The process of buying real estate can be overwhelming, especially if you’re a first-time home buyer. There is a lot of documentation to think about, even before you’ve found the perfect home. From loans to home inspections, investing in real estate takes strategy. So if you want to make sure you navigate the process seamlessly, we’ve got advice on buying a home, made specifically for first-time home buyers. Read on to get the key to your home as soon as possible!
5 Steps to Buying A Home
As a combination of financial and sentimental efforts, buying a home can be a lengthy process. There is plenty to think about, and your finances will dictate the kind of home you will get.
We'll cover these basic 5 steps to buying a home in great detail throughout the guide:
- Establish your criteria and financial possibilities
- Find the right real estate agent
- Credit check: get preapproved for your loan
- Start shopping for the right home
- Finalize your loan
Each step comes with a specific to-do list you need to take care of in order to make the very process of moving in as simple as possible. Let’s take a look at each step in detail, and make sure you know what you can expect:
1. Establish Your Criteria and Financial Possibilities for Buying a Home
Buying a home is a significant real estate investment. While that comes as a significant factor for calculating your budget, it is also a factor for planning your future.
Planning Your Future
For example, you may be married, and plan on having only one child. However, you should also account for the fact that your plans may change. You may even get a pet for that child. All of this factors into your ultimate decision. It’s important to consider your plans for the future, which include:
- Family planning
- Retirement planning
You may think that buying a condo in a metropolitan setting is the best plan for you right now. However, if you commit to a mortgage that you will be paying off for twenty years, then it’s important to reexamine your long-term plans:
- Do you plan on having a family? If so, you may want to be in a good school district, or in a gated community.
- Do you plan on keeping your job in the long term, and are you choosing your home solely based on its proximity to your workplace?
- Will your dream home be able to adapt to eventual lifestyle changes?
By the end of this stage, you should have a clearer idea on what kind of home you want to be looking for; not just in terms of bedrooms and bathrooms, but in terms of neighborhoods and amenities.
Finance
After establishing your criteria for the dream home, it’s important to understand your financial situation.
As a rule of thumb, don’t buy a home unless you’re sure you can afford it.
This means making sure that you have a portion of your money allocated to a safety fund. Additionally, owning a house comes with plenty of other expenses such as utilities, repairs, and insurance. The ideal scenario would be that you have those hundreds of thousands of dollars in cash. However, that’s not a reality for the majority of us, so make sure that you consult a financial advisor and understand your budget. Professionals can help you understand whether you’d be able to repay your loan comfortably. As a rule of thumb, try to stay in the 25 – 30% range of your gross income. Your mortgage payment shouldn’t be more than that. It’ll ensure that you can repay your home even if the economy goes south. Finally, don’t forget to take into account the debt you may have accumulated, such as student loans. Always budget so you can live comfortably, even if the economy goes south. Your mortgage payments (typically) won’t change, so it’s important that they’re an amount you can work with even if you encounter unexpected financial difficulties.
2. Finding the Right Real Estate Agent
We recommend keeping an eye on the housing market in your target neighborhoods just so you know what kind of prices you’ll be working with. Look for median prices of homes in that area. However, having a good Realtor® on your side is the best way to ensure that you’re not only happy when you buy your home, but even as you start living in it.
Realtors® know a wealth of information about:
- Neighborhoods
- Housing prices
- Sellers’ terms
- Negotiation
- The home-buying process itself
How to Find a Realtor® for First-Time Homebuyers
It’s a good idea to consult your friends and family members who recently bought their homes. They might have a Realtor® they loved working with.
In general, a good Realtor® will:
- Help you navigate the process
- Be as objective as possible
- Clear up any misunderstandings and confusions you may have
- Inform you about the neighborhood and the potential of homes in the market
Make sure you pick a Realtor® who has a proven track record of success. Some real estate agents simply want to sell the homes they’ve commissioned. However, you want to find a professional who will ensure that you find your dream home, and that you’re not blind sighted by anything.
3. Credit Check: Get Preapproved for Your Loan
Before you start looking for your dream home, it’s important to get pre approved for the loan you plan on taking out to pay for it. However, you won’t only shop for a home. You should shop for a loan: meet with a mortgage broker or get in touch with the lenders in your area; small credit unions included. Some of them offer much better terms that will help you secure your home. If you plan on keeping your home for a longer period of time, you should look for a set-rate mortgage. However, if you plan on selling your home within the next few years, you may want to look into ARM (adjustable rate mortgage) where payments go up and down according to the economic index. Typically, ARMs are more flexible, and you could be able to afford a much more expensive home. The caveat is that they are unstable and you could find your payments going up, so it’s all a matter of your personal preferences and needs.
Home Loan Requirements
Every lender has their own requirements. However, generally, you should have:
- Good credit – Your score should be higher than 580 if you want to qualify for an FHA loan, and higher if you want to qualify for a regular loan
- Income that covers the mortgage payment – Lenders want to make sure that you can repay your loan, so they don’t want the mortgage payment to be more than 25-28% of your gross income. However, other debt can influence your lending options.
