How To Buy Your First Home

9 Basics Steps To Finding and Purchasing Your First Home

Tips for buying your first home: Get out of debt and build an emergency fund before buying Browse loan options Be careful when considering creative financing for the down payment Be honest with yourself about what you can afford Find a good realtor

The Balance / Erika Pajarillo

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.

Key Takeaways

  • 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 is a lot more expensive than renting, since you're 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.

Consider getting out of debt (or at least reducing your debt) and saving up an emergency fund before you purchase your first home. Look for ways to reduce high-interest credit card debt before purchasing a home, too. 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.

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.

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 you 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, look for a good real estate agent. This person should listen to your wants and needs carefully. That way, they can better make recommendations or explain the 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.

Consider using a buyer's agent—someone who is bound to help the buyer. A listing agent is responsible to the seller, so it might make sense to have someone in your corner.

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. The escrow holder will work to 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)

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?

Those who bought homes before 2010 could claim a first-time homebuyer tax credit of up to $8,000 or 10% of the home's value (whichever was less). That credit has since lapsed, but another bill was introduced in Congress that, if passed, would revive the tax credit and increase the maximum dollar amount to $15,000.

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, so your state's housing finance agency will have the best information available for you. On the national level, the Public Housing Agency offers housing vouchers for low-income Americans who want to buy a home. The Federal Housing Administration also has a program of insuring mortgages, making it easier to find an affordable loan for a home.