a lender when you start looking at homes. It’s a necessity in our market to have this step done.
Where do you start?
First, get free copies of your credit reports from all three credit bureaus, TransUnion, Equifax and Experian. Visit the link below to get copies of your credit reports for free. Review your credit reports for errors and follow the instructions of each agency on how to get those items disputed and fixed. People often ask me, what credit score do I need? Here in Minnesota it’s possible to get a loan with as low as a 620, but that varies by lender. The interest rates, and therefore payments, would be higher for someone with a 620 score versus someone with a 720 or 820 score. That’s just common sense.
Visit www.annualcreditreport.com to get copies of your credit reports.
Down Payment Cash
Second, you need to make sure you have your down payment money set aside and your earnest money available when you are ready to sign a purchase agreement. I will cover earnest money and the purchase agreement in a future post. I cannot point out strongly enough that if you decide to buy a home, and you will be using a lender to do that, you cannot buy any big ticket items until after the deal is done and you have possession of the new home. Do not buy furniture, appliances and especially a car. If your car breaks down a month before closing and you want to replace it, just rent one, borrow one, ride the bus, or take Ubers until the deal is closed.
Select a Lender
Third, talk to lenders. Banks, credit unions and mortgage companies are the typical first stops on your homeowning journey. Pick a lender that will guarantee a smooth and on time closing. You should probably avoid the online, super-fast, shoot for the moon mortgage lenders on the internet. They don’t have a good reputation for closing on time. When you are in as competitive a market as we are in now, you need to make sure the seller feels like your offer will close on time without a hitch. That could be just what the seller needs to see to choose your offer over another.
Stay tuned for more articles on making that first home purchase! Congrats on getting your loan pre-approved in advance!