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Buying a home is one of those milestone life events that many of us have been dreaming about for ages -- but there's a reason why not everybody tries it as soon as they could. It's time-consuming, it can be messy, and it involves a lot of things that feel uncomfortable or unusual because they aren't part of your everyday experience.
Before you get ready to buy a home, it's helpful to understand exactly what it will entail, step by step until you're standing at the front door with keys in hand. If you've never done it before, it's not a bad idea to familiarize yourself with all of the things you'll need to accomplish to get there, which we've compiled here for you.
Understand your financial footprint
Most financial advisors suggest that a household spend no more than 30% of its gross (take-home) income on housing. That's fairly easy when you know what your rent costs and it doesn't change significantly from year to year, but it's quite a bit more complicated when you're securing a mortgage loan to buy a house.
The mortgage payment you make is going to include the principal (the money you borrowed), plus interest, taxes, and homeowners' insurance. You won't know what your interest rate will be until you do a little bit of financial digging to figure out your credit score and what kind of down payment you might be able to make -- if it's less than 20%, then you could end up paying insurance on the mortgage loan itself, too.
Know what your monthly income and expenditures are (print out bank statements if you aren't clear on this), and spend some time working on your credit, paying off old debt, and stacking up the cash for the down payment. When your financial house is in order, you'll feel a lot more comfortable about taking this big life step.
Polish up your credit
Your credit score is the financial area where you can make the biggest impact on your home loan opportunities, so it's smart to talk to a credit counselor before you really get moving to figure out how to make it look ship-shape. A good credit score will get you a good mortgage loan interest rate, which can lower your monthly payment (and possibly allow you to afford more house), so this is not a step you should skip.
If you're more the DIY type, then at the very least, make sure you are in the habit of paying all your bills on time, and take a look at any outstanding debt on your credit report. You can ignore anything older than seven years -- it won't affect your score -- but if there's any way to settle the more recent debts, do it. (Tackle the debt with the highest interest rate first and then work your way down if you don't know where to start.)
Figure out financing
Apart from a standard traditional mortgage loan, there are a ton of financing options for buyers in this day and age. The Federal Housing Administration gives low-down-payment mortgage loans, and you can also sometimes get good deals on loans in rural areas from the U.S. Department of Agriculture. There are shared equity arrangements that might make sense for you, which involve someone else (an individual or company) chipping in on money for your down payment in exchange for a slice of the home's equity when you eventually sell it in a few years. Or maybe a lease option (also called rent-to-own) is a viable opportunity if it's being offered by a reputable source.
In addition, some buyers think that they should automatically jump on the first mortgage loan they're offered -- but this can be a mistake. One lender might give you a different interest rate than another, or provide some incentives to entice you to select their loan over another, so do a little bit of shopping around to discover the deal that's truly the best fit.
Find a mortgage broker
A mortgage broker can explain your loan options and help you figure out what's right for you, so ask friends for referrals and start looking for one well before you start shopping for a house. Mortgage brokers also can clarify what price range of loan you're actually qualified for (versus what you're just dreaming about -- no shame; we all do it) so that you can start aligning your expectations with reality and figure out what that means for your home buying experience.
Understand your price range
When your mortgage broker tells you that you're approved up to a certain amount, does that mean you should be shopping for homes up to and over that amount? Definitely not!
Remember the rule of thumb that your household should spend no more than one-third of its take-home income on housing. And remember that this number will include insurance, interest, and taxes in addition to the loan you're paying back. Spending a little (or a lot) less on the front end is going to mean less spent over time in interest, so even though it might be tempting, think very carefully about buying a house that's at the very top of your price range. Owning a house is nice; getting foreclosed on because you couldn't make payments is much less nice.
It might be tempting to just jump right in and start shopping, but a preapproval from a solid mortgage lender will give you a huge advantage over buyers who just downloaded an app and got a prequalification. Do your best to get a preapproval in hand before you start looking at houses so that you can put an offer on the right one as soon as you know it's right for you.
Find a real estate agent
When it's time to start seriously shopping, a real estate agent can be a real asset to any first-time buyer. Agents know where to find all the hidden gems, which up-and-coming neighborhoods are being largely overlooked, how to negotiate a sale, and whether that asking price really makes sense given the location and the market.
Referrals from friends can be a good way to find an agent, and you can also look for area specialists on social media and the internet. Remember that you don't have to work with the first agent you interview! Talk to several and ask them about their experience. Look up their reviews online, read their websites and social media pages, and decide whether you like the idea of working intensely with this person for several months while you find your new home.
Decide on the neighborhood
Maybe you know exactly where you want to live, and that's great! More than likely, though, you have several options when it comes to the exact locale, and an agent will be invaluable in helping you parse the difference between this area and that, providing insight into schools and crime, and helping you make a decision.
