Most of us will buy a home at some point in our lives, or at least try to. Unfortunately, purchasing your first home can be a long and confusing process. That’s why I decided to make a complete guide to buying your first home – with all the ins and outs I had to learn firsthand! Let’s skip the jargon and get straight into what you need to know.
Preparation
Start Saving Ahead Of Time
Start saving as much as you can afford towards your down payment. It may require a tight, zero-based budget. However, the more you can start saving now, the better off you’ll be when it comes time to actually close on your home. Also, do not use your emergency fund towards your down payment. There are usually a lot of unexpected expenses that come with moving and settling in. Consequently, using your emergency fund as your down payment will only put you in a bad financial situation that you may not be able to afford.
Do A Soft Credit Check, And Adjust Habits If Needed
If your bank or credit card company give you a free credit score estimate, use it. If you want a more accurate estimate, use a paid service like myFICO. It’s important to have a good head on your shoulders with your credit score, and work on fixing any problem areas you may have. In my guide to credit scores, I break down how they’re calculated and ways you can improve your score.
If you have a low score, you’ll get worse interest rates. In other words, your mortgage could be MUCH more expensive. If you have a bad credit score, it may be a good idea to wait to purchase a home until you can fix it, otherwise you may be left with an unreasonably large monthly payment. Of course, as long as you follow good financial habits, your score should be good enough to land you competitive rates.
Calculate How Much You Can Afford
The key here is to be brutally honest and realistic with yourself. Based on your credit score, debt to income ratio, and your other life expenses, be sure you aim for something you can afford. Also, you don’t need a down payment that is 20% of the property’s value to purchase a home, but if you have a smaller down payment you will have to pay PMI. If you don’t know what PMI is, it’s basically just an extra amount you’ll pay every single month (as part of your mortgage) if you have a down payment of less than 20%.
If you still want a house, and can’t afford a 20% down payment, be sure you calculate PMI into your monthly total. On top of that, don’t just go with the biggest loan you get approved for. It is possible for a lender to approve you for a loan that you can’t COMFORTABLY afford. It’s up to you to determine what is actually in your budget.
Mortgage Shopping
Research Your Main Choices
These days, most people will probably go for a conventional loan. Depending on your current financial situation and eligibility, FHA and VA loans could be other good options to look into. USDA loans can also be a good choice, if it applies to you.
With that being said, most people will end up going with a conventional loan. Just make sure the loan you’re applying for is fixed (not variable). Variable loans destroyed a lot of families and their finances during the last housing crash, and they’re generally not worth the risk. A lot of people recommend getting a 15 year loan, but I prefer a 30 year loan. It gives you more breathing room and flexibility with your money. Besides, investing that money instead of making larger or additional payments will probably make you more in the long run.
See If Any First-Time Homeowner Deals Apply To You
Research any special deals for first time homeowners offered through the local or federal government. It’s always a good idea to check, because sometimes there a lot of ways to ease the burden of purchasing your first home. If you can’t find any on your own, be sure to mention that you’re a first time homeowner to your real estate agent, and he or she may know about deals or tax credits you can get.
Compare Rates And Fees
Now that you have all the basic information you need, go ahead and start seeing what offers you can get from lenders. Weigh the best options carefully and narrow them down based on which ones fit your financial situation well.
Pick One And Get Pre-Approved
You may want to do this process with a real estate agent, but the main thing you need to know is that you need a pre-approval letter when you’re ready to buy a house. These letters are only valid for a certain time-frame, so be sure you’re ready to buy a home as having to reapply can negatively impact your credit since they’ll be performing hard credit score checks.
Finding A House
Pick The Right Agent – They Can Also Help With Mortgage Shopping
Find a good agent near you who can help you find the right home (and lender) for you. Make sure it’s a good fit and that they’re professional. Nobody wants an agent who just goes through the motions with you – purchasing a home is a big deal whether it’s your first time or not! Word of mouth can be a great way to find some of the best agents in your area.
Determine Your Must-Haves And Location
I hope this goes without saying, but it’s a good idea to know what you want going into this. Have an idea of where you want to live, the type of house you want (i.e. the style), how much land you want, whether you need a garage, how many bedrooms and bathrooms you need, and so on. Of course, do your best to line up what you want with your budget – in other words, be realistic about your housing wants and needs.
Adjust Must-Haves If Your Budget Is Too Tight
If you’ve been realistic, but find yourself just over budget, you’ll probably have to compromise somewhere. Maybe you’ll need to change neighborhoods, move to the next city over, get a slightly smaller house, or sacrifice certain amenities. When you’re over budget, you’ll have to find something your can compromise on to afford the house.
Putting In An Offer And Closing
Inspection
Usually, you (the buyer) will have to pay for the inspection. Make sure it’s done thoroughly, and finds all potential pitfalls or concerns with the house. Not only is it good to be informed about any problems, but it can be used for leverage when you negotiate.
Negotiation
Depending on the inspection, and the skills of your real estate agent, you may be able to ask for a lower price or get the seller to cover closing fees. Alternatively, they might be willing to just outright pay for any repairs that are necessary. Negotiation will be heavily driven by the current market too, so if it is a seller’s market you may have an uphill battle.
Closing, Warranties, And Insurance
Your real estate agent should walk you through the closing process, all you need to do is show up and follow the instructions closely! On top of that, make sure you’re getting a home warranty and homeowner’s insurance when you close. It’s important to be covered in case of emergencies, so it doesn’t lead to financial ruin. If you want more information on how to get the best insurance rates, check out my article on it.
10 Mistakes To Avoid
- Going with your first lender and not comparing options
- Purchasing too much house
- Rushing the purchase and not thinking everything through
- Using your emergency fund for the down payment
- Purchasing with bad credit
- Picking a house for purely emotional reasons
- Not comparing different types of loans like FHA, VA, and USDA with conventional loans
- Underestimating the total costs
- Waiting too long for the “perfect” house
- Looking for a home before you have a pre-approval letter
Conclusion
Hopefully, you now have enough information to begin the home buying process and get yourself a real estate agent. Remember to stick to your budget and weigh all of your options carefully. If you have any other tips, be sure to leave them in the comments.
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