Buying your first home is considered one of the biggest milestones, both in life and in regard to your finances. It's a big commitment, and there's a good chance this will be the largest purchase you've made to date.
As you prepare, here are the steps to follow as you purchase your first home.
- Make sure your finances are in order before you take the first step toward buying your first home, which means paying off debt and establishing emergency savings.
- Do your homework to learn about all the available loan types, then compare their terms to determine which is best for you.
- Get preapproved for a mortgage loan so you have a good idea going in as to just how much you can spend to buy a home.
- Find a good real estate agent who can guide you through the homebuying process and the details of closing on the deal.
Determine Whether You Are Ready to Buy a Home
First, you should determine whether you are ready to buy a home. Homeownership can be more expensive than renting, since you're ultimately responsible for added costs like home repairs, utility costs, garbage pickup, water, and electricity.
You also need to pay for taxes and insurance related to your home. These costs add up quickly, and if you are not financially prepared, you could end up in a bad position—especially if you only have one income.
In addition to establishing an emergency fund, consider getting out of debt (or at least reducing your debt) before applying for a mortgage. While having debt is not a deal breaker, lenders will use your debt-to-income ratio which shows how much of your income goes toward debt repayment each. This ratio helps lenders determine how mortgage you can handle, mathematically.
If you're not sure you can afford a home, try sticking to a budget with what you expect your home payment will be, and put the extra money in savings. This can build your confidence and your savings strategy so you can move forward with the home purchase.
While you may be under pressure from friends or family to buy a home, it might make sense financially to wait until you're truly ready.
Start Shopping for a Loan
Most people need a loan to make a home purchase. In many cases, it makes sense to get preapproved for a mortgage before you begin shopping for a home. Your preapproval can provide you with an idea of how much you can afford.
If you want more options, consider using a mortgage broker. With a mortgage broker, you have access to several different loan companies and programs, which can help you find the best rates. However, your small local bank or credit union may have options that will save you money as well.
Find the Best Payment Options and Loan Types
When it comes to your mortgage, you may be surprised at the different loan types and payment options available. Looking at terms like private mortgage insurance (PMI) can become overwhelming, but a little research can help you move forward.
Some buyers choose a 15- or 20-year loan, because the term is shorter, and they might be able to lock in a low rate. On the other hand, one reason 30-year loans are so popular is that a longer-term usually means a lower monthly payment. In this case, you might have a slightly higher interest rate, but the payments are usually more manageable.
Adjustable-rate vs. fixed-rate mortgages
With an adjustable-rate mortgage (ARM), you can expect to see your interest rate vary over time. The initial rate is lower, but you run the risk of seeing the rate rise as market conditions change—and that means a higher monthly payment.
On the other hand, a fixed-rate mortgage remains the same, no matter what is happening with the economy or the market. This provides stability in your monthly payment and can make it easier to plan. However, you run the risk of missing out if rates fall, but if they do, it might be possible to refinance to a lower rate and capture the savings.
Watch out for hybrid mortgage products that offer a low, fixed rate for the first few years but then switch to a higher variable rate. You could end up with a larger payment than you expected.
Have a Down Payment Ready
Your down payment can reduce what you owe and also reduce your costs. Realize, though, that if you put down less than 20% of the cost of your home, you could end up paying private mortgage insurance (PMI). While you don't need 20% down to be successful in homeownership, it might be a good idea to consider the cost of PMI when you buy.
You may be considering creative financing to cover the down payment, but you should be careful when you make these choices. You want to build wealth with your home purchase. If you make the wrong choice, then you may end up hurting yourself financially.
Be Honest About What You Can Afford
You also need to determine how much home you can really afford. One good rule of thumb is to keep your mortgage, along with your taxes and insurance, between 25% and 30% of your income. Other experts advise that your home cost no more than two and a half times your annual salary.
If you spend too much on your mortgage, you might not be able to meet your daily obligations, let alone save for retirement. A smaller house might be worth the peace of mind. If you are carrying debt (credit card or student loan debt), a smaller home payment can be an especially good idea.
Find a Good Real Estate Agent
Once you have determined how much you can really spend and are preapproved for a mortgage, it's time to find a good real estate agent. This is one of the most important steps when preparing to buy a home.
Your agent should support you at every step of your homebuying process while carefully considering your wants and needs. They will be your go-to person for advice, recommendations, and explanations of market to help you find a home that suits your needs and that you can afford.
