How to Buy Your First Home - A 21-Step Easy to Follow Guide

When you buy your first home it is an exciting milestone in your life, at the same time it can also be overwhelming. With so many steps involved, it’s essential to approach the process methodically. This guide will walk you through 21 crucial steps to help you navigate the journey of homeownership with confidence.

1. Your Initial Evaluation of Your Financial Abilities

Before diving into the home-buying process, assess your financial situation. Consider upfront costs, including:

Down Payment: Your down payment will depend upon the type of mortgage you select and the lender’s requirements. Usually, it ranges from 3% to 20% of the cost of the house. In case of conventional loans, as little as 3% down payment is required for first-time homebuyers with outstanding credit. For instance, $9,000 is the down payment for a $300,000 house at 3%.
Closing Costs: These typically range from 2% to 5% of the loan balance and pay for title insurance, inspections, and assessments. For a $300,000 loan, your closing fees could range from $6,000 to $18,000. You would have to pay that sum in addition to your down payment.
Move-In Expenses: Moving expenses, house repairs, and furniture costs might total between $2500 and $3000 for local relocation. The cost of long-distance relocation can be significantly higher. This will be necessary as soon as your house purchase is completed.

Knowing these expenses can assist you in assessing your financial preparedness for home ownership.

2. Set Up a Budget

To avoid making the mistake of purchasing a home that you will eventually be unable to afford, create a budget to determine how much you can afford to spend each month. One useful rule is the 28/36 rule:

28%: Housing costs (mortgage, property taxes, and insurance) should not exceed 28% of your gross monthly income.
36%: Your monthly gross income should not be greater than 36% of your total debt payments, including housing and other loans.

This rule helps ensure you don’t overextend yourself financially.

3. Check Your Credit Score and Debt-To-Icome Ratio

Your mortgage possibilities are greatly influenced by your credit score. Experian, TransUnion, and Equifax are the three main credit bureaus where you may check your score.

Obtain free copies of your credit report from each of the three credit bureaus. Pay close attention to any errors and dispute them if necessary, as this has a significant influence on your mortgage interest rates.
While you are looking for a house mortgage loan, refrain from opening new credit card accounts.
Pay all of your credit card bills on time and maintain your credit cards open. Because it impacts your DTI ratio, closing a credit card will immediately reduce your available credit and may also result in a decrease in your credit score.

Furthermore, determine your debt-to-income (DTI) ratio by dividing your gross monthly income by the total amount of your monthly loan payments. Better financial health is indicated by a lower DTI ratio, which can also result in better mortgage conditions.

4. Understand Different Mortgage Types

Familiarize yourself with various mortgage types:

Conventional Loans: The most prevalent kind of home loans are these. Government insurance is not provided, and down payments are usually required. To be eligible, you must have very good to exceptional credit. If you do not have a 20% down payment, you could have to get private mortgage insurance. For first-time homebuyers with outstanding credit ratings, some traditional loans need as low as a 3% down payment.
Jumbo loans: These (non-conforming) loans are utilized for large-square-foot residences and expensive neighborhoods, and they surpass typical mortgage spending limits. To get the loans, you need to be able to make a sizable down payment and have outstanding credit.
FHA Loans: The Federal Housing Administration insures these government-backed loans, which let the buyer put down as little as 3.5%.
USDA Loans: The U.S. Department of Agriculture is guaranteeing these loans. They are intended to assist families with low and moderate incomes in buying a home in rural areas that qualify for USDA assistance. They are intended for homebuyers in rural and suburban areas. You must meet income and other standards, but there is no down payment required.
VA Loans: They are provided by the Department of Veterans Affairs, as the name implies. They are intended for veterans, active military personnel, and qualified spouses. If you meet the conditions, you will not be required to pay a down payment.
Renovation loans: If a traditional renovation loan is out of your price range, you can apply for an FHA renovation loan, which are excellent for purchasers who enjoy a good fixer-upper. With this mortgage, you may combine all of the expenses associated with purchasing and remodeling a house into a single monthly payment.

