The steps to buying your first home may seem daunting at first, considering you’ve never done it before and there are a lot of things to consider. But buying your first home is one of the best things that you can do financially, and one of the best ways to move forward toward a family, permanency, and eventual retirement.
But with so much involved in buying your first home, how do you know the steps to buying your first home? Here’s a basic rundown. Note that this is only scratching the surface – there’s a lot to learn on each of these steps.
#1. Determine If You’re Ready to Buy a Home
Figuring out if you’re ready to buy your first home is a big decision, and there are some things that you’re going to want to look at in your personal finances. The first, obviously, is income and employment status. If you’re not secure in employment then you don’t want to get tied into a mortgage.
But you also should look at your debt-to-income ratio (DTI). This is basically all your monthly debts divided by your monthly income. So if you have $2000 in monthly debts but an income of $8000, then your DTI is 25 percent. Generally speaking, a lender won’t give you a mortgage unless your DTI is less than 43 percent.
You’ll also need to pay close attention to your credit report and credit scores, as that can make or break your steps to buying your first home.
And, of course, you’re going to want to make sure that you’re ready to settle down for the long term. The longer you live in that first home the more likely you will benefit from price appreciation.
#2. Figure Out How Much You Can Afford
Now that you’ve decided you’re ready to buy your first home, you need to figure out how much you can afford so you can start shopping for that dream house.
There are several things that go into this calculation, including both your DTI and your down payment and interest rate, as well as whether you want a 15- or 30-year mortgage. You’ll also be calculating in homeowners insurance. There are a lot of calculators you can find online to help you determine how much you can afford for your home purchase. Don’t forget to consider property taxes. If you’re buying a condominium, monthly homeowner association fees are part of the equation.
#3. Prepare with a Down Payment and Closing Costs
There are going to be upfront costs for buying your first home, and these include your down payment and the closing costs. A lot of the time, people think they need 20 percent as a down payment, but that’s not necessarily the case. There are even some programs where you can get a home loan with as little as 3 percent down. Special sources of financing include FHA loans, VA loans, and USDA loans, as well as loan programs from Freddie Mac and Fannie Mae.
The amount of closing costs will vary but are typically between 3 percent and 6 percent of the cost of the house. Sometimes this is rolled up into the buying price and paid for in your mortgage, but not always. Sometimes the seller will pay the closing costs. It all depends on the nature of the housing market in your area.
#4. Obtain Financing
Now you need to go out and get applying for that mortgage. Conventional loans are the most common, often backed by the government through Fannie Mae or Freddie Mac. But, as mentioned, there are also FHA loans, VA loans, and USDA loans. The process of getting through all of the paperwork to obtain financing can be stressful, but rest assured that millions of people do it every year and that you can do it.
If this is your first time buying a home, you will want to research first-time homebuyer programs in your state.
#5. Find the Right Exclusive Buyer Agent
Next you’re going to want to find an exclusive buyer agent. There are different types of real estate agents, but some of them have their fingers in more than one pie. These are real estate agents who are involved both in the selling of real estate and the buying of real estate, and we at naeba.org strongly advise against that.
If a real estate agent makes money selling a house AND makes money buying a house, then they’ve got a conflict of interest and may not do what is best for you when you’re buying your first home. Do your homework before choosing a real estate buyer agent.
Always get an exclusive buyer agent, who only buys–never sells.
#6. Begin House Hunting
Then you begin house hunting. This can be one of the most enjoyable steps to buying your first home. Looking through home after home, picking out what you like and imagining what life will be like when you’re living there is a wonderful opportunity.
But it can also be stressful if you’re in a hot housing market and you feel like you need to make a decision very quickly. Always rely on a dedicated, true buyer agent to guide you.
#7. Make An Offer
Making an offer at the right purchase price is something your exclusive buyer agent will help you with. There are tricks to the process, and knowing whether you need to underbid, overbid, or add in closing costs is all something that the real estate agent can help you determine. They’ve done this countless times, and they can help you make a wise decision.
#8. Home Inspection and Appraisal, and Ask For Repairs
Once your offer is accepted, you’ll want an inspector to go into the home and look for anything amiss to make sure you’re not buying a lemon. And you’ll want an appraisal (often this is required by the bank). If there are any outstanding problems, you can either ask the current owners to fix them or have them lower their price. The current real estate market will determine how you proceed.
#9. Close On Your New House
Finally you close on your home, which involves, once again, a lot of paperwork. But the great thing about closing is that you leave with the keys.
And that’s it! Those are the steps to buying your first home!