Buying your first home is an exciting step. It will mark an important milestone in your life. But it also takes a lot of work, organization, and preparation (not to mention, money) to lock in the right home.
Indeed, if you are preparing to buy your first home, you’re probably beginning to realize just how complicated this process can be. From getting your pre-approval to making your big down payment, there are numerous steps that go into buying a home. We do our best to break these steps down so you know exactly what’s coming on the road ahead.
One great way to prepare for eventual homeownership is to arm yourself with the right tools. Get started with a look at The Best Financial Calculators For Homeowners Including Mortgage, Refinance, Affordability, and More.
1. Check Your Credit Score
The very first step toward home buying is making sure you actually have the credit score to qualify for a mortgage loan. And of course, beyond meeting the basic threshold for receiving a loan, the strength of your credit score will have a determinant effect on the terms of your loan.
Redfin says that “credit score of 620 is the minimum credit score for a conventional loan, although some lenders look for a score of 700 for new homebuyers. It is important to keep in mind that when buying a house with a low credit score, the higher your interest rate is likely to be. With a higher credit score, you’ll likely qualify for a lower interest rate.”
If your credit score is lower than anticipated, you may consider delaying your home buying process to focus on credit score improvement. There are numerous steps you can take, including credit monitoring and debt consolidation, to help raise your credit score. Ultimately, the better your credit score, the more money you’ll save over the lifetime of your mortgage. If you have the flexibility, delay your home buying process and get that credit score up.
[Need a little help moving that credit score up? Check out our list of the best Credit Cards for Improving Credit Scores.]
2. Get Your Pre-approval
If you do have a favorable credit score, the time is right to get all of your ducks in a row. That’s what the loan pre-approval process is for. Your pre-approval is what ultimately tells lenders that you are financially fit to receive a loan. Assuming that you are,the process will also indicate roughly the size of the loan you are likely to receive.
Redfin says “Getting pre-approved initiates the mortgage process with a lender and tells you how much you can borrow. It also allows you to move faster when you’re ready to make an offer. It is important to get quotes from multiple lenders, rather than choosing the first mortgage lender you come across or even your current bank. Different lenders offer different mortgage options and rates, so research is key in finding the best rate for your homebuying goals.”
Shop around a bit as you seek your pre-approval. Once you’ve landed on the best rate for your situation, you’ll be in prime position to make an offer on any house in your price range. Once that’s out of the way, you can focus on your shopping preparations.
3. Figure Out What You Can Afford
Those preparations should begin with an accurate appraisal of how much house you can afford. While you may be pre-approved up to a certain amount, it doesn’t mean that the top house in that range is within your budget. You’ll need to do a handful of calculations first.
Fortunately, most online mortgage sites offer access to free home affordability calculators. Here, you’ll enter in figures including your income, debts, the cost of a home, your pre-approved interest rate, and a rough estimate of your likely property taxes in order to determine both the size of your down payment and your monthly mortgage payment.
Nerdwallet notes that while “20% down payments used to be the norm, many homeowners opt to put down less. A smaller down payment requires less money upfront, but means you’ll have to pay mortgage insurance. The type of home loan you use also impacts the minimum down payment required.”
Ultimately, you’ll find that there are several different ways to structure a home loan. For instance, if you qualify for an FHA loan, you may be able to secure a mortgage with as little as 3.5% down (and with a credit score as low as 500). Bear in mind that your lower credit score and lower down payment will ultimately result in higher monthly payments.
Before you decide how much you’re willing to spend on your new home, plug a few different numbers into your home affordability calculator and consider your options.
4. Make Your Wishlist
Now that you know what you can afford, it’s time to consider what you’re looking for. What features must you have in your home? This is where you pin down your top priorities. Are you looking for a detached home, a condominium, a townhouse, or an apartment unit? Are you living alone, with a partner, or with a full family?
Do you see yourself in a suburban neighborhood, a big city, or a rural area? Are you looking to move somewhere close by or are you open to a major change of scenery?
And what about the features of the home itself? Are you looking for an open floor plan or a traditionally sectioned home? From the outdoor space to the interior storage, from the number of bedrooms to the overall square footage, consider everything you’re looking for in the perfect home.
You’ll also want to determine how much time, money and work you’re actually willing to put into your new home once you buy it. Are you looking for a fixer-upper, something that’s move-in ready, or a perfectly livable home with the potential for numerous upgrade projects?
Do some research on the neighborhoods you might be considering. Learn about the property taxes, the quality of your school district, the walkability of the neighborhood, crime and safety factors, and whether you’ll be required to take on any homeowner association fees. Not only will these factors help you determine the right house for your needs, but you’ll also get a clearer sense of the peripheral costs of owning a particular type of home in a particular area.
With all of that said, you must also remain flexible. Your wishlist may describe the perfect home, but that home may not actually exist. Be willing to make compromises. When it comes to finding the perfect home, it’s really about finding balance between what you want and what you need.
5. Find a Real Estate Agent
Now that you’ve taken some of the preliminary steps on your own, it’s time to enlist some professional assistance. Find a real estate agent in your area (or the area where you’re house hunting) and lay out your wishlist.
