Buying your first home can be an exciting but daunting process. After years of renting or living in the family home, you’re finally ready to become a homeowner. But where do you start? Read on for our checklist of the seven key steps to buying and financing your first home purchase.
Before searching for a home and mortgage, first think about how much you can afford to put toward your down payment and monthly payments. As an example, let’s say you’re purchasing a home at the average national sale price ($383,000 in Q1 2021), with the standard down payment for a conventional loan (20%), average 30-year fixed-rate mortgage (3.13% in April 2021) and roughly 5% closing costs (these vary from 2-6%). In this scenario, you’d be looking at an upfront payment of roughly $92,000 plus monthly payments of $1,313.
The simplest way of figuring out how much you can afford is to take your monthly household income and subtract your household monthly expenses. If you currently rent, keep in mind that the monthly payments on your mortgage will replace your rent payments. Still, you may also be subject to other new expenses such as homeowners insurance, home maintenance costs, property taxes, and private mortgage insurance (usually required if you make a down payment below 20%).
Getting pre-approved means that a lender has reviewed your initial application and conditionally agreed to offer you a loan up to a certain amount. Having a pre-approval letter from a lender can be an advantage when searching for a home as it shows potential sellers that you’re serious. It also means you won’t have to worry about the possibility of not being approved for a mortgage after closing on a home.
In order to apply for pre-approval, you’ll need to provide personal ID, social security number, proof of income, proof of employment (or alternative documentation if you’re a sole proprietor or business owner), and proof of assets.
The most important factors in getting pre-approved are:
- Good credit. – The minimum credit score for a conventional loan is usually 620, while FHA loans are offered to borrowers with credit as low as 500. The better your credit, the better your chance of scoring a low interest rate.
- Debt-to-income (DTI). –Your DTI is all your monthly debt payments (your mortgage payment plus other loans) divided by your gross monthly income (the amount of money you earn before taxes and other deductions). The maximum allowed by most lenders is 43%.
Previous generations used to look to real estate agents to help them find a home, but these days it’s more common to look online. There isn’t really a right or wrong way to search for a home. It all depends where you live, your level of comfort with searching on your own (or with the help of someone who doesn’t charge you for the service, like a friend or relative), and how much you’re willing to pay for assistance.
According to the 2021 NAR Home Buyer and Seller Generation Trends report, the internet is now the most commonplace for people to find a home, followed by real estate agents, yard signs/open house sign, and talking to friends or relatives.
|Where buyers found the home
||Percentage of buyers
|Real estate agent
|Yard sign / open house sign
|Friend, relative or neighbor
|Home builder or their agent
|Directly from sellers / knew the sellers
Source: 2021 NAR Home Buyer and Seller Generational Trends
Once you find a home you like, it’s time for you (or your agent, acting on your behalf) to negotiate with the seller or their agent. If you complete step 1 in this guide (figuring out how much you can afford) and do proper research on sales prices and property values in the area where you’re buying, this should help you calculate the maximum reasonable amount to offer.
If the price suits you, it’s time for you (with the help of a real estate agent or other professional, if you have one in your corner) to submit an offer letter. This should include information about any pre-conditions you have such as repairs or upgrades to the home. Another thing to include is what’s known as an earnest money deposit – a good-faith deposit for 1-3% of the house price to show the seller you’re serious.
Next, sit back and wait to find out if the seller accepts your offer.
Before closing the sale, it’s recommended to hire a professional to conduct a home inspection. This will help you identify anything that needs repairs or maintenance before you move in.
A standard home inspection usually takes 2-4 hours and ranges from $300-$600 depending on the size of the home. It typically includes:
- HVAC (home and air conditioning) system
- Plumbing system
- Electrical system
- Visible insulation
- Roof and attic
- Walls, ceilings, and floors
- Windows and doors
- Foundation, basement, and structural components
An appraisal involves a separate visit to your home by a professional who conducts an estimate of the value of the home. Mortgage lenders always hire their own third-party appraiser – and charge you for it as part of the mortgage closing costs. If you wish, you may also hire your own appraiser to visit the home and make sure the lender’s appraisal is accurate.
The typical cost of an appraisal for a single-family home ranges from $300 to $500. An appraiser can spend anywhere from 15 minutes to a couple of hours conducting their business, depending on the size of the home. They typically look at internal factors such as the square footage, layout, structure, and condition of the home, as well as some external factors like property prices of comparable homes in the same area.
Closing is the process of transferring ownership of a property from the seller to the buyer, and it can typically take several weeks. It comprises the title closing (which deals with the property itself) and the mortgage closing). Procedures vary from state to state, but generally the following people are present at the official closing: the buyer, the seller, the buyer’s and seller’s respective attorneys (you don’t have to have one – but it is advisable), the buyer’s mortgage lender, and the title agent.
Here are other important steps in the closing process:
- Opening an escrow account. This is an account held by a third party (such as a bank or escrow agent) where any money owed by the borrower to the seller is held until the transaction is closed.
- Renegotiation (if necessary). If any issues come up during the home inspection, you can renegotiate the price with the seller. In extreme cases where there are major problems the seller refuses to pay for, you also can cancel your offer.
- Title and homeowners insurance. Once you own the home, all liabilities are yours. Homeowners insurance protects you from damage to your home and belongings, while title insurance protects you from defects (such as back taxes, liens, and conflicting wills) in the title to your property.
The best things in life take time. Buying a home is a complicated and lengthy process, but at the end of it all, you will have a home you can truly call your own.
- Free comparison tool
- Pre-qualify for multiple lenders
- Entirely online service
- Not a direct lender
- Contact details required
LendingTree uses technology to help find the best lending solutions, based in North Carolina. To no surprise, its unique, innovative approach to consumer lending has already proven its worth in the typical consumer experience, thanks to the volume of information being made available to users searching for a loan. It’s ideal for those looking for several potential options, and with <b>over 1,500 </b> lenders to choose from, you’ll certainly find a lender perfect for all your needs.
- Apply in minutes and close in days
- No need to wait for an in-person appraisal
- Online video notary and support
- Limited to 39 states
- Only HELs, no first mortgages
- Minimum credit score of 640
Figure is a fintech company that uses blockchain, artificial intelligence, and advanced analytics to provide consumer credit products. Founded in 2018, it offers its own unique versions of home equity loans (HELs) and reverse mortgages. By leveraging blockchain, the same technology that powers cryptocurrencies like Bitcoin and Ethereum, Figure is able to approve HEL applications immediately – and to send the funds to the borrower within 5 days
- Pre-approval letter in as little as 3 minutes
- Rate lock in as little as 30 minutes
- 3-6 weeks to close – faster than industry average
- No FHA or VA loans
- Not available in HI, MA, MN, NV, NH, VT (as of March 2021)
Better.com is a direct lender with a simple online application that can be completed any time, any day of the week. Better.com aims to revolutionize the way Americans get a mortgage – after completing an application, you can access personalized rates, talk to a dedicated non-commissioned Mortgage Expert, generate custom loan estimates, and search for mortgage discounts in your area
Better has automated much of the mortgage process. This drastically reduces the cost to originate and allows Better to pass as much of those savings as possible onto the customer and invest in customer satisfaction. Better.com was recently named Best Mortgage Lender for Customer Service by Nerdwallet.
Last but not least, rates at Better.com are backed by the Better Price Guarantee, which promises that Better won’t just match a competing price, but beat it by $1,000.