Buying a home for the first time is one of the most important and costly decisions you’ll make in your life. Whether it’s for investment purposes or personal use, buying a home can be extremely rewarding as long as it’s done when you’re financially prepared. Many first-time home buyers make small mistakes that add up to thousands of dollars lost, but having a thought-out plan can save you big time.
Thanks to the internet, home buyers have more information at their fingertips than ever, which means more power over the buying process. Knowing just the general steps for buying a home takes the complexity out of the entire process. Below is a guide with tips and tricks that will decrease the stress involved in buying a home for the first time and empower you to make the right decisions.
So you’ve decided that you want to purchase your very first home. One of the first steps you’ll need to take when coming to this decision is to give yourself a general framework for what you expect to get out of this purchase.
- When do you want to move in? Deciding when you want to move is an important first step because it determines how much time you’ll have to save for the down payment and how much time you’ll have to search for the home.
- Where do you want to move to? Location is incredibly important when factoring in your overall budget and whether or not the location caters to your needs. If you’re thinking about moving to an entirely different city or state, you’ll want to factor in small things like the costs to transport your belongings, or larger things like where your job or school is in relation to your potential home. Certain locations are also more expensive than others.
- What do you want in a home? Think about the various features you’ll want in your dwelling. What amenities, interior and exterior design features are you wanting? Having a checklist ready before viewing homes will set you up for satisfaction, but don’t expect anyone to fulfill your entire checklist. Try to prioritize what is most important to you first.
- Analyze your credit score. Like with most financial decisions, your credit score is an extremely influential factor that will determine your approval odds, loan amount, and interest rate. During your planning phase, see what you can do to improve your credit score before seeking a loan. Various resources online will show you approximate approval odds and interest rates depending on your credit history.
- Start planning early; at least 12 months out.
- Keep in mind that the actual home shopping phase takes about 1 to 3 months.
- Don’t make drastic changes that could negatively affect your credit score and income-to-debt ratio. This includes job changes, pulling out loans, and opening or closing credit cards, etc.
- Try to pay off all of your high-interest loans before buying a home.
- Ask lots of questions every step of the way, and don’t sign papers until you know what you’re buying into.
2. Budget Planning
Once you have a general idea of where you want to live and when you’d like to move, it’s time to start budgeting. This involves assessing what type of home you’ll be able to afford based on your income and expenses. By the time your budget is formed, you will have an accurate picture of the monthly mortgage you can afford.
- Think about monthly expenses that lenders probably won’t see when assessing your credit report. Things like car payments, cell phone bills, food, and utilities can add up to a pretty large chunk of your income. When you start shopping around for a mortgage loan, the lenders aren’t going to see the hidden costs of your lifestyle. Just because you are approved for a certain loan amount doesn’t mean you can actually afford it. Use a budgeting app or create a list to see all possible expenses that are coming out of your income each month.
- Save a little extra for maintenance costs. Eventually, you will want to do a home inspection before officially closing a deal on a home. Home inspections often find unforeseen issues that result in repair costs. And aside from the costs revealed by the home inspection, you’ll also want to think about ongoing maintenance for the next few months after purchasing your home.
- Consider closing fees when forming a budget. Closing fees include all of the back-end processes involved in securing a home. Examples are application fees, insurance, credit report fees, and more. The amount of closing fees varies widely, so it’s best to include about 2 to 5 percent of the overall purchase price of your home into your budget.
- Don’t forget the down payment. This is the amount of money you will save up for the initial investment into your home. Depending on the type of loan you choose, this price should be anywhere from 5 to 20 percent of the size of your loan.
- As a rule of thumb, you should spend no more than 25 percent of your monthly income on your home payment.
- Don’t forget closing fees, real estate agent costs, and home inspection costs in your budget planning.
3. Down Payment / Mortgage
Now that you have a budget drawn out, you’ll want to start saving for your down payment target. This step can take a while, so ideally you’ll already have a bit saved ahead of time. Otherwise, you’ll need to wait until you have a down payment saved up before moving to the next step.
- Research the type of loan you want to pull out. Essentially there are two types of loans you have to choose from: conventional loans or government-sponsored loans.
- A conventional loan is one you would get from a bank or other private lender. They typically offer lower interest rates but usually require 10 to 20 percent for the down payment in relation to the loan amount. These are good for people with higher credit scores, or people with a large amount of money saved up for the down payment.
- Government-sponsored loans on the other hand, such as the Federal Housing Administration (FHA) loan, have higher interest rates but they only require 1 to 5 percent for the down payment. Some government loans require no down payment at all. These types of loans are good for people with lower credit, or who meet special criteria.
- Get preapproved for a loan before shopping for a home. Having a pre-approved amount in mind will help tremendously in determining your ideal home. Most lenders have a 60 day grace period before the preapproval ends.
- Make sure to shop around for different lenders. Don’t settle on the first lender that offers you a loan unless you’ve done your research beforehand.
- Research the several available government-sponsored loans online. Depending on your circumstances, or if you meet certain criteria, a government-sponsored loan can be advantageous for you.
- Paying a 20 percent down payment on a conventional loan will waive you from private mortgage insurance (PMI) fees.
