If you’re a first time home buyer, you’re probably feeling a bit at a loss as to where to begin. What do you need to buy a home? What’s the first step? Uh, can you even afford to buy a house in the first place? These questions are common -- and with so much money (and years of your life!) on the line, you’re smart to want to do things right.
But don’t let yourself get overwhelmed. After over 250 accepted offers, Open Listings' director of residential sales, Beatrice De Jong, has this sage advice for first-time homebuyers: "Don’t worry too much about knowing everything upfront. We know that seeing pages of contracts can be daunting, and not grasping real estate lingo can be confusing. A good real estate agent is here to help explain everything from the inspection reports, contracts, and the whole buying process. We understand that every buyer’s situation is a little different and will strategize to figure out what works best for you."
The process might seem daunting, but when you take it step by step, it’s totally, 100-percent doable:
Step 1: Figure out how much house you can truly afford
The first thing you’ll want to do is figure out how much you can afford to pay each month. Experts generally say not to spend more than 30% of your monthly income on housing, so start from there and work backward. For instance, if you make $5,000 a month, you shouldn’t spend more than $1,500 of that on your home.
Use a mortgage calculator to get more specific about what you can afford, but remember, there’s more to housing costs than just your mortgage payment. Sure, that will make up a big chunk of it, but you’ll also need to cover things like:
- Property taxes
- HOA fees
- Homeowner’s insurance
- Maintenance and repairs
Don’t expect to put that full $1,500 on just your mortgage. Make sure you leave some wiggle room for these extra costs, and always have a rainy day fund as well. You never know when unforeseen repairs might crop up.
Step 2: Start saving
As soon as buying a home is on your radar, start saving for that down payment, as well as other costs that will come up in the process. There’s no hard and fast number you have to hit, but at the very minimum, you'll need at least 3.5% of your home’s total price for the down payment.
Yep, you read that right: 3.5%. Unlike that old wives’ tale you might have heard, you don’t need 20% to buy a home. You can, of course, put down that much, but there are loan programs that accept down payments as low as 3.5%. If you qualify for a VA loan, you may be able to forgo a down payment altogether.
Down payment aside, you’ll also want to start saving for things like moving expenses and closing costs. Closing costs generally add up to about 2 to 5% of the home price and are due at the very end of the home buying process.
Step 3: Make sure your credit is at its best
You don’t need a perfect credit score to qualify for a mortgage, but the better your score, the more options you’ll have -- and the better rate you’ll get. So, start working to boost your credit as soon as you know a home is in your future.
Here’s what you can do to get that score up:
- Handle any collections issues. If you’ve got collections agencies calling, settle those debts ASAP. These can kill your credit score (and look worrisome to lenders).
- Pay down some of your debts. You may not be able to pay off all your loans and balances by the time you buy, but inching them down just a tiny bit can equal a better credit score.
- Stay on top of your bills. Pay your bills on time, every time. Payment history makes up a big portion of your credit score, so keeping up-to-date is key -- especially as you prepare to buy a house.
You should also pull your credit report and make sure everything looks accurate. If there’s an error, report it to the credit agency immediately. Removing these issues from your report could mean an instant boost in score.
Step 4: Find a mortgage lender
You’ll next want to find the best mortgage lender for you. There are hundreds of banks, credit unions and lenders you can choose from, so do your research. Though rate comparison sites can give you a starting point, be careful about choosing by rate alone. Advertised rates are typically based on best-case scenarios -- meaning they’re only offered to cream-of-the-crop buyers (huge down payment, perfect credit, etc.)
You should also take into account things like:
- Customer service
- Reviews/ratings from past customers
- Ease and convenience (can you apply online?)
- Experience with first time home buyers
You might be stuck with your lender for the next 30 years, so don’t choose them lightly. Ask around, get recommendations, and talk to a few different companies before deciding who to go with.
Step 5: Get pre-approved
Once you’ve chosen a lender, it’s time to apply for pre-approval. This is typically a quick form or application, depending on the lender and takes only a few minutes. They’ll ask about your income, your credit, the estimated loan amount you’d need, and a few other details.
Basically, they’re looking to verify that you’d make a good candidate for a loan. If you are, then they’ll “pre-approve” you as a borrower. They’ll even give you a letter that shows your pre-approval, as well as how much money you’ve been pre-approved for.
Pre-approval is a must for any first time home buyer, because it:
- Gives you a budget to work with when home shopping
- Helps you stand out from other buyers
- Gives sellers confidence in you and your offers
- Makes the final mortgage process easier and faster
Make sure to include your pre-approval letter with any offers you make in the future. It shows sellers that you’re serious about buying and that you’re a safe bet to follow through.
Step 6: Find the right house
Now the fun begins. It’s time to shop! Start researching homes in your price range, and schedule showings of any that stand out.
You can opt to hire a traditional real estate for this step, though that will cost about 3% of your home’s price. In this day and age -- and with services like Open Listings -- you can actually do most of the process yourself online. It streamlines the process and saves money to boot. (Yes, please!)
Step 7: Make an offer
When you’ve found that home, make them an offer you can’t refuse. Talk to your agent (or us!) about what to offer, as well as what contingencies and other items you should put into the contract.
You should also include a personalized letter to the seller. Tell them what you love about the home, share your home buying story, and appeal to their emotions. This is your chance to win them over (and stand out from those other buyers), so make it count!
Step 8: Get an inspection
If the seller accepts your offer, you’ll want to schedule an inspection of the home ASAP. You typically have a small window in which to get your inspection done -- and you don’t want to miss out. Inspections ensure you’re buying a safe, hazard-free home and that you’re making a good investment of your money.
Your home inspector will come out and assess the property, looking at its structure, systems, appliances, and everything from top to bottom. At the end, you’ll get a report detailing all the findings, as well as what issues (if any) exist in the home.
If there are items that need repairing, you have a few options:
- Ask the seller to make the repairs before you close on the home
- Negotiate a lower price point to make up for what the repairs will cost you (and the less-than-ideal condition of the house)
- Pull out of the transaction completely
If you opt for No. 1, you’ll want to have your inspector come back out after the repairs are made to ensure they’ve been handled properly.
Step 9: Close on the home
While you’re busy getting the inspection done, your lender will start to process your loan. They’ll request documentation of your income, debts, and assets, and they’ll want to verify your employment to make sure you have steady money coming in. Be sure to respond promptly to these requests, or you could delay your closing -- and the day you can move in the home.
The lender will also order an appraisal for a professional valuation of the home. Why do they do this, when you’ve already agreed to pay a certain amount of money to the seller?
Basically, they want to make sure the home is worth the money they’re giving you. If the home appraises for under what you offered, you’ll have to re-negotiate with the seller or make up the difference out of pocket.
Once the appraisal phase is settled, the lender will underwrite your loan and give you a closing date. You’ll do a final walkthrough of the house (to make sure all repairs were made and that the home’s condition hasn’t changed), and if all goes well, you’ll head to your closing meeting, sign a bunch of paperwork, wire over your down payment and closing costs, and you’re done! You’ll get your keys, and the home buying process is over.
Step 10: Move in
Congrats, first time home buyer! The home is yours. Now, onto the really fun part...unpacking.😫