Understanding these options will help you choose the best mortgage for your situation.

Decide whether you want a 30-year or 15-year mortgage.

30-Year Mortgage: Over time, more interest is paid but the monthly payments are smaller. Because 30-year mortgages have smaller and more manageable monthly payments than 15-year loans, they might be a better option if you desire more space in your monthly budget. The majority of homebuyers choose a 30-year fixed-rate mortgage, which has an interest rate that remains constant and is paid off in 30 years.
15-Year Mortgage: Compared to a 30-year mortgage, a 15-year mortgage loan usually has higher monthly payments but lower total interest paid. It is more difficult to be eligible for the 15-year loan because of the greater payment.

Also, consider fixed-rate vs. adjustable-rate mortgages (ARMs):

Fixed-Rate: Interest rate remains constant throughout the loan term.
Adjustable-Rate: An index is linked to an adjustable-rate mortgage, also known as an ARM. After a first fixed period, interest rates may fluctuate, which could result in reduced initial payments but unpredictable future payments. Consider an adjustable-rate mortgage (ARM) if you only intend to remain in the house for a few years. Although ARMs can rise (or fall) over time, they often begin with a lower fixed-interest introductory rate, allowing you to purchase a more expensive property for the same monthly payment.

Consider your financial status and risk tolerance when weighing the benefits and drawbacks of each choice.

5. Compare Mortgage Rates and Fees

Compare mortgage rates and fees for the same loan amount once you have reduced the number of lenders you can choose from. Consider origination fees, closing costs, and other charges in addition to the interest rate. This comparison will assist you in determining the most economical choice.

Make plans to compare three to five quotations from various mortgage providers. You might save thousands of dollars in interest over the course of the loan if you do this.

To compare the costs, including interest rates and potential origination fees, the Consumer Financial Protection Bureau advises receiving loan quotes for the same kind of mortgage from many lenders.

Discount points, which are costs the borrower pays up front to lower the interest rate, may be available for purchase from lenders. If you have the funds and intend to remain in the house for a long time, purchasing points may make sense.

6. Determine Your Down Payment

Determine how much of a down payment you can afford. You might require Private Mortgage Insurance (PMI) for a conventional loan if your down payment is less than 20%. PMI safeguards the lender in the event that you default on the loan. Since this will increase your monthly payment, account for it in your budget.

FHA loans only need 3.5% down payments while VA loans and USDA loans can be taken out without a down payment.

The good news? In the United States, the majority of mortgages do not require a 20% down payment. Depending on the local housing market, the range for first-time buyers is between 6 and 7%, according to current data from the National Association of Realtors (NAR).

7. Examine Programs for First-Time Home Buyer Assistance

Investigate first-time home buyer assistance programs available in your state. First-time home buyer programs are available in several states, as well as in certain cities and counties. These initiatives can provide tax credits, reduced interest rates, closing cost help, or down payment aid. For information on available resources, contact non-profits or the local housing authorities.

You might be eligible for a grant or forgiving loan that does not require repayment if you fulfill low- to moderate-income requirements.

8. Gather Personal Documents

Prepare the necessary list of documents for the mortgage loan process, as your lender will ask you for financial records to verify your income, assets and debt including:

Identification: A copy of your Social Security card and driver’s license from the state
Rental history: It contains the prior landlord’s contact details.
Details on self-employment or employment verification: (1) If you are employed, your lender will focus on your employment history and present, including length of service, and will probably check your responses with your employers. In addition, you can be questioned about the length of time you have been employed in your field. (2) Documents proving outstanding accounts receivable and a year-to-date profit and loss statement are required if you work for yourself.
Proof of income (pay stubs): 30 to 60 days’ worth, depending on the lender
Tax returns: W-2s and 1099s for the past 2 years. Whether you work for an employer or for yourself, most lenders will want to see steady income for a minimum of two years.
Bank statements: Bank statements for all your checking and savings accounts. Bank statements ensure that you aren’t borrowing money for your down payment.
Statements of all investment accounts: 401 (k)s, IRAs, CDs, and brokerage account statements (if available)
Statement of retirement accounts (if applicable): If you’re retired or living on passive income, you’ll still need to demonstrate that your income is reliable. Be ready to provide proof of retirement account balances, Social Security documentation and any paperwork related to annuities or pensions that you draw on for income. This includes any income generated by rental properties, capital gains and dividend stocks.
Down payment gift letters (if applicable): If money is being gifted to you, the person providing it will have to complete and sign a gift letter supplied by the lender.
Accumulated cash value from life insurance, if applicable
Alimony and child support, if applicable
Records of debt payments: These include payments such as credit card payments, student loans, personal loans, auto loans, medical bills or any real estate debt.
Documentation of other events that impact your finances, such as divorce, bankruptcy or foreclosure.

