First-Time Homebuyer’s Guide

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Buying your first home is exciting, but it can also be scary. After all, with the median home price well over $300,000, it’s a big financial commitment.

With more than 1 million people buying their first home each year, plenty of people obviously decide the commitment is worthwhile. And as for the scary parts, preparation goes a long way. Homing in on what you want and really need in a house will make each step of the process much easier as well.

You shouldn’t make the decision to become a homeowner lightly. Take the time to prepare and educate yourself. 

This is the single biggest purchase you’re going to make in your life, says Ilyce Glink, real estate author and CEO of Best Money Moves, a financial coaching and advice site. You should take your time with the process, she says: “Why are you trying to rush a purchase that might cost you a quarter of a million dollars, plus another $100,000 in interest on top of it?”

To help you navigate your first home purchase, we’ve gathered the best advice and boiled it down to these simple steps.

Taking Advantage of Being a First-Time Homebuyer

Being a first-time homebuyer has its difficulties: saving enough money for a down payment, making sure your credit score and finances are up to par, and of course, navigating the complicated housing market, which is currently more competitive than ever

But there are certain advantages to being a first-time homebuyer as well. You may qualify for assistance with your down payment or closing costs, which can greatly reduce the amount of cash you need to set aside for the purchase. And most of these programs classify a first-time buyer as someone who hasn’t owned a home in the previous three years. Some, like the HomePath ReadyBuyer Program, are federal programs, while many others are run by individual states. It’s always worth checking out what’s available in your local area. If you work in a certain career field, you may also be eligible for profession-based assistance programs like Good Neighbor Next Door, Nurse Next Door, and Teacher Next Door.

Make Sure You Are Ready to Buy

Buying a house is a major financial decision and a long-term commitment. Before you start shopping for a new home, be sure you’re ready for the responsibilities that come with being an homeowner and the costs associated with buying and owning a house.

Here are three questions you can ask yourself to help you determine whether you’re ready to buy a house:

1. Can I afford it?

The first thing to do when buying a home is to figure out how much house you can afford. But your income isn’t the only number you should be looking at; your existing debts also matter. Experts recommend the 28/36 rule: your mortgage payment shouldn’t take up more than 28% of your monthly pre-tax income, and 36% of your total debt. 

Another thing to take into consideration is the down payment. For most people, it takes a while to accumulate the down payment money, says personal finance expert and author Eric Tyson. To get access to the best terms, you’ll want to put down 20% of the purchase price, he says. That’s in addition to saving up funds for closing costs, moving expenses, and, ideally, having an emergency fund to cover a job loss or expensive home repair. 

It’s possible to purchase a home with a smaller down payment, as little as 3% down with conventional loans, and you can finance 100% of the purchase price with certain government-backed loans. But the less you put down at the beginning, the more you will pay in interest over the life of the mortgage, and may also subject you to mortgage insurance requirements

2. Will I stay in my new house long enough to recoup the upfront costs?

Beyond the purchase price of a home, you’ll also typically have to pay closing costs. These costs, which include things like the taxes, lender fees, and appraisal and inspection costs, typically run about 3%-6% of the home purchase price. All in all, you can expect to pay a few thousand dollars in addition to the down payment. 

If you plan to sell the house and move soon after you buy your house, you won’t get any of that money back. Because of this, it’s generally only a good idea to purchase a home if you’re planning to stay there for at least a few years. If you plan to move around or travel frequently, or if you’re uncertain about your future plans, you may be better off renting for the time being. 

On a related note, if you’re uncertain about your finances or future income, you might be better off waiting to buy a home. The last thing anyone wants is to lose their new home to foreclosure because they couldn’t make the monthly payments.

3. Is my credit good enough to get a loan with low rates?

With the current low interest rates, now might seem like the perfect time to buy a house. But keep in mind that just because national interest rates are low, that doesn’t mean everyone will be able to get the advertised rates — or even qualify for a loan in the first place. 

Your credit score, loan-to-value ratio, and debt-to-income ratio can all affect whether a lender approves you for a loan, and what rates they offer you. If you have poor credit, it’s critical to improve your credit score. If you have problems with your credit report, you’re probably not going to be able to fix those quickly. It can take months or even a year or two, Tyson says. 

You should check your credit report for accuracy and dispute any errors you find. But at the end of the day, the best way to build your credit is to pay off debts and consistently pay your bills on time. A high credit score is important because it will get you a better mortgage rate, and make it easier to qualify for a mortgage. And paying off debt has the added benefit of reducing your debt-to-income ratio, which makes you a more attractive borrower.

Navigating the Buying Process

Buyers should start off the homebuying process by determining what they want, what they can afford, and when they want to move, Glink says. 

You don’t have to become a real estate expert to get the right deal on your future home. But the more you learn ahead of time, the better off you’ll be.Understanding the basics of what a real estate agent does, and how a mortgage works, will help you know what questions to ask prospective agents and lenders. 

Here are six basic steps to help you navigate the buying process, from finding a lender to closing the deal: 

1. Find the Right Lender and Mortgage

The financing you choose for your home purchase will have a big impact on your monthly budget for years to come. So it’s important to get it right.

