Eight steps for first time homebuying success
Going through the purchase of your first home is an incredible milestone in many people’s lives that can be exciting yet daunting. However, if you’re committed to taking the time to understand the many facets of the homebuying process, you’ll land the home of your dreams with less hassle along the way.
The homebuying process has many moving parts and pieces that can be confusing at times, but when broken down, it’s much easier to digest. Using a homebuying checklist such as the one we’ve created below will help make homeownership an easier process.
While a buyer’s agent is there to help answer questions and organize all those moving pieces, it is in your best interest to have a general understanding of the process, too. You’ll be able to ask more informed questions. Plus, taking the homebuying journey step by step empowers you to make one of the most significant purchase decisions in your lifetime while easing some of the worries that come with it.
There are eight stages we’ve outlined below for the real estate transaction including key terminology to understand, protections you’ll want for your house, and other professionals that you’ll be interacting with aside from your trusted buyer’s agent.
Step One: Do Your Initial Homebuying Research
Remember the days of only word-of-mouth recommendations? Back then, the internet wasn’t widely available to offer a wide array of real estate information through property listing websites, online connections to real estate professionals, and helpful articles like this checklist. So just as you are now, do research and inform yourself at a basic level of what happens in a real estate transaction.
Familiarize yourself with some of the key terminology involved, look at dream homes, and think about how you’ll begin the search for a real estate agent. This foundation of knowledge will provide confidence when later conversing with real estate agents, lenders, title agents, closing attorneys, home inspectors, and other professionals.
It will also help you understand what type of home is feasible for your budget based on neighborhoods, local demand, and pricing. This initial step is about getting an idea if you’re emotionally, mentally, and financially ready for the homeownership journey.
Some key items to get familiar with:
Step Two: Figure Out Your Finances
While you conduct preliminary research, you’ll likely see many additional costs apart from the purchase price of a home. It’s essential to make sure you can handle these costs and avoid stretching yourself too thin to achieve homeownership. Foreclosures happen more often than we’d like to think, but proper planning will help prevent future delinquencies or financial burdens.
One easy way to get a quick estimate of homeownership costs and what you can afford is to utilize an online home affordability calculator. It’ll provide you with an idea of your budget before meeting with a lender to discuss a mortgage. There are a few other financial aspects to assess before deciding to buy your first home.
Look at your debt-to-income ratio (DTI) as an indicator of your financial health during homeownership. It’s calculated by taking all your monthly debts divided by your monthly income, and most lenders factor it in their decision-making process.
For example, if you have $2,000 in monthly expenses and an income of $8,000, your debt-to-income ratio is 25 percent. Mortgage lenders generally like to see a DTI ratio lower than 43 percent to offer you a loan.
Typically, you need a minimum credit score of 620 for a mortgage lender to feel confident in providing you with such a significant loan, but the higher your score, the better off you’ll be and more lending options available to you. It depends on the lender and current market conditions regarding what requirements are used.
Lower interest rates and more flexible loan terms are two of the main perks of coming into the homebuying process with a high credit score. Make sure you’re thinking about your score well before buying your first home because it takes time to build.
In the excitement and anticipation of buying a new home, it’s easy to overlook the many closing costs that homeowners have to deal with once a deal is finalized. Each state handles these costs differently, so estimating them can be complicated.
A good estimator of these costs is taking three to six percent of the home’s total cost. So, for a $200,000 home, they would add up to anywhere between $6,000 and $12,000. Speaking with your local real estate agent to understand them in greater detail is another way to help estimate how they’re handled locally. The amount of closing costs will vary from state to state.
Step Three: Find a Real Estate Agent
Much like landing on the perfect paint color for the living room of your future home, as is the process of finding the right real estate agent. It’s an important person you’ll need to lean on throughout the transaction process so having a great connection with them is important.
Choosing an agent is mainly about finding someone you can trust to help guide you through the ups and downs of the transaction process. Filtering through all the many agents in your area can be overwhelming, but there are a few strategies to use.
How to find a buyer’s agent:
- Use a trusted resource to search for local agents
- Compare different options and their level of experience
- Have informal interviews with them and ask questions
- Check for an online presence (like social media, website, etc.)
- Ensure they’re not a part of a dual agency
You should also evaluate the brokerage’s reputation or any organizations they may be a part of, as there is often a code of ethics or standards for professionalism. The National Association of Exclusive Buyer’s Agents is just one example of this where these standards help ensure you’re in good hands, no matter where you’re buying.