Having these documents ready will streamline the application process. You’ll need them for a mortgage pre-approval as well as when you apply for the loan.

9. Get Preapproved for a Mortgage

Getting pre-approved for a mortgage strengthens your offer when you find a home you want. Preapproval involves a lender reviewing your financial information and determining how much they’re willing to lend you. This process gives you a clear budget and shows sellers you’re a serious buyer.

A mortgage preapproval is a lender’s offer to loan you a certain amount under specific terms. Having a preapproval letter shows home sellers and real estate agents that you’re a serious buyer and can give you an edge over home shoppers who haven’t taken this step yet.

Because preapprovals are hard credit inquiries, minimize the hit by applying to all lenders within a short period, e.g., 30 to 45 days.

10. Choose a Real Estate Agent Carefully

Select a real estate agent who understands your needs and has experience in your desired area. A good agent will guide you through the buying process, help you find suitable properties, and negotiate with the seller on your behalf.

Ask your friends and colleagues for recommendations or visit a few real estate offices. Pro-tip is to get agent referrals from other recent home buyers. Interview at least a few agents and request references. When speaking with potential agents, ask about their experience helping first-time home buyers in your market and how they plan to help you find a home.

You may be asked to sign a buyer’s agency agreement. This states you agree to work exclusively with the agent for a set period. Most buyer’s agents are paid on commission from the house sale so you won’t pay anything upfront.

You might also ask how they find homes that aren’t yet on the market, which can be a handy skill when buyer competition is fierce.

11. Find the Right Property

Identify properties that meet your family’s requirements. Consider factors such as size, layout, and amenities.

Make a list of must-haves and nice-to-haves to help narrow your search. Your real estate agent, can show you a variety of homes based on your wishlist.

Keep the following key elements in mind when deciding on your ideal property:

An existing home generally costs less than buying a new construction home. But if local inventory is low and you have the means, a brand-new home offers enticing options to customize.
A condominium or townhome may be more affordable than a single-family home, but shared walls with neighbors will mean less privacy. Don’t forget to budget for homeowners association fees when shopping for condos and townhomes, or houses in planned or gated communities.
A manufactured home, commonly called a mobile home, can be an affordable option if you have a tight budget. You’ll need to title it as real property and affix it to a permanent foundation if you want to finance it with a traditional mortgage. Many manufactured homes are financed through chattel loans, which have higher interest rates than mortgages.
Fixer-uppers, or single-family homes in need of updates or repairs, usually sell for less per square foot than move-in-ready homes. However, you may need to budget extra for repairs and remodeling. Renovation mortgages finance both the home price and the cost of improvements in one loan.

12. Pay Attention to Location

The location of your first home is crucial. Research neighborhoods for safety, schools, amenities, and proximity to work. Choose one with amenities that are important to you.

A good location can enhance your quality of life and impact your home’s resale value. If you work away from home, test out the commute during rush hour.

13. Go Home Shopping

With the help of your real estate agent, who can show you a range of properties based on your wishlist, the exciting part of house hunting starts. Online postings are entertaining, but it is always preferable to see the house in person to see all the details and get a sense of the neighborhood and outdoor area.

