How to buy a first home: a step-by-step guide
Buying your first home is a big step—and can be super exciting. Before you start arranging furniture in your mind, use this guide to better understand the home buying process for first time buyers. Breaking the home buying process into smaller steps may make it easier to get started.
Step 1: Know your scores
The first step of any home buying process is to know your credit scores. Your credit score is calculated based on your payment history, amount of credit, amount owed, length of credit, and other factors. The score is meant to reflect your creditworthiness, or likelihood that you will pay your debts.
Credit scores can range from 300 to 850, and scoring systems are different across the three different reporting bureaus. Typically, you will need a score of 620 or higher to be considered for a conventional mortgage, but there are other options.
Federal Housing Administration (FHA) loans are available and may require lower down payments and accept buyers with lower credit scores. FHA loans only require a credit score of 580 or higher.
If your credit score is particularly low, you may want to try to improve your credit before beginning your housing search—by paying off debt and avoiding getting new credit cards.
Step 2: Determine budget
After understanding your credit score, you need to determine a budget before house shopping. Gather your W-2s, bank statements, and monthly bills to determine exactly how much you have to spend each month on housing.
You should consider taking a closer look at your finances and select a housing budget that is manageable for the long-term. There are online calculators available from most lenders and banks to help you easily determine your budget.
Step 3: Research financing options
Different types of mortgages have different eligibility requirements and will require different down payments.
Conventional mortgages are the most common type of loan. They are not guaranteed by a government agency. Down payments required will vary widely. The traditional, standard down payment was 20 percent. However, there are now fixed-rate conventional loans that allow down payments as low as 3 percent or 5 percent. Selecting a lower down payment may mean that you have to pay private mortgage insurance, a fee that will be added to your monthly payments.
FHA (Federal Housing Administration) Loans are often ideal for first-time homebuyers. The loans are issued by private lenders and insured by the federal government. Individuals with lower credit scores may qualify for FHA loans. These loans typically require a down payment as low as 3.5 percent.
Loans from the U.S. Department of Agriculture (USDA) are available for qualified buyers in suburban and rural areas. These loans may require no down payment.
Veteran’s Affairs (VA) loans are offered by the Department of Veterans Affairs and are only available to current military members and veterans. VA loans also usually require no down payment.
After understanding the mortgage options available to you, you should also think about the mortgage term that may appeal to you. The most popular type of loan is the traditional 30-year, fixed-rate mortgage. This means that the interest rate remains the same and you pay the home off over the course of 30 years. The other typical option is a 15-year loan, which may offer a lower interest rate but a higher monthly payment.
Step 4: Get pre-approved for a mortgage
A preapproval is a letter from a mortgage lender specifying exactly how much you can afford to spend on your first home. You may want to get this letter before looking at properties, so you have an exact budget. This may help you and your real estate agent target your search. It also may make your potential offers stronger, as the preapproval shows the seller that you have the money to purchase the home and are motivated to buy.
Step 5: Find a real estate agent
Ask friends, co-workers, and family members for recommendations for a real estate agent. You may want to look for someone who specializes in the area you are shopping for a house. You also may want to interview a few agents and request references before making a final decision. Ask potential agents about their experience working with first-time buyers in your market.
Step 6: Make a wish list and give it a reality check
It is important to know what you want when searching for a first home, but you also should be realistic about the available homes in your budget. Your first home may not be your dream home, but it will undoubtedly be a step in that direction.
Make a wish list of the things that are most important to you in a property. First, you may want to consider your commute time to work. Then start considering other questions:
- Do you want a single-family home or a condo?
- How much space do you want?
- Where do you want to live (list specific neighborhoods or school districts)?
- Do you want a house that is move-in ready or are you willing to take on some home improvement projects?
Step 7: Search and tour homes
Now that you have a budget and a solid wish list, it is time to start touring homes. Your real estate agent will help you sort through homes that are worth visiting. You may want to see quite a few places in person, so it is easy to make comparisons. Visiting homes will help you familiarize yourself with the options in your particular market. When walking through homes, be sure to look closely at the lighting, flooring, and built-in elements.
Step 8: Prepare for a down payment and other expenses
As you get closer to finding your first home, you may want to get prepared to pay a down payment on your home. The amount of your down payment will depend on the price of your home and the type of loan you selected.
In addition to down payments, homeowners may also need to factor in closing costs and moving expenses. Closing costs may include homeowner’s insurance, escrow fees, property taxes, and other expenses. All of these costs will be laid out for you prior to the closing. First time home buyers may be able to get grants or loans from the government to help with closing costs.
Step 9: Select your home
Once you have found a home you want, your real estate agent will help you place an offer on the property. If your offer is accepted by the seller, then you have just purchased your first home.
It is important to keep in mind that it is not unusual in competitive markets to lose out on several homes before your offer on a home is accepted. Many sellers review multiple offers (some over asking price) before selecting a buyer.
Step 10: Arrange for a home inspection and appraisal
It is important to have your future home inspected by an independent inspector who is qualified to look at both the structure and the systems of the house, including the electrical wiring and the HVAC system. You may also want to have your home independently appraised to ensure that the value matches the sales price. Your real estate agent may be able to help you with arranging for these professionals.
Step 11: Closing
The final—and often most exciting—step in the home buying process is closing. Closing happens when you have reached an agreement with the seller for the purchase of a home. During closing you will be asked to sign a variety of documents, as will the seller. Closing generally occurs about a month or two after the sales and purchase contract is signed. Generally, all of the costs you will have to pay at closing will be clearly marked on your paperwork and will include down payments, prepayments, and closing costs. If you have any questions about costs, you should consult your real estate professional or attorney.
Step 12: Insure your purchase
You found your first home. The next step is to make sure the home and all of its contents are protected.
Homeowners insurance is available for all types of homes—from condos to single-family homes. This type of insurance covers the cost to repair or replace your home and belongings if they are damaged by an incident covered in the policy. Policies may cover natural disasters, theft, or vandalism.
If you are obtaining a loan, your lender will typically require you to buy homeowners insurance before closing the deal. You may want to get a policy that has a limit high enough to cover the cost of rebuilding your home.
Welcome home
Congratulations. When you complete these steps, the home buying process should be complete. Now comes the fun part: enjoying your new home with family and friends.
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