As someone who has never bought a home before (but dreams of doing so one day soon!), you probably already know you’ll need a down payment, and to talk with a loan officer and real estate agent at some point. But you have more questions: “When does the inspection happen? What’s the deal with earnest money? How do I know which type of home loan to choose?”
For new buyers, the process of buying a home can be completely overwhelming. We know there are a lot of steps involved in buying your first house. We’ve counted 17 of them and broken them all down so you can know exactly what to expect and when to expect it. Let’s go through the steps that will take you from renter to homeowner, unlocking your own front door.
Step 1: Assess your readiness
It’s easy to get swept away by the romance of homeownership, but first thing’s first: Is it the right time for you to make one of the biggest purchases in your life? We typically think of homeownership as preferable to renting. And in many cases, it is the wiser financial choice. However, there are some instances when having a lease makes more sense than taking out a mortgage loan.
As you assess your readiness for homeownership, make sure you consider the decision with an eye toward the next four or so years. Why four? That’s typically the amount of time it takes to break even on your home purchase. If you have to sell your home before you break even, you’ll lose money. So, if you’re likely to move in the next few years for your career, family, a relationship, or just good old-fashioned wanderlust, it probably isn’t a good time to buy.
On the other hand, if you’re likely to stay put in your community and can see yourself staying in the same property for at least four years, this might be a great move for you. Your home should ideally meet your needs of today and potential future needs as well. For example, if you’re looking to start a family soon, you might want to consider properties with a bit more space than you’ll need at the moment.
Step 2: Research the market
The two biggest considerations for homebuyers are typically location and budget. If you haven’t yet nailed down the areas where you’d like to live, start there. The following factors can help you narrow down your list of target neighborhoods:
- Property taxes
- The type of home you’re looking for (single-family, townhome, condo, etc.)
As you zero in on areas with homes that meet most of the criteria on your list, take note of how much these homes recently sold for and how long they were on the market. You’ll want to take a look at the square footage and lot size of the home to get a sense of how much space you’ll be able to get at different price points.
If you already have a feel for your desired areas, your real estate agent can dive into providing you with listings in your target areas that meet your criteria.
Step 3: Check your credit report and repair what you can
Good credit is key to snagging a mortgage with good terms and a lower interest rate. Your credit score is used to determine which loans are available to you and the interest rate you can get.
There are many different types of home loans (more on that in step 8), and their availability is dependent on buyer income and credit score. Conventional loans are generally considered to have the most favorable terms and rates. You’ll need a score of 620 or above to be eligible for most conventional loans. A credit score of 740 or above is generally considered the sweet spot for locking in the best interest rates.
If your credit score isn’t where you want it to be, it’s advisable to repair it before going into the homebuying process. First, make sure your credit reports are accurate. If there are any inaccurate accounts, dispute it with the reporting credit bureau.
Your credit utilization ratio is also a key factor in your score; It compares your credit balance to the amount of revolving credit you can access. If you need to boost your score, work to pay your balances down to below 30%, paying down debts and maintaining these lower balances can seriously help improve your score quickly.
Lenders will also raise the credit score requirements when the loan environment is riskier, such as when there is a recession or the threat of a recession. We saw lenders raise the minimum credit score requirements in 2020 during the coronavirus pandemic, for example.
Step 4: Start saving up
Twenty percent is often cited as the target amount to put down on a home. This percentage can scare off some would-be homebuyers from even considering purchasing a home. According to the 2018 National Association of Realtors, the median down payment for first-time homebuyers in 2019 was 6%. Most homebuyers (even repeat buyers) don’t use a full 20% to purchase a house.
“You don’t necessarily need a tremendous amount of money to be a first-time homebuyer. I think a lot of first-time homebuyers don’t realize that,” confirms Russie Weidl, a top-selling agent in Sandford, Florida, who has sold 73% more properties than the average area agent.
Still, home purchasing costs add up fast. It’s a good idea to develop a step-by-step plan for saving the funds you need. Unless you’re getting a VA or USDA loan, you’ll need at least 3%, if not 3.5%, to put down on your home. A simple down payment calculator can help you get a better idea of how much you should have saved.
Just like with credit scores, when loan environments are riskier, lenders will also raise the down payment requirements. In 2020, some lenders raised their down payment requirements for conventional loans to 20% because of the coronavirus pandemic.
Step 5: Figure out how much you can afford
Now that your finances are in preliminary shape, it’s time to start looking at a budget and price range for a home for yourself! A good ballpark figure for determining how much house you can afford can be found by multiplying your total pretax income by three. This quick calculation should give you a general figure to start with, but talk to an agent and a mortgage broker to get a clearer idea.
To create a more informed budget, be sure to factor in existing debt, your savings, potential closing costs, student loan payments, child support, your current credit score, and so on. Instead of trying to calculate it yourself, plug in the numbers into this easy home affordability calculator. It’ll also give you a feel for monthly payments that are affordable, a stretch, or too aggressive for your financial situation.
Step 6: Find an agent
The right buyer’s agent will help guide you through the process, find the ideal home, negotiate your offer, and get you to the closing table. (Not sure you need an agent? Here are a few things to keep in mind before you navigate the homebuying process on your own.)
The best real estate agents have a constant pulse on the market and use that experience to help you secure the best price on your new home. To tailor your buyer’s agent search to your specific needs, give our free and unbiased matchmaking algorithm a spin.
