• First-Time Home Buyer Checklist - Part 2 of 3

    Brandon Cornett

    By Brandon Cornett
    © 2011 All rights reserved

    Editor's Note: This is part two in a three-part checklist for first-time home buyers. If you haven't read the beginning of this tutorial, you might want to start here. Part one covers budgeting, saving up for your housing costs, and checking your credit. In this part of the checklist, we will focus on mortgage loans.

    Review Your Mortgage Options

    Up to this point, the home buyer's checklist has focused on the preliminary steps in the process. We talked about the importance of establishing a budget, saving money, and reviewing your credit information. Now it's time to look forward and think about the different mortgage options you have when buying a house.

    You actually have fewer financing options today than a home buyer from, say, 2005. A lot of mortgage products disappeared during and after the housing crisis that started in 2008. This is actually a good thing. For one thing, it means you have less homework to do.

    In this part of the first-time home buyer checklist, we will focus on your mortgage options:

    • Consider the differences between the FHA loan and the conventional mortgage loan. This is one of the key decisions you will have to make when buying a home. If your credit score is good enough, you can put as little as 3.5% down on an FHA loan. You won't find a down payment that small with a conventional mortgage. But you'll probably pay a lot more in mortgage insurance with the FHA program. Conventional vs. FHA
    • Another important decision is whether you want to use a fixed rate or adjustable-rate mortgage loan. Here again, there are certain pros and cons with each option.
    • A fixed-rate loan is generally better over the long term, because it keeps your mortgage payments the same size.
    • The ARM loan may have a lower interest rate for the first few years, but the rate will begin to adjust after that. Will you be able to afford the new payment, if the rate adjusts upward?
    • Learn more about the differences between fixed vs. adjustable mortgages.
    • You should also think about the size of your down payment. How much can you afford to put down on a home? This will help you determine which type of loan is best for you. It will also determine the size of the loan you can afford. The VA loan is great for veterans because it has no down-payment requirement. With an FHA loan, you will pay at least 3.5% down. Conventional mortgage loans usually have a minimum down payment of 5% to 10%. More about down payments
    • Do you know someone who has bought a home recently? If so, pick their brain about the type of mortgage loan they use. Home buyers who have recently navigated the mortgage process are intimately familiar with current lending options. Thus, they are a great source of information for other first-time buyers.

    You can also learn about your mortgage options by talking to a lender. This is why I recommend getting pre-approved for a loan. And that's our next topic.

    Mortgage Pre-approval Process

    You are not required to get pre-approved for a home loan before shopping for a house. But it's a good idea to do so. I strongly recommend that all home buyers get a pre-approval letter at this stage in the process. That's why it deserves a place in the first-time home buyer checklist.

    Here's how to go about it:

    • Starting this process is fairly easy. You would simply contact a mortgage lender or broker and tell them you want to get pre-approved for a loan. You can even do this by e-mail if you want.
    • Most lenders have an online pre-approval form somewhere on their websites. This is an easy way to get the ball rolling. You would simply fill out the requested information on the website, and the lender would get back to you regarding your pre-approval. Just make sure it's a secure website before you enter any personal information.
    • When you get pre-approved for a mortgage, the lender will review many aspects of your financial situation. They will likely check your credit score at this point, as well. Eventually, they will start requesting financial documents from you. This may include your tax returns for the last couple of years, as well as proof of income.
    • This is your opportunity to ask the lender any questions you have about your mortgage options. Ask about down-payment requirements, debt-to-income ratios, and whether or not you need to pay points at closing.
    • Things will go more smoothly if you round up your financial documents before contacting the lender. Here's a list of documents you may need when you apply for a loan.
    • It's okay to get pre-approved with more than one lender. This is the only way to shop around for the best interest rate and mortgage terms. If you have an existing relationship with a bank, you might want to start there. The same applies if you're a member of the credit union. Learn more here
    • Most real estate agents will require you to have a pre-approval before they show you homes. It only makes sense, when you think about it. The last thing an agent wants is to spend hours on somebody who can't even qualify for a mortgage.
    • Getting pre-approved will also help you when the time comes to make an offer on a house. The seller will be more inclined to take your offer seriously, if you've already been reviewed by a mortgage lender. So it's a critical item in the home buyer's checklist.
    • Just remember that a pre-approval is not a guarantee. Things can still fall off track between now and the final closing. So make sure you maintain the status quo, as far as your finances are concerned. Continue saving money. Don't tap into your savings. Don't switch jobs. Don't make any major purchases or open new credit accounts.

    Note: This concludes part two of the first-time home buyer checklist. You can continue on to part 3 here.

2011 Home Buyer's Guide