Buying a home can be daunting. Most people looking to buy a home don’t even know where to start.
With help from this article, you can easily become familiar with buying a home and making significant strides towards moving into your dream house. Most importantly, you’ll want to know what steps you need to take towards buying a home and ensure your home is within your budget.
This article is intended to give you a general overview of the buying process so you know what steps to take when buying your first home.
1. Review Your Budget
The first thing you’ll need to do before buying your first home is to review your budget. You need to figure out exactly how much you spend every month. This will help you figure out how much you can allocate monthly on your mortgage payment.
Lenders typically limit your total mortgage payment, including interest, taxes and homeowners insurance, to no more than 30 percent of your total monthly income.
2. Save For Your Mortgage Down Payment
Mortgage lenders typically require you to have saved a downpayment of 20 percent or more on the total purchase price of the property you want to buy. However, as a first-time homebuyer, you might qualify for a government loan from the Federal Housing Administration (FHA).
These FHA loans allow you to purchase a home with a smaller down payment, sometimes as low as 3.5% depending on the strength of your credit score, debt-to-income ratio and other factors. Keep in mind that you’ll have a higher mortgage payment and need to pay for additional monthly insurance costs to compensate for the lower down payment costs.
Knowing what your down payment is going to be will give you a rough estimate of what you need to save and how much you can afford each month.
Additionally, you will need to save an extra 2-5 percent of the total purchase price to pay for the closing costs associated with buying the home (these costs range from realtor fees, property taxes, attorney fees, etc).
As a first time buyer, you may have access to first-time buyer programs depending on your state or city. These programs are designed to help walk you through the process of buying, and often offer low-interest rate mortgages and down payment assistance.
3. Find A Property That Suits You
Now that you have a rough estimate of what your mortgage payment is going to be and how much you need to save for your down payment, it’s time to start looking at homes. There are many types of properties to choose from, including duplexes, condos, single-family homes and townhomes.
Think about what you desire in a home, such as proximity to work or having an outdoor space. Then start browsing locations using online real-estate databases such as Zillow.
Realtors recommend staying in a home you purchase for a minimum of five years, so it’s important to anticipate your needs over the next five years when making your purchase.
If you’re serious about buying a home, refrain from reaching out or attending an open house until you have an agent. Dealing with the seller’s realtor before you have an agent is typically not in your best interest.
4. Get Pre-Approved
While you may be eyeing a 400k home and have a downpayment ready for it, a lender might think you’re only good enough for a 300k home. Mortgage lenders take a deep dive into your financial history and consider your credit score, how long you’ve been at your current job, your income, your debt-to-income ratio and many other factors when determining their loan offer to you.
It’s important to get pre-approved so that sellers and your real estate agent know that you’re a serious buyer. Get a mortgage pre-approval letter from your lender so you know your exact loan amount and the terms of the loan.
Make sure to compare costs for the same type of loan from multiple lenders, including their specific fees and interest rates.
5. Hire A Realtor
A realtor will help you search for a home with your specific desires, needs and budget in mind. Realtors will also help you with the mountain of paperwork and legal work required when making your first home purchase.
Realtors negotiate on your behalf with the seller to get the best purchase price for the property. You may be able to save money by having your realtor negotiate for a lower purchase price if the property requires repairs.
To find a good realtor, get referrals from other first-time homebuyers in your desired area. It’s important to interview at least a few agents and to ask them for references so you can follow-up with buyers and see what their experience was like.
6. Make The Offer
Now that you’re ready to make an offer on a home, do a quick reexamination of your needs, budget and costs. Ask yourself the following questions:
- How well does this house fit my needs?
- Will this house meet my needs for the next five years?
- Does the home require extensive repairs or is it move-in ready?
- Are there other costs I’m forgetting about, such as homeowners’ insurance, property taxes, HOA fees and a housing inspection?
Your realtor will help you decide what to offer for the house and negotiate with the seller’s agent to get the best possible price. This negotiation process can take months depending on the desire the seller has to sell their property and the conditions of the negotiation, such as wanting to have certain areas of the home fixed before you buy.
Once an agreement is reached, you’ll be asked to deposit 1-2 percent of the final purchase price into an escrow account. This shows the buyer you’re serious and gives you a short period, usually 30 days, to do a home inspection and finalize your decision.
7. Have The Home Inspected
While the house may look freshly painted and flawless from the outside, the bones of the house might not be up-to-par. It’s important to have a professional home inspection done of the property to determine the safety, quality and condition of the home.
Your home inspector will point out any major flaws, such as the need for new plumbing, new electrical wiring or a new roof.
If the inspector finds any serious defects that the seller did not make you aware of, you can rescind your escrow disbursement and get your money back. You can also further negotiate with the seller to have the needed repairs done or ask them to lower the selling price.
If the inspector doesn’t find any issues and you decide you don’t want the house, the seller will typically get to keep the escrow money.
8. Close On The Home
Once a deal has been reached, you’re ready to close. This process involves a mountain of paperwork for you to sign among other things, such as the lender getting the home appraised and purchasing mortgage insurance.
9. Save for Upgrades and Maintenance
Congratulations, you’ve purchased your first home!
Once you’ve moved into your new home and the dust has settled, you need to start saving for a homeowner’s emergency fund. This fund will cover unexpected expenses such as roof leaks, a broken appliance or the need for a new furnace.
Houses require constant maintenance. The more you keep up with maintenance, the cheaper your costs will be in the long run. A small hole in your roof that goes unrepaired can mean major mold and structural damage in the future.
A good rule of thumb is to save between 10-20 percent of your total monthly mortgage payment for maintenance and repairs, depending on the condition and age of your home.
Now that you know what to expect when purchasing a home, get out there and make your dreams come true! Thoroughly research each step of the buying process beforehand, create a budget, save fervently and find a home that works for you.