Once you make an offer, your real estate agent should work to negotiate terms that you are happy with. They can also guide you through the paperwork and the process needed to close successfully.
Request a Home Inspection
Once you've found the home for you, make sure to get a thorough home inspection. You should pay for the home inspection. When you do so, the home inspector will look for hidden problems with the home before you purchase it.
Through the home inspection, you can learn about any issues that may prevent you from buying the home. These may include mold, termites, foundation problems, or a roof that needs to be replaced. The inspection can save you thousands in repairs later on.
You may be able to negotiate a lower price if you know that the home needs major repairs. Consider an independent home inspection, separate from the one the homeowners had done. In many cases, the results of a home inspection can be grounds for pulling out of a deal without losing your earnest money.
Be Patient During Escrow
Once you have bid on your home, and the offer is accepted, you will go into escrow. During this step, an escrow holder will make sure that all the documents, money, and other necessary information are properly prepared before you close. Escrow is set up to protect the buyer, the seller, and the lender. It can take time to complete escrow, depending on a number of factors. It's not uncommon for a closing date to be three to five weeks in the future.
Close and Move-In
When the closing date arrives, you show up and sign the final papers. When this happens, the escrow agent will release the funds to all appropriate parties.
Once you have closed on your home, it is time to move in. You can paint, unpack, and enjoy your new home.
Be sure that you change your address with your bank, and other accounts. You can set up your utilities and cancel your old ones as well. That will save you time and money, because you will avoid late fees. Some companies, such as Xfinity, will even waive installation fees if you transfer your old account to your new address, too.
Frequently Asked Questions (FAQs)
How do you get help buying your first home when you have low income?
There are many assistance programs on the state and local levels, including first-time homebuyer tax credits; check your state's housing finance agency. Other programs include:
- The U.S. Department of Housing and Urban Development funds public housing and offers vouchers for low-income Americans.
- The U.S. Department of Veterans Affairs (VA) has home loan programs for service members, veterans, and eligible surviving spouses.
- The U.S. Department of Agriculture (USDA) has a homeownership program for rural Americans.
- The Federal Housing Administration insures mortgages and offers downpayment assistance, making a home purchase more affordable.
What kinds of questions should you ask your realtor when buying your first home?
You should ask your realtor questions about the technical and business aspects of homebuying. A realtor will have great insight into your negotiating options and what kinds of concessions or contingencies are appropriate for your situation. You can ask about the sales history, comparable sales in the area, and who to hire for the home inspection. Consider asking your realtor whether they would buy the home to learn what they see as the pros and cons of the home.
What things should you buy when moving into your first home?
Some important purchases that are sometimes overlooked by first-time homebuyers include cleaning supplies. For example, what types of floors does the home have, and do you have the proper tools to clean them? If you're moving into a house from an apartment, you may also need to stock up on yard supplies like a lawnmower.
What is the tax credit for buying your first home?
The first-time homebuyer tax credit is up to $15,000 or 10% of the home's value (whichever was less).
Consumer Financial Protection Bureau. "Get a Prequalification or Preapproval Letter."
Consumer Financial Protection Bureau. "Understand Loan Options - Loan Term."
Board of Governors of the Federal Reserve System. "Consumer Handbook on Adjustable-Rate Mortgages," Page 4.
Consumer Financial Protection Bureau. "What is the Difference Between a Fixed-Rate and Adjustable-Rate Mortgage (ARM) Loan?"
Consumer Financial Protection Bureau. "How To Decide How Much To Spend on Your Down Payment."
Federal Deposit Insurance Corporation. "Loans and Mortgages," Page 1.
Consumer Financial Protection Bureau. "Schedule a Home Inspection."
California Department of Real Estate. "Surviving the Real Estate 'Escrow' Process in California: Important Things and Tips You Should Know, and Mistakes to Avoid," Page 13.
Xfinity. "Moving to a New Address."
U.S. Department of Housing and Urban Development. "Housing Choice Vouchers Fact Sheet."
The U.S. Department of Veterans Affairs (VA). "VA Home Loans."
The U.S. Department of Agriculture (USDA). "Housing Assistance."
U.S. Department of Housing and Urban Development. "The Federal Housing Administration (FHA)."
U.S. Congress. "H.R.2863 - First-Time Homebuyer Act of 2021."