4. Real Estate Agent
Finding the right real estate agent can make or break the home buying experience for you. However, it is generally recommended to hire a real estate agent if it’s your first time buying a home. A real estate agent can take care of a lot of the work, like finding prime locations, recommending home inspectors, and helping with negotiations.
- Real estate agents should be there to serve you. Find an agent who is passionate about their work and loves setting people up with their dream homes. The last thing you’ll want is someone who is just out for the money and will try to sell you any home to earn a commission.
- Take recommendations from friends and family, and read reviews of agents online. You may even want to interview multiple agents before choosing the right one. If you already know the specific location you want to search, then find an agent who is an expert on that location.
- Ask your mortgage lender for recommendations. Many lenders have partnerships with real estate agents. Often it’s in the best interest for the lender to provide clients with high-quality agents.
- Time is money. Good real estate agents can help speed up the searching and buying process by taking on some of the burdens with their expertise. Your real estate agent can negotiate with sellers and can let you know ahead of time any issues that need to be taken care of. Your real estate agent can also provide you with an accurate estimation of your closing costs.
- In this day and age, it is very possible to buy a home without a real estate agent by using online tools. For the super frugal shopper, this may be desirable as a way to save money.
- Pick your real estate agent’s brain as often as you can to glean additional tips.
5. Shopping For Home
Here comes the fun part! Assuming you’ve tallied up your budget, gotten preapproved for a loan, saved up your down payment, and hired a real estate agent, it is now time to explore some homes both online and in-person.
- Utilize online tools. Nowadays, there are several apps that will help you hone in on the style and location you’re looking for. Popular apps like Zillow can give you a great overview of the market. Don’t rely too heavily on the information listed on these apps, however. It’s pretty hard to gauge the true value of a home, based on internet listings.
- With your checklist in hand, have your real estate agent take you to several locations. Even if a home meets the majority of your checklist, keep visiting others. You may find things you didn’t know you wanted, or certain items on your checklist may not be as important as you thought. Be prepared to make adjustments to your checklist. Also, revisit homes you like on different days and times to get a better feel for the atmosphere of the location.
- Visit every Open House event that you can. This is a chance to meet like-minded buyers, potential neighbors, and other real estate agents. Discovering little details or housing trends is a great benefit of Open House events too.
- Research the location to make sure it suits your lifestyle. Work commute, nearby schools, crime rates, shopping centers, and entertainment are all important factors to your overall home satisfaction.
- Make an offer. After narrowing down your options and feeling confident with your choices, your next duty in buying your first home is to put your money where your mouth is. An offer will include stating your preferred purchase price (hopefully in line with your pre-approved loan amount), providing proof of down payment, then possibly paying a small deposit to briefly take the home off the market. Sellers will typically accept or counter your offer within 24 hours. Have your real estate agent negotiate any counteroffers, or just outright reject it and move on. But if you reach an agreement with the seller, it’s time to move on to the next step.
- Take notes when viewing homes because it’s easy to forget specifics after visiting so many places.
- Don’t rely on glamourous online photos; make sure you visit homes in person.
- Keep in mind that sellers have the right to keep your offer deposit if you back out of the agreement after-the-fact.
- Buying a home is an emotional process. Make sure you are not making important decisions based on sudden fleeting feelings.
- Important: Stick to your budget.
6. Home Inspection
Once you’ve settled on a prime candidate and have made an offer on it, you’ll want to schedule an inspection of the home to make sure there are no costly surprises, and that all potential repairs are manageable. You’ve now entered the “escrow” phase of your first home buying experience, which is basically the wrap-up phase.
- Leverage your existing resources to find a home inspector. At this point, your real estate agent is most likely aware that you’re interested in buying the home. They’ll probably already have a good home inspector in mind, so if you trust your agent, you’ll likely trust their recommendation.
- Not all inspections are the same. Some inspectors may only look for certain things. For example, if bug infestations are a concern, you may want to hire that type of home inspector as well.
- Additional negotiating may be required once you’ve seen the repair estimate of the home. Again, your real estate agent can be a big help with this part. It is not unusual for your mortgage lender to back out of the loan offer if they determine the repair costs are too high.
- Try to think of everything that can possibly go wrong in a home and tailor your home inspection towards that.
- Sellers may also be responsible for footing certain repair bills, so make sure they take responsibility for oversights on their part.
- After the inspection, you may want to do a final walkthrough to make sure nothing was missed, and that you still want this home.
7. Closing the deal
Congratulations if you’ve made it this far, you are only days away from securing your first home! The offer has been made, the home has been inspected, and the mortgage lender has made a final appraisal and has officially approved the loan. Closing the deal is where you cross your t’s and dot your i’s. Think of this as the paperwork phase. All of the parties involved come together to make your home purchase official.
- Know the closing fees. Hopefully, you have already researched the various closing fees in your planning phase and have discussed potential fees with your real estate agent. If so, your initial budget will already include these costs and they won’t come as a surprise. On average, closing fees will comprise 2 to 5 percent of your budget.
- Accept your keys and move in! You’ve done it! The final task is to move all of your belongings into your new home and possibly invite friends and family over for a house-warming party.
You should now be equipped with the essential knowledge required to buy a home for the first time. Remember that your home is not only a potential investment, but it’s also where you’ll create memories for a long time to come. We hope that your experience towards the new stage of your life will be pleasant and bump-less.