- Enough funds for a down payment – Normally, you’re expected to cover 20% of the price. If you’re getting an FHA loan, you can get by with around 3-5%.
Keep in mind that your mortgage is not just your loan. Your mortgage will also include insurance premiums for your mortgage (if you don’t have at least 20% of down payment capital), property taxes, and the insurance for your home.
Documents you will need for a mortgage pre approval:
- Tax returns
- Income statements: W-2s and two recent payroll stubs if you’re an employee. If you’re self-employed, prepare 1099s, yearly profit and loss statements, as well as two years of records. If you have other real estate, prepare real estate income documentation.
- Bank statements
- Information about brokerage and retirement accounts (if applicable)
- Debts: Monthly debt payments (list everything from student loans to credit cards) and real estate debt, if applicable
- If applicable, records of divorce, foreclosure, etc.
Calculating Your Interest Rates
Interest rates can significantly affect how much you’ll be paying for your mortgage every month. If you get lower interest rates, you’ll pay off your mortgage sooner. Fortunately, there are a few ways of ensuring that your interest rate is as low as possible:
- Have the funds for a bigger down payment
- Improve your credit score
- Shop around for loans, and opt for shorter loans
Do I Need Mortgage Pre Approval?
In short: yes. It’ll make the whole home-buying process a lot smoother. When you’re pre approved, you know exactly what kind of price range you’re working with. Additionally, sellers will be more likely to accept your offer if they know you’ve already secured funding.
4. Start Shopping for the Right Home
At this step, you should have:
- Clearly defined criteria for your ideal home
- Information about the price range of your home
This is where mortgage pre approval comes in handy, as well. You can simply shop within the price range covered by your loan.
The most important thing is that you stay within your budget.
First-time home buyers often bite off more than they can chew. They fall in love with a house. So resist the temptation to go above your means, especially as owning a home comes with plenty of costs.
When you start touring the houses, jot down the information about each house:
- Size, number of bedrooms and bathrooms
- The list of other rooms (e.g. Does the house have a laundry room, garage, basement, etc.?)
- Size of the front yard/backyard
- Flooring (e.g. Hardwood floors, carpet, etc.)
- Energy (Heating, insulation, A/C, energy efficiency, etc.)
- Appliances (Do the appliances come with the house? How old are they?)
- Other amenities
- Neighborhood (Schools, parks, public transportation, etc.)
- Your opinion (What did you like? What did you dislike?)
You can even make a spreadsheet. It’ll be much easier to decide on a home when you have all the information at hand. When touring, make sure you test the water pressure and the electrical system. If the house has a fireplace, get information on how often it’s been maintained. When evaluating the location of your potential home, pay attention to the neighborhood and yes, even appearances. If other homes in your neighborhood are well-maintained, and the neighborhood is safe, it’s another pro to add to your list.
Choosing Your Home
First, shortlist all the homes you’ve toured, and then decide on the top three.
Keep your long-term goals and financial possibilities in mind.
Make sure you’re both comfortable with the home and the neighborhood.The price of the home matters, of course. However, if your ideal home’s asking price is lower than prices of other homes in the neighborhood, consult your Realtor®. You may have to invest a lot in repairs. Consult your Realtor® about Homeowner Association’s details. Understand their requirements, as they will impact potential modifications. If you’re not the only one making an offer for the house, ask your Realtor® about other bidders so you understand the state of the competition. If there are no other offers, you could negotiate for a lower price.
Schedule a Home Inspection
When you’ve decided on a home and the seller has accepted your offer, contact your Realtor® so they can arrange a home inspection.
Ensure that the home inspector is licensed and insured.
It is critical that your home inspector is licensed and insured to be sure that he or she knows what they are doing. It’s important to have the inspector evaluate the potential concealed damage of the home (e.g. structural, termites, electrical and plumbing systems, etc.) before you sign the contract. Additionally, if your inspector does find damage, you have the right to ask the seller to repair the issue prior to closing, renegotiate the price or even walk away from the house. However, what ever you and the seller agree to, make sure you have it all in writing.
5. Finalize the Loan and the Sale
Typically, this is the part of the process where your money and your documents go into escrow with a settlement agent or title company to ensure the paperwork is in order. Your lending institution will send an appraiser to evaluate the home and ensure that the price matches the value of the property.
Once the load is approved and the titlework comes back clear, you’ll sign the final loan paperwork. This process can take anywhere from 30 to 90 days. However, if you’ve been preapproved for mortgage, passed home inspection, and agreed on a fair price with the seller, you’ll be on your way to moving in no time! It’s time to find your dream home and we would love to assist you. Please call Realty Executives Exceptional Realtors® at (866) 742-5732 or email us at ClientCare@RealtyExecutives.com.