14. Make an Offer to the Seller

In a hot real estate market where homes are receiving several bids, you might need to move quickly. Verify that you have completed your homework. To avoid overbidding or underbidding, ask your real estate agent for a comparative market analysis to find out what comparable houses in the neighborhood have sold for.

It is normal for sellers to make a counteroffer after your agent makes an offer on your behalf, so do not be shocked if they do.

It is time to provide the seller your earnest money when you sign a purchase agreement. Your willingness to purchase the house will be shown by this deposit. In most markets, budget between 1% and 3%; in competitive markets, budget up to 10%.

15. Get Your Mortgage

Once you have a purchase agreement, it’s time to get a mortgage. If you use the lender who preapproved you (it’s not required), it may speed up the paperwork process.

16. Purchase Homeowners Insurance

Before closing, secure homeowners insurance to protect your investment. This insurance covers damages to your home and liability for injuries that occur on your property. Shop around for the best rates and coverage options.

17. Conduct a Thorough Home Inspection

Once you find a property you like, hire a professional inspector to evaluate the home’s condition. An inspection can uncover hidden issues, such as structural problems or outdated systems, allowing you to make an informed decision.

Professional inspectors look for potential problems, so you can make an informed decision about buying the property. Keep in mind about these factors related to home inspection:

Standard inspections don’t test for things like radon, mold or pests. Understand what’s included in the inspection and ask your agent what other inspections you might need.
Make sure the inspectors can get to every part of the house, such as the roof and any crawl spaces.
The buyer doesn’t have to attend the inspection, but it could be useful to be there. By following the inspectors around you can get a better understanding of the home and ask questions on the spot.
If you can’t attend the inspections, review the reports carefully and ask about anything that’s unclear.

18. Conduct a Home Appraisal

A home appraisal is an unbiased opinion of the home’s value by a professional appraiser. The appraiser uses a checklist to evaluate the home and create a report with detailed information about the house, including amenities, size, condition of the interior and exterior, and a floor plan.

Before finalizing your purchase, a home appraisal is necessary to determine the property’s market value. Lenders require this to ensure they’re not lending more than the home is worth. If the appraisal comes in lower than the purchase price, you may need to renegotiate with the seller.

The report will also contain information on the sale of similar properties and current market trends. An appraisal can also help when you negotiate with the seller if the home’s appraisal value is lower than expected.

19. Negotiate with the Seller

Once you have the inspection and appraisal results, negotiate with the seller. You can request repairs, a lower price, or closing cost assistance. Effective negotiation can save you money and ensure you’re making a sound investment.

20. Finalize the Deal

Review all documents and ensure everything is in order before closing. This includes the purchase agreement, loan documents, and any disclosures. Make sure you understand all terms and conditions.

At closing, you’ll sign the mortgage documents and other paperwork. This step finalizes your loan and officially transfers ownership of the property. Be prepared to provide a cashier’s check or wire transfer for closing costs.

21. Moving In and Beyond

Congratulations! You’re now a homeowner. Plan your move, set up utilities, and change your address. Take time to settle in and make your new house a home. Remember to maintain your property and stay on top of mortgage payments to protect your investment.

Summary

Buying your first home is a significant achievement that requires careful planning and consideration. By following this 21-step guide, you can navigate the process with confidence, ensuring you make informed decisions every step of the way.

Frequently Asked Questions

1. How much should I save for a down payment?

Aim for at least 20% of the home’s purchase price to avoid PMI, but many loans allow for lower down payments.

2. What is PMI, and when do I need it?

PMI is insurance that protects the lender if you default on your loan. It’s typically required if your down payment is less than 20%.

3. How long does the home-buying process take?

The process can take anywhere from a few weeks to several months, depending on various factors, including market conditions and financing.

4. Can I buy a home with bad credit?

Yes, but your options may be limited. Government-backed loans like FHA loans may be available to those with lower credit scores.

5. What should I look for in a real estate agent?

Look for experience, local market knowledge, good communication skills, and positive reviews from past clients.

By following these steps and seeking professional guidance, you can confidently embark on your journey to homeownership.