Step 7: Research first-time buyer programs
Your city or state may offer first-time homebuyer programs or grants to help cover the cost of your down payment or closing costs. These programs range from buyer education classes targeted toward moderate-income residents to housing aid for educators and first responders. It’s worth it to explore all options available to you as a first-time buyer.
Step 8: Research your mortgage options
Whew, there are a lot of mortgage options out there. If trying to keep up with all the different options has your head spinning, start with a mortgage 101 breakdown first. We’ve mentioned conventional and government-backed loans (VA, FHA, USDA), but you’ll also want to consider term lengths and whether you prefer a fixed-rate or adjustable-rate loan.
Thirty years is the standard term rate, but you can also look at 15, 20, or 25. Many lenders will do custom term rates if you ask. A shorter-term rate can be beneficial if you want to reduce the amount of interest you pay over the life of the loan and can afford the higher monthly payment.
In most cases, you can pay ahead on your mortgage by submitting additional principal payments. Be sure to check with your lender to ensure there are no prepayment penalty fees.
The interest rate for fixed-rate mortgages does not change over the life of the loan. The only way your interest rate would change is through refinancing. Fixed-rate mortgages make it easy to budget and know exactly how much you owe.
With an adjustable-rate loan, the interest rate is variable. Your initial interest rate will be lower than that of the market rate for fixed-rate loans, but it will change over time. How often the interest rate changes is dependent on the loan’s adjustment frequency.
Step 9: Get preapproved for a mortgage
Getting preapproved for a mortgage is beneficial for you and the seller. First, it helps to confirm that you can afford what you think you can afford. (Always a good thing!) Second, sellers take offers from preapproved buyers more seriously. Remember: Sellers don’t want to have to deal with an offer falling through due to a lack of financing or funds. After a cash offer, an offer with a preapproval letter is the strongest there is.
Side note: Don’t confuse a prequalification letter with a preapproval. There’s a big difference between the two and the documentation required.
Step 10: Start shopping
Here comes the fun part you’ve been waiting for! House-shopping time. Going to house showings and open houses will become a part-time job for a bit, depending on how long it takes to find the one. To save time, have your agent set you up with a feed of available homes on the MLS that meet your criteria.
Step 11: Make an offer
Once you’ve found a house that meets your criteria and budget, it’s time to make an offer. If your offer is what the seller is looking for, it might be accepted right away. After that, you’ll be under contract. Or the seller may present counter-offers until you can land on agreeable terms.
Your agent will help you put together the most appealing offer possible. In some cases, you may want to include a personal letter alongside your offer to give yourself an edge over the competition. Keep in mind that a written offer is a legally binding document. Your personal letter is just the icing on the cake (and you should talk to your agent to make sure you’re not inadvertently violating any Fair Housing guidelines in your letter).
If you’re in a highly competitive market, multiple contingencies and tight closing dates can push your offer to the bottom of the pile. This doesn’t mean that you can’t ask for what you need, but you should be aware of the potential effect these requests may have on sellers.
Step 12: Deliver your earnest money
Your earnest money demonstrates your commitment to the purchase. It’s a type of security deposit and helps to protect the seller if the deal falls through. The amount varies but is typically somewhere between 1% and 3% of the price of the property. These funds are usually delivered via cashier’s check and will be held by a title or escrow company until the sale is final. There are standard contigeniences to help protect you as a buyer if things don’t go as planned.
Step 13: The inspection
As a buyer, this is your time to make sure the house is in a condition you’re willing to accept before finalizing the purchase. A good home inspection will also give you the information you need to make a decision to negotiate repairs for any issues or simply walk away.
The home inspection typically needs to take place 7 to 10 days after signing the contract. There are several different types of inspections you may want to schedule, so be sure to take a look at your options ahead of time.
Step 14: The appraisal
The appraisal process can take a few weeks if the appraisers in your area are busy. The actual examination of the property can last anywhere from under half an hour to a few hours.
For buyers, the key takeaway here is that you want the appraisal to come out as the same as or higher than your offer. You aren’t out of luck if the appraisal is lower than your offer, but there are additional hoops to jump through. Your options at that point are to negotiate with the seller, pay the difference, or walk away from the deal.
Step 15: Title search
The title search is all about making sure the seller has full rights to sell the house. The title company will look for any outstanding taxes, liens, or ownership issues with the property. This search has to take place before the final transaction can occur.
Your title company will also issue title insurance to protect your lender against any future claims to ownership of the property. However, this policy protects your mortgage lender’s financial interests in the property, not your own. To be safe, you may want to purchase an owner’s policy, which will cover your interest in the property for as long as you have ownership.
Step 16: Final walkthrough
Now it’s time to walk through the house one last time with your agent to make sure everything is okay.
- The house is clean and clear of any items you haven’t agreed to keep.
- The lights, HVAC, toilets, and sinks are in working order.
- Any agreed-upon repairs are complete and effective.
- Check all repair receipts.
Step 17: Closing
Closing time! It’s time to take your new home… well, home!
During this final step, the ownership is transferred from the seller to you as the buyer, and you officially take out the mortgage loan, both of which involve signing a ton of paperwork. There are a number of people who may be present at your closing; Here’s a breakdown of what to expect on the happy day.
Now that the house is yours, what’s next? After you’re all settled in and have celebrated the big purchase, we suggest working your way through the ultimate to-do list for new homeowners.
Header Image Source: (Bernard Hermant / Unsplash)