Be sure to ask your agent for recommendations, too. Agents see a lot of houses go on the market, and there might be streets or entire neighborhoods that simply aren't on your radar, but that might be absolutely perfect for you.
Visit some open houses
Pictures are worth a thousand words, and they certainly tell a broader story than a listing description, but nothing will acclimate you to what's available and common in your price range than attending some open houses and walking around.
Spend one or two weekends walking through some homes to sale with other members of your household. In the car on the way to the next place, designate a debriefer to extract opinions from everybody -- what they liked, what they didn't, how they felt about the size, whether the kitchen or bathrooms need updating. If you can, try to identify any deal-makers or deal-breakers that you'll want to keep in mind as the search gears up.
Start shopping for real
At this point, you've probably got a good idea of where you want to live, how much you can spend, how many bedrooms and bathrooms you need, and any other guidelines that will support your search. So now it's time to start looking in earnest!
Your agent can usually set you up with access to the multiple listing service (MLS), where homes are listed for sale; most MLSs offer email and sometimes text alerts that will ping you when a home that meets your parameters goes on the market. Check out the pictures, peruse the details and descriptions, and if it seems like a winner, ask your agent to set up a time to walk through it in person.
Research: Insurance, internet, utilities, and more
If you're moving to an unfamiliar neighborhood, then the last thing you want to encounter is a nasty surprise -- like not having access to high-speed internet, or through-the-roof homeowners' insurance costs.
It helps to have an insurance agent on hand who can give you ballpark figures for homeowners' insurance when you think you've found a place that's viable, and it's also not a bad idea to research other necessities and utilities. In some rural areas, for example, propane heat is more common -- that means you'll need to be prepared to drop some cash on a propane tank every now and then for heat. If you know all of this going in, you'll be less likely to find one of those nasty surprises down the line.
Make a competitive offer
You've done your research, walked through dozens of homes, and you've finally found one that's a fit. Hooray!
But there's one major hurdle to clear before you can call it yours: You need to make an offer that is within your budget, but is enticing enough for the seller to accept.
This is where an agent can be worth a human body's weight in gold. There are ways to sweeten the deal for the seller without always offering more money -- and an agent should also offer a gut-check if you're planning on lowballing the seller. Humans are humans, and they have a tendency to get offended if somebody offers a price for something they love that doesn't reflect its fair-market value. An agent can keep you from making that mistake and burning a seller bridge.
Get an inspection
Once the seller has accepted the offer, there are just a few more hoops to jump through before everything is finalized. The inspection is a requirement for most lenders, who want to make sure that there are no significant issues with the house (plumbing, structural, pests, and so on) before they accept it as collateral for their money.
And you need to know, too -- this way you're not unintentionally buying a fixer-upper when you thought the place was move-in-ready. So it pays to do a little bit of research on your inspectors upfront to make sure they're experienced, qualified, and familiar with most of the major home issues that are typical in your part of the world.
Get an appraisal
Mortgage lenders also require appraisals so that they can ensure the home is really worth what you (and by proxy, the lender) is paying. The appraiser will verify the square footage, look at the inside and outside of the home, and based on his or her experience and other similar homes that have recently sold nearby, will generate a dollar value that the home is worth at this point in time.
Oftentimes that value aligns with the offer, but sometimes it's higher or lower than the offer. A higher appraisal typically isn't a huge problem, but if the appraisal is too low, the lender may decide to only lend you the amount of the appraiser's value instead of your full offer price. If that's the case, you may need to bring in another appraiser for a second opinion, or it could be time to sit down with the sellers again and talk about a price reduction or another option.
There are a lot of reasons why you might need to hit the negotiation table again at this stage. Maybe the inspector found a problem, or maybe the appraisal was too low. Whatever the case, before the home changes ownership, you'll need to hash out who is responsible for any repairs and how you will manage any appraisal snags.
This is another area where a good agent proves their worth, serving as your advocate and point person for negotiations, trying to get you the best possible deal.
Figure out the utilities
It's almost the finish line -- but before you get ready to pack up and move, you'll want to deal with any and all utilities so that everything is ready when you get there. Don't forget about "extras" like trash and mail, which you will definitely miss if they disappear; take this time to change your address with the postal service, figure out trash and recycling, get the electric and gas and water switched to your account, and make sure you have all your ducks in a row. It'll make the move smoother if you don't have to worry about these loose ends later.
This is the finish line! Usually, the buyers, sellers, both sets of real estate agents, and the buyer's mortgage broker will attend the closing to help answer any questions or clear up any last-minute red tape. A title agent is usually there, too, to help facilitate the close.
Make sure you follow your agent's instructions about how to deliver the down payment, and be ready to sit down for a few hours and sign your way through a bunch of paperwork. It's tedious, but necessary -- and you'll have your posse there to answer any questions that emerge as you sign, sign, sign.
When it's all over, that's it! You're the proud owner of your first house. Congratulations!