Steps to Buying Your First Home
Buying your first home is both exciting and stressful at the same time. Many things come with homeownership. Yard work, upkeep, and maintenance will all be waiting for you when you sign your closing documents. On the other side, a lifelong place to dwell and new neighbors will also await. In this guide, we’ll explain everything you need to know to buy your first home.
Determine your budget
When first deciding to purchase a home, you’ll need to have an idea of a few things. Obviously, you’ll need to know your monthly income and expenses. This will help to determine your overall budget. When planning your budget, you’ll need to add new expenses such as water, electricity, internet/cable, real estate taxes, and homeowners insurance. When determining the budget for your new home, it is recommended that you do not go over 30% of your gross income (before tax). While you cant determine exactly how much your mortgage will be at this time, you can estimate using mortgage calculators. Not sure if you’re ready to buy a home? Read our article on buying vs renting a home here!
The next step in your home purchase it to get approved from a mortgage lender. We’re assuming that you do not have the cash available to purchase your home outright as this is the situation for 99% of people. You can go to your local bank or find a mortgage broker that will guide you through this process. Typically, you’ll need to supply paystubs, your past two W-2s, and bank statements to prove that you are creditworthy. All of this information will determine how much you can be approved for. Your credit will also be pulled. This will determine your interest rate.
NOTE: If you do not have a good credit score, talk to your bank or mortgage broker first to avoid an unnecessary hard inquiry.
After you are approved you will receive a pre-approval letter from your mortgage lender. This document can be used when putting in an offer.
Find a realtor
Did you know that a realtor cost you nothing when purchasing a home? That’s right, the seller assumes all realtor fees during the home purchase, so why wouldn’t you have one? Find a realtor can be simple. Talk to friends or family to see if they have someone they recommend. If not, usually your mortgage lender can provide you with information as well. As a last resort, you can always do a quick Google search for realtors in your area.
This process can take the longest depending on the market, your budget, and your needs. Your realtor has access to resources that provide everything about listings including the price, size, images, and more.
After finding a home you feel might work for you, it’s time to schedule a showing or attend an open house. During this time your realtor will have access to the home for an allotted amount of time. This is your chance to view the home and make any mental notes of what you do or don’t like.
NOTE: Pictures can be deceiving! Always be sure to look a home before putting in an offer.
Now that you’ve viewed the home, it’s time to review the disclosures. These documents contain information about the house from prior residents. It contains things like when the roof was installed, if the basement has ever leaked, and more. This can also be a deciding factor on if you decide to move forward with the house, or you can use it to your advantage to get a better price. For example, if you notice that the basement has leaked in the past, you could offer less than the asking price with that as justification.
Look at comps
Assuming that you’re happy with the disclosures, it’s time to look at comps. In order to get a mortgage, the house must be worth the amount that you are going to offer. The house is “collateral” so that the lender has something to take back if you don’t pay it. By looking at comps (homes that have sold recently in your area similar to your house) you can determine if you will be able to get a mortgage for your offer amount.
Put in an offer
After you’ve found the home of your dreams, it’s time to put in an offer. Your realtor is there to guide you through the process ensuring you offer the right amount. They can usually tell you if the property is listed too high, or too low. At the end of the day, it is your money and your offer. You must determine the amount you are willing to pay for the property. In your offer, you can put many things, like how long the buyer has to respond, items in the home you may want to keep, or small updates that need to be completed.
Await buyers response
Depending on the terms of your offer, you’ll need to wait to hear back from the buyer. The buyer could have multiple offers, or just yours to review. This step should take a few days to complete.
Did the buyer accept your offer? Great! You’re on to the next step. Did the buyer decline your offer? If yes, did they submit a counteroffer? If no, it might be time to sweeten the deal if they haven’t already accepted a different offer. Some common reasons your offer was rejected are listed below:
- The offer was too low
- The offer was too high. For this situation, the seller assumes the house will not appraise for the amount offered and the deal will not close.
- A different buyer offered better financing (usually cash)
- The seller didn’t like the conditions of your offer. This can be for things like requesting items to be left or you didn’t give them enough time to consider the offer if you included time stipulations in your offer
Once your offer is accepted by the seller, your work isn’t over. The seller will give closing conditions such as how long the offer must be closed within.
During this next step, you’ll need to get your home inspected. This usually costs around $400-$600 for a single-family home. Your home inspector will look at the house inside and out for any issues that could cause potential problems down the road. Commonly they can provide insights into things such as water leaks, termite damage, foundation problems, plumbing, and electrical issues. Once the inspection is complete, you will receive a detailed report of everything found. This is your chance to ask the seller to fix any issues that were found or ask for cash compensation so that you can fix the issues yourself.
Once your home is inspected and the terms are agreed upon, you’ll need to get a bank appraisal of your home so that the bank knows your home is worth what you offer. The appraiser will verify square footage and look at comps in the area to determine the value of your home.
Note: This only applies to people who are financing the purchase. If you are not getting a mortgage, you do not need an appraisal.
A few days prior to closing, you will have one more chance to walk through the home to ensure nothing has drastically changed from when you originally submitted your offer. If something major is wrong, this is your last chance to voice it, so don’t skip this step!
Assuming your appraisal is satisfactory to your lender, it’s on to the last step of purchasing your home. At any time during the process your lender might ask what day you’d like to close on the home. This date is then sent to the sellers until a mutually agreed upon date is set. The location will also be provided to you by your lender.
When closing day comes around, you will need to bring a few things with you that your lender will explain beforehand. Plan to arrive about 15 minutes early. You will sign all documents stating the final sale of the home, your financing agreement, and the deed of the home. This is also your last chance to ask any last questions to the seller about the property. (How does the trash service work? What day do you need to put trash out?). After all paperwork is signed, you’ll receive the keys to your new home!
Note: Typically, the sellers will pay for electricity, water, and gas for the day of closing. But be sure to get all utilities set to turn beforehand (sometimes itcan take a few days!).
Congratulations! You’ve signed all paperwork and have the keys in hand to your first home! Now the fun begins and lifelong memories are sure to ensue. Need some help preparing your finances for your new mortgage? Be sure to read our article on how to lower your monthly expenses here!