According to QuickenLoans, “Your real estate agent will represent you throughout the home buying process to ensure you find the right home, ask the important questions, make an appropriate offer, have the power to negotiate and receive the necessary disclosures. But perhaps even more important is having a real estate expert in your corner can provide some invaluable peace of mind.”
If you’re not sure where to start, consider crowdsourcing friends, family, and co-workers. The odds are good that somebody you know can recommend a real estate agent. Otherwise, you could consider jumping online and locating a Verified Partner Agent through a service like Rocket Homes. Just be sure that the agent you hook up with truly understands your vision before you start looking at homes.
6. Start Shopping!
Now comes the fun part! You’re actually ready to start walking through homes. If you’ve enlisted the help of a real estate agent, you can start scheduling walkthroughs in bunches. Most agents will schedule several walkthroughs in succession so that you can see a few houses on a free day. But you’ll also want to keep a lookout for open house events, for-sale signs in your neighborhood, and houses that catch your eye online. Sites like Zillow and Redfin are constantly adding new properties.
Think of your real estate agent as a teammate. Both you and your agent may bring prospective houses into the mix so don’t be afraid to do a little independent browsing. However, Quicken Loans says that “As you browse, keep your priorities in mind. Remember it’s highly unlikely any listing will perfectly match your dream home, so try not to be too picky until you see the houses in person.”
Be open minded about prospective homes as you search online and consider the options presented by your real estate agent.
7. Make an Offer
You’ve seen enough houses to make an informed decision and you’re pretty sure you just found your dream home. It’s now time to make an offer. But this is something you need to do strategically. There’s a lot more to consider than just your personal budget and the list price of the home. Indeed, if you really want this home, you’ll need to make an offer that is sensitive to market conditions as well.
This is where your real estate agent can be particularly valuable. According to Quicken Loans, “Ask your real estate agent to run a comparative market analysis to determine a fair price based on recent sales of similar homes in the area. The less interest there is – and the longer the house has been on the market – the more power you’ll have to negotiate.”
This may be the first step in a negotiation process. Place your first offer with this in mind. Consider the relative interest in the home you desire and make sure you have a full understanding of market conditions before sizing up an offer. Then be prepared to volley numbers with the seller. Know in advance how high you’re willing to go, and know when to walk away. If you can’t settle on a price that’s right for you, it’s probably not the right house.
8. Get An Inspection
Once you’ve made an offer and it has been accepted, you’re ready to get your prospective home inspected. This is an absolutely critical step. You need to be sure that the home is as advertised. Make sure there are no major maintenance issues lurking under the floorboards or behind the walls.
Redfin says “You’ll want to hire a professional home inspector to conduct a thorough inspection of the home’s condition.They will test the operational status of all major systems – plumbing, electrical, heating, and cooling – and check the roof, the foundation, and the home’s exterior. If the inspection report indicates any major issues with the home, you can try to negotiate repairs or a lower price with the seller.”
Depending on whether or not repairs are then required, you may also want to do a final walkthrough of the home before your closing day. Make sure that all repairs have been completed as required and that there are no unexpected surprises awaiting you in your new home.
9. Get An Appraisal
The home appraisal is a mandatory step, one that provides your lender with a sense of the home’s true value. The goal behind the home appraisal is to ascertain whether or not your offer is in line with the correct market value.
Rocket Mortgage says that “A home appraisal is a review that gives the current value of the property you want to buy. You must get an appraisal before you buy a home with a mortgage loan. Lenders require appraisals because they can’t lend out more money than a home is worth. If the appraised value comes back lower than your offer, you might have trouble getting financing. Be thoughtful about your offer and consider contesting the results of the appraisal if you believe the appraised value is too low.”
Of course, you have no guarantee that contesting these results will change the outcome. But if you have had the support of a real estate agent in negotiating the final offer on the house, the appraisal should merely be a formality.
[If you’re facing credit challenges, start with a look at our tips on how to improve your credit scores.]
10. Close On Your New Home!
This is the big day. By the end of this step, you will be a homeowner. To make sure that everything goes accordingly, you’ll need to be sure that you’ve provided every requested document up until this point. You’ll also need to bring a number of documents with you to this meeting including a photo identification, a copy of your Closing Disclosure, and accepted proof of funds to meet your closing cost requirements.
From here, Rocket Mortgage notes that “Your lender is required to give you your Closing Disclosure, which tells you what you need to pay at closing and summarizes your loan details, 3 business days before closing. Read through your Closing Disclosure and make sure the numbers don’t vary too much from your Loan Estimate, which you would have received no more than 3 business days after your initial application.”
This is also the day that you’ll be making that big payment, so be sure that you have the required method of payment at your disposal. If everything goes according to plan, you will depart this meeting with the keys to your new home!
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Of course, the expenses don’t end once you own your home. Indeed, that’s when the real expenses can start to pile up. Make sure you’re prepared for everything up ahead by familiarizing yourself with The Real Costs of Owning a Home.