Step Four: Consider Federal, State, and Local First-Time Homebuyer Programs
Step five comes back to researching options before meeting with a lender. Since the purchase of a home can be a financial hurdle for many people, first-time homebuyer programs are offered at various levels throughout the country. Federal programs have been created to offer government-backed loans, whereas state and local programs offer similar options but have more specific requirements based on local laws and regulations.
First-time homebuyer programs offer assistance, such as:
- Grants for down payments
- Flexible loan terms
- Closing cost loans or assistance
- Tax Reductions
- Lower interest rates
The programs are often specific to first-time homebuyers, so don’t miss out on the opportunities. It’s a good idea to research the various programs and consult your local buyer’s agent on the details as they’ve probably helped other homebuyers use them.
Step Five: Compare Mortgage Lenders and Get Pre-Approved
Just as you shop around for your house, you should be doing the same with your mortgage lender. There are various options for which loan is right for you, but the lender plays a big part in securing competitive rates and offering the right terms to help you afford your home, so you should compare.
The length of your loan and interest rates are important aspects to compare with your lender and requesting a pre-approval letter to help expedite the process when it comes time to make an offer. It’ll show the seller that you are ready to take on the purchase.
Some different terms to consider:
- Conventional loans
- Federal Housing Administration (FHA) loans
- Veterans Association (VA) loans
- Adjustable-rate mortgages (ARM) vs. fixed-rate mortgages
- Private mortgage insurance (PMI)
Step Six: Select a Home and Present an Offer
Once you’ve considered all the homes that meet your requirements and prepared your financing, it’s time to select a home and present your offer. Your real estate agent will be vital in helping you know how to make a reasonable offer that is appealing to the seller and decide on which home is right for you.
This is also where it becomes helpful to work with an Exclusive Buyer’s Agent that has your needs in mind, not both yours and the sellers. That is the case with dual agencies, which can allow bias to affect you getting the very best deal on the home of your dreams.
Aside from those initial steps, be prepared to put a small amount of money down for the Earnest Money Deposit, typically one to five percent of the home’s price. This deposit is typical in many transactions and will be held in escrow and later used towards purchasing the house.
Step Seven: Do Your Homebuying Due Diligence
Once you’ve reached the offer stage of the homebuying process, you may think it’ll be smooth sailing from there, but many things could go awry. It’s important as the buyer to do your due diligence before making one of the most significant purchases in your lifetime.
You’ll need to coordinate with a home inspector, appraiser, insurance agent, title agent, and other professionals. Many of the terms from step one of this checklist will be discussed during this stage of the homebuying process.
You’ll begin by scheduling a home inspection to make sure there aren’t any major defects with the property. The inspection may uncover items that can be used as leverage in your purchase contract negotiation. The lender will also require an appraisal of the home to make sure the value matches the mortgage loan amount they are providing. It also offers peace of mind for you as the buyer, so you know you’re getting a fair deal.
Additional due diligence you’ll want to address:
- Title insurance (title exam)
- A land survey or plot plan
- Check HOA covenants (if within an HOA)
- Homeowner’s insurance
- Seller’s disclosure and lead paint disclosure
- Ensure local zoning codes are met
- Other inspections, depending on the location
In hot markets, you may feel pressure to rush through some of these due diligence items, but it could be a major mistake down the road. Title insurance, homeowner’s insurance, and a home inspection are elements of ensuring that the home you’re buying is protected.
Step Eight: Prepare to Close on Your First Home
Once you’ve completed all the due diligence for your home and an offer has been established, it’s time to sit down at the closing table. This step is the final finish line before receiving the keys to your new house. You’ll need a little patience, though, as the closing process requires a lot of paperwork.
Make sure to bring the following items:
- A government-issued ID to verify your identity
- A copy of the purchase agreement
- A standard check or cashier’s check to cover remaining closing costs (depending on the contract terms)
- Proof of homeowner’s insurance
Voila! Once you’ve gotten through the last stage of the process, you’re now a homeowner. As was mentioned earlier, there are many hurdles that can present themselves during the transaction process. Delays in due diligence, lengthy negotiations, competition from other buyers, and many other things can occur. However, having a foundational knowledge of the process will help you tackle them with ease.
Additionally, the support of an Exclusive Buyer’s Agent who is a part of an established and trusted organization like the nonprofit National Association of Exclusive Buyer’s Agents will offer an added layer of support. As a team with your trusted agent, you’ll be moving into your first home in no time.