Steps To Buying A First Home
You might feel like you’re in the center of a road that leads six different ways when you’re a first-time homebuyer. What do you do first? Call a Realtor? Visit the bank? Save for a down payment?
Sign up for homeowner’s insurance? We’re here to rescue you. Here’s a checklist that can help you iron down the eight steps you need to take. By following these tips for buying your first home, you’ll be in your first property in no time.
Step 1: Dive Into Your Finances: How Much Can You Afford?
Take a look at your current financial situation. How much do you have saved up for a down payment? How much can you afford to pay toward your mortgage each month?
Calculate how much it’ll cost you over time to pay off a home with interest — there are lots of amortization schedules out there that can use various home costs and different interest rates.
A lender will only approve you for an amount you can successfully pay each month — but keep in mind that you don’t have to take the full loan amount from a lender. Only you know how much a mortgage will chip away at your finances. However, a lender can give you a much better idea of how much house you can afford.
The first step is to dive into your finances. Put pen to paper and figure out how much — to the penny — you’ll be able to spend on your mortgage. Your lender will compute a few other, more technical things, like your debt-to-income (DTI) ratio. Simply put, this is the amount of debt you have compared to how much income you have coming in. Most lenders approve any debt-to-income ratio under 50 percent.
Your lender will also be looking at a few other things, such as your credit score, your employment history (get ready to pony up your W-2s) and other assets — your lender wants to make sure you’ll:
Be able to pay back a mortgage.
Have other money lying around to help pay for your mortgage if you lose your job.
Make sure you have a solid grasp on the mortgage terminology the lender will be using. Confusion is one of the worst financial aspects of buying your first property.
Step 2: Look For A Real Estate Agent
Most of us aren’t real estate experts. In other words, you probably aren’t clear on how much a home is really worth. You might not know for sure about the other things you should be on the lookout for (like a shifting foundation or black mold!). Next on your checklist should be a no-brainer — find an excellent buyer’s real estate agent.
You’re under no legal obligation to hire a real estate agent, but an experienced individual can be a lifesaver during the entire process. A real estate agent will help you:
Stay within your budget.
Compose an offer letter.
Seal the deal at closing.
Real estate agents have your best interest at heart — not the sellers. A real estate agent will also be able to offer some emotional distance from the home-buying process. In other words, it could be possible for you to get too attached to a home, ignore the fact that it’s got a termite infestation and offer way too much money for it.
A real estate agent won’t let that happen to you. Not to mention, you’re too busy to spend all your time house-hunting. Let your real estate agent do all the hard work for you so you can spend your time leisurely touring homes on your lunch hour or after work.
Step 3: Shop Around For A Mortgage Lender And Get Pre-Approved
Okay, so you’ve found your real estate agent, and you’ve taken a look at your finances, now what? Well, now it’s time to get pre-approved for a mortgage.
Getting preapproved for a mortgage gives you a realistic estimation as to how much house you can afford. Note that it’s different than a prequalification, which is a much “softer” look at your qualifications.
For instance, a pre-approval means that a lender usually verifies your information using financial documents, and prequalification only means that you provide verbal information about your income and assets.
In other words, a pre-approval is better, and it also lets your agent and the future seller know that there won’t be any hiccups — you really can afford the home you’re after.
You’ll also need to consider whether to choose a big bank or non-bank lender. There will undoubtedly be pros and cons worth considering.
Step 4: Time To Hunt For Your Dream Home
Now for the fun part! You should have a pre-approval, and maybe your agent has pinpointed a few houses on the market.
Start your search online by using an online real estate database such as Zillow to get an idea of what’s out there. You can also start by driving through neighborhoods you can envision yourself living — be on the lookout for “for sale” signs.
While house hunting, it’s essential to keep a few items in mind:
Location – do you want a home in the city or the suburbs?
Features of the house
Water damage and mold
Structural and foundation damage
Has your real estate agent worked their charm and helped you find the perfect fit? Great!
Step 5: Make An Offer On A Property
Your perfect home is in a great location with an excellent school district, and the property taxes are not overly pricey. The next step is to make an offer.
At this point, you’ll follow your real estate agent’s guidance. He or she will use data of previous sales and other local property values to help you make the best offer. At this time, your real estate agent will craft an offer letter and send it to the seller.
Tell your agent exactly what you want in the offer letter. This can include any repairs you may want to have done or any appliances you wish to have left in the home. A word of warning: This could hike up the price.
Step 6: Inspection And Appraisal
Congratulations! Your offer went through, and now it’s time to do the home inspection and the appraisal. Contrary to popular belief, these are not the same thing. Buyers should have a complete understanding of these two purchase milestones.
The inspection is an in-depth look at your home. You might think you’ve found the perfect house, but sometimes, things pop up during the inspection — and some can even be deal-breakers. For example, let’s say your inspector looked at the plumbing in the house and found that it’s backed up. Bad plumbing could cost $300 to fix or $30,000 — you decide if that’s a risk you’re willing to take.
Appraisals are a less in-depth look at a property. An appraiser’s job is to give you an overall estimate of what your property is worth. Most mortgage lenders require an appraisal, so they know they aren’t lending you more money than your home is worth.
Step 7: Closing Time
Have you made it this far? Pat yourself on the back — it’s finally time to put the finishing touches on the deal. Closing on your new home includes signing all of the necessary paperwork on your mortgage, transferring your down payment, and taking ownership of your new property.
Your agent will walk you through everything that you’re signing.
Step 8: Move And Decorate
The complicated process of buying a home is now complete, but you might not think you’ve hit the final stride. What about moving and decorating your home? By this time, you should have a move-in date and some basic decorating ideas. This is the enjoyable part — you now own your first home and you can decorate it however you want.
Need ideas? Some furniture companies even offer professional help. Check out Pottery Barn’s Design and Decorate for inspiration.
Buying your first home is a significant financial commitment. It makes sense to do plenty of homework and due diligence before proceeding. Above all else, make sure your financial house is in order before taking the necessary steps to buy a home.
About the author: The above article on buying a first home was written by Benny Emerling. Benny is a personal finance expert who specializes in content related to investing, real estate, and long-term financial planning. He is currently a writer for Benzinga.