First Time Home Buyer Checklist: Are You Ready to Buy a Home?

Buying a house can be one of the most stressful things—no matter when you decide to buy. But the good thing is that there are a lot of stages in the buying process that really allow you time to evaluate whether the choice is right for you. 

Understanding the intricacies of securing a mortgage can save you a significant amount of money and stress over the life of your loan.

Assessing the Market and Your Financial Situation

As interest rates and home prices stay high, the question remains: is it worth it to buy now or should I wait? And though many people jump at the opportunity to share their predictions or opinions on economic markers, it doesn’t mean they’re right. 

The truth is no one truly knows what the market will do, which is why it’s particularly important to adjust your mindset to be prepared for everything—the good, and the not-so-good. The best way to do that is:

1. Make sure you can financially afford the worst case scenario. So many people focus on the minimum mortgage payment they can secure. But everyone should look at the maximum amount a home will cost each month. This consists of rounding up on everything—mortgage payments, title insurance, mortgage insurance, utilities, etc. Start by playing with some of the numbers to see how much home you can afford. Consider using the Banzai What Mortgage Can I Afford Coach to help you figure out what price range is realistic.
2. Ask yourself if the majority of the properties on the market suit both your long-term and short-term needs? Even if you’re buying a starter home, it’s important to consider whether or not your family will be happy in the home if the market dips and the resale value is impacted. As long as you’ll be comfortable no matter the quantity of time you’ll need to live in it, then it’s safe to say that house is a good fit.

Finding a Buyer’s Agent

If, after referring to the two points above, you confirm you’re ready to start searching for a home then it’s time to find a buyer's agent. Do you need a buyer’s agent to buy a house? No. But it can help. Buyer’s agents schedule tours, handle paperwork, and negotiate with sellers in ways that a buyer negotiating for themselves might not be able to.

Financing a Home

Working with a mortgage lender can be an unnecessarily stressful part of the homebuying process. But it can also be a swift process. For most, the biggest challenge is shopping around for rates. 

As one of the most crucial factors in determining the cost of your mortgage, interest rates represent the percentage of the loan amount that you’ll pay annually in addition to repaying the principal. Interest rates are decided by a number of factors, including credit score, the loan term, and current market conditions. The lower the interest rate, the less you’ll pay each month for a mortgage—that’s why it's important to shop around and secure the best rate possible.

Mortgage interest rates can be fixed or variable:

• Fixed-Rate Mortgage: The interest rate remains constant throughout the life of the loan, providing predictable monthly payments.
• Adjustable-Rate Mortgage (ARM): The interest rate may change periodically based on market conditions, which can result in fluctuating monthly payments.

There are also different mortgage types you can consider. Using this mortgage type activity calculator can help you find which one is right for you before you dive in. Once you’ve shopped around and found a loan officer you trust, they can guide you through the next steps towards financing:

1. Secure a pre-approval: Before you start looking, you’ll need to get pre-approved for a mortgage loan. This is when a lender assesses a potential borrower’s likelihood of being approved for a loan amount. Getting the pre-approval is a simple process. Simply talk with your lender and have them run the numbers: your income, assets, and liabilities (credit card debt, additional loans, etc.).
2. Start shopping for houses in the price range you and your mortgage lender have established you can afford. 
3. Officially secure your loan: At last, that long-awaited time comes when you finally find a home. When you’ve decided to put an offer on a house, refer to this mortgage application checklist to see what documentation to prepare for applying.
4. Offer a down payment: A down payment is the amount of money you pay upfront when purchasing a home, typically expressed as a percentage of the home's purchase price. For example, if you buy a $300,000 home with a 20% down payment, you would pay $60,000 upfront. The size of your down payment can significantly impact your mortgage. For example, if you can put down at least 20%, you typically avoid paying Private Mortgage Insurance (PMI), which is an additional cost that protects the lender if you default on the loan.
5. Consider buying down the interest rate: Buying down the interest rate, also known as purchasing mortgage points, involves paying an upfront fee to reduce the interest rate on your loan. Each point typically costs 1% of the mortgage amount and lowers the interest rate by a small percentage (usually 0.25%).

For example, on a $300,000 mortgage, one point would cost $3,000. If this point reduces your interest rate from 4% to 3.75%, the lower rate could save you money over the life of the loan.

Making an Offer and Closing on a Home

When the time comes for you to sign and finalize a contract, it’s necessary to take certain steps to protect yourself and your finances. Here are some of the pivotal steps in this process:

1. Making an offer:
   1. Research and Strategy: Before making an offer, research comparable home sales in the area to determine a fair price. Consider factors such as market conditions and the home’s condition.
   2. Offer Letter: Work with your real estate agent to draft a formal offer letter, specifying the price you’re willing to pay, any contingencies (such as financing or inspection), and the proposed closing date.
   3. Negotiation: Be prepared for a negotiation process. The seller might counter your offer, and you may need to adjust terms to reach an agreement.
2. Putting down earnest money:
   1. Purpose: Earnest money, also known as a good faith deposit, shows the seller that you are serious about purchasing the home. It’s typically 1-3% of the purchase price.
   2. Escrow Account: This deposit is held in an escrow account until closing. If the sale goes through, the earnest money is applied to your down payment or closing costs.
   3. Protection: If the deal falls through due to contingencies specified in your offer (like a failed inspection or financing issues), you usually get your earnest money back. However, if you back out for reasons not covered by contingencies, you might forfeit the deposit.
3. Performing due diligence:
   1. Home Inspection: Hire a certified home inspector to conduct a thorough inspection of the property. This step identifies any potential issues or repairs needed.
   2. Appraisal: Your lender will order an appraisal to confirm the home’s value aligns with the purchase price, protecting you from overpaying.
   3. Title Search: A title search ensures the seller has legal ownership and that there are no outstanding liens or claims against the property.
   4. Reviewing Documents: Carefully review all related documents, such as HOA rules, property surveys, and environmental reports. This step ensures there are no surprises that could affect your ownership or use of the property.

Paying off a Mortgage Early

Paying off your mortgage early can save you thousands in interest and provide that your loan term ends early. An early mortgage payoff calculator allows you to explore how additional payments impact your loan.

Understanding mortgage concepts like interest rates, down payments, and the option of buying down the interest rate can empower you to make smarter financial decisions. By leveraging tools like an early mortgage payoff calculator, you can optimize your mortgage strategy and potentially save thousands of dollars. Whether you’re a first-time homebuyer or looking to refinance, knowledge is your greatest asset in navigating the mortgage landscape.