Finding the right loan and lender can be like shopping for new clothes at the mall: lots of choices, but only some will actually fit you. So it’s important to find someone you trust and who has your best interest in mind. 

“Looking at third-party reviews is very important, [but] you want to look at the third-party review for the originator (individual loan officer), not just the company,” says Jennifer Beeston, a branch manager and SVP of mortgage lender for Guaranteed Rate. The company may have high ratings, but your loan is only as good as the person you’re working with, she said. If the loan officer doesn’t know their guidelines, you could suffer.

Shop around for the best overall deal on a mortgage, and focus on a handful of lenders you’ve connected with. “It’s very hard for consumers to effectively rate shop,” Beeston says. 

When searching online, read the fine print because a low advertised rate may come with higher up-front fees in the form of discount, or mortgage, points. It’s not as simple as looking at the average rate for a 30-year loan, noted Beeston. There are a lot of factors at play, like your credit score, loan to value, and the lender’s profit margins. 

The bottom line is look at the total cost of the loan – including all fees – not just the interest rate.

2. Get Pre-Approved

Getting pre-approved for a mortgage will show you how much money a lender is willing to loan you. More importantly, it signals to a seller that you are a qualified buyer. Many sellers won’t even consider offers without a pre-approval letter.

To get a pre-approval letter from a lender you’ll need to verify your income, debt, and credit score. Being pre-approved is an important first step in the loan process.

Also, be sure to get a pre-approval, not a pre-qualification. Sometimes the terms are used interchangeably, but there is a difference. A pre-qualification is only an estimate of what you can borrow based on the information you provide. A pre-approval, while not as thorough as a full mortgage application, requires the lender to review actual documentation of your finances.

Pro Tip

When choosing a real estate agent, ask them for an activity list that shows all the properties they have helped others buy or sell. This can help you assess whether they have the right experience to help you find what you’re looking for.

3. Find a Real Estate Agent

Having the right real estate agent on your side gives you a headstart on the learning curve that comes with buying your first home. 

You should work with an agent who’s an expert in the area where you want to buy and who has familiarity with homes in your price range. If you’re a typical first-time buyer, it doesn’t do you any good to work with an agent who sells million-dollar-plus properties, says Glink. When you work with someone who’s out of sync with where you are, they’re not as up to date on the market as it pertains to your search, she says.

To get an idea of the real estate agent’s focus, Tyson recommends asking prospective agents for what is known as an “activity list.” This list includes all the properties the agent has helped others buy or sell, giving you a good idea of the agent’s specialty.

You can also ask family and friends who are homeowners for the names of the real estate agents they’ve worked with, assuming they liked their experiences. Once you have a few agents you’re interested in, take a look at online reviews and interview two or three. Talking about what you’re looking for in a new home, along with your homebuying budget, will help you find an agent you feel good about.

4. Start Your Home Search and Make an Offer

You’ve got everything lined up, and now it’s time for the fun part: house hunting. Your real estate agent will line up showings for you, but you should have an idea of what you want beforehand. Make a wish list and prioritize it, Glink says. Then prepare a list of things you absolutely can’t live without. Going over this list with your agent will help you assess different properties. 

Once you’ve narrowed down your choices to “the one,” it’s time to make an offer. This is where you should really lean on a real estate agent. Keep in mind that the number of homes for sale has gone steadily down in recent months, compared to where the market was a year prior. This means the competition among buyers is heating up and more homes are likely to receive multiple offers. So while you’ll want your offer to be affordable to you, it will also need to be competitive. Because we’re in a seller’s market, buyers might have to change their expectations and be more open to compromise when negotiating, Glink says. 

5. Begin the Closing Process

When a seller accepts your offer, the closing process begins. This is when the lender will complete the underwriting process for your loan, which includes verifying your employment and overall financial health, as well as getting the property appraised. 

It’s important to avoid taking out new lines of credit, changing jobs, or making unusually large deposits or withdrawals during this time. Your mortgage is based on your current financial circumstances, so making big changes during underwriting requires the lender to adjust based on new information about you. This can result in a delayed closing, or worse, changing your interest rate or ability to get a loan that makes sense for you. 

Other than the down payment, closing costs will be your biggest out-of-pocket expense, amounting to 3%-6% of the purchase price. This is where comparing offers from lenders will pay off. While some fees aren’t negotiable, many are. For example, you may be able to shop around for better title or attorney fees.

There are also other upfront costs you can reduce with a little planning, like prepaid interest. You can control this cost to some extent. For example, if you close on the last day of the month you’re only going to owe one day of interest up front, says Glink. But if you close on the first day of the month, then you’ll owe a whole month’s worth of interest up front.

6. Complete the Final Walk-through and Close on the Home

At long last, it’s time to finalize the deal and get the keys to your new home. Closing is when the buyer and seller sign all the necessary paperwork and the money changes hands. The specifics of what needs to be done at the final closing, and who handles each step, varies by state. 

Before you sign the dotted line, you should complete a final walk-through with your agent. This should be done as close to the final closing as possible, often the same morning. During the final walk-through, make sure everything is there that’s supposed to be there and there is no damage to the property, says Tyson. He emphasized this is especially important if the property was vacant beforehand. If appliances are missing or something needs repaired, you want the seller to take care of it before you take ownership of the home.