Home Buying a Home The Home Buying Process: Where to Start When Buying Your First Home

The Home Buying Process: Where to Start When Buying Your First Home

by Shannon Whyte
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Whether you’re a first-time homebuyer or seasoned homeowner, buying a home is an exciting process. However, it can also be complicated, time-consuming, and emotional.

Fortunately, knowing what lies ahead on the home buying journey can help you prepare for your big leap into homeownership without getting overwhelmed. To help, we’ve put together a step-by-step guide walking you through the entire process of buying a home.

Step 1: Determine if Now Is the Right Time for You to Buy a Home

Buying and maintaining a home is a major financial commitment. Most people will need to obtain a loan to purchase a house. Therefore, you’ll want to make sure you’re financially ready to buy and can get a quality loan.

Consider these questions when deciding whether you’re financially ready to buy a home.

Are you currently in debt?

If you have significant debt, you’ll have a harder time obtaining a loan from lenders. You may need to first pay off your debt before starting the buying process. 

Do you have access to liquid assets?

Your mortgage will not cover all expenses you’ll encounter when buying a home. Therefore, you’ll need access to money for closing costs and down payment that is readily available. 

The amount of available liquid assets you’ll need will vary based on your loan type and the amount of money you borrow. For instance, your down payment is the amount of money you pay early in the buying stages of your home. It will represent a portion of your total purchase price. Your mortgage loan will cover the remaining cost of the house at the time of closing. 

While some people will buy a home with no money down, there are advantages to making a down payment on your loan. The greater your down payment, the less money you’ll need to borrow. As a result, you’ll have lower monthly payments and pay less interest over the life of your loan.

How good is your credit score?

Check your credit score before starting the home buying process. Lenders use your credit score to determine how risky it will be to lend you money. You may have trouble qualifying for a quality loan if your credit score is low. 

Many lenders look for credit scores of 620 or higher to qualify for a loan. So, if your score is very high, such as 720 or more, you’ll likely be able to get excellent loan terms. If your score is low or you’re having trouble getting a quality loan, you may want to take steps to raise your credit score before starting the home buying process.

Step 2: Clarify What You Need in a Home

Looking for a new home can be an emotional experience, with some people ‘falling in love’ with a house on sight. However, before you start seeing what’s available, take time to identify what you actually need from your new home versus what’s nice to have. This step helps ensure you end up with the right home for both your budget and your life.

Some factors to consider before shopping for a home include:

  • Minimum square footage you’ll consider
  • The price range that fits your budget
  • If you need access to public transportation
  • Location and ranking of local school districts
  • Number of bedrooms you’ll need (now and in the future)
  • Whether you’ll consider a fixer-upper
  • Whether there are layouts or styles of homes that won’t work for you (e.g., a two-story house may not be suitable if a person has trouble navigating stairs)
  • Minimum yard size you’ll consider
  • Type of neighborhood that fits your needs

Step 3: Identify How Much House You Can Afford

Once you’ve determined now is the time to buy a home, you’ll need to set your budget. Your housing budget will be linked to the total savings you have to put toward a down payment, how much debt a mortgage lender believes you can reasonably take on, and the amount you actually afford to pay back on a monthly basis.  

To help determine a target price range for your home, you’ll want to weigh your reliable monthly income against recurring monthly expenses like food, utilities, car insurance – and of course, housing. Consulting an online mortgage calculator that features current interest rates will give you a more accurate picture of what your future house payment might be – and how much home you can reasonably afford in your search area.   

Assess your debt-to-income ratio (DTI) if you plan on borrowing

Debt-to-income ratio is a measure that lenders look at to determine how risky it might be to offer you a mortgage loan. This ratio is essentially all of your monthly debt payments divided by your monthly gross income. For example, a household with a combined monthly income of $6,000, and regular monthly expenses totaling $2,000, will have a DTI of about 33%. 

$2,000 / $6,000 = .33 x 100 = 33%

As a general rule, lenders prefer to see a DTI of less than 36%. When estimating your DTI, be sure to account for the additional costs of homeownership, such as property taxes, homeowner’s association fees, and homeowners insurance. 

Step 4: Calculate Your Estimated Closing Costs

You’ll need to have enough liquid assets to cover closing costs. The amount of your closing costs will vary based on the loan type, lender, and where you live. 

However, you can determine a rough estimate at this stage so you can make sure you’ve saved enough money. Typically, you’ll want to set aside 3% to 6% of the house’s purchase price. So, if you’re planning to buy a home for $150,000, closing costs would roughly be between $4,500 to $9,000. You calculate this estimate by multiplying the price of the house by the percentage.

Once you have a mortgage lender, they will give you a specific amount that you will owe at closing. At this stage in the game, knowing a rough estimate should be enough to help you determine whether you have the available assets needed to start the buying process.

Step 5: Determine Your Down Payment Options and Amount You Can Put Down

As mentioned, most homeowners will place a down payment on a home. Your down payment will depend on your current financial situation, credit score history, the lender, and the loan type. 

If you’re struggling to get a loan, consider taking time to save up cash for a larger down payment before starting the home buying process. 

Common Down Payment Options to Consider

Many home buyers try to put down at least 20%. This will increase your chance of being approved for a mortgage at a lower interest rate. However, not all homebuyers can put down 20% when purchasing a home. Fortunately, there are other little-to-no down payment options for those who qualify, such as: 

  • VA loans: These loans are for current and veteran military members and are guaranteed by the U.S. Department of Veterans Affairs. These loans typically don’t require a down payment.
  • FHA loans: These loans often have down payment requirements as low as 3.5%. The Federal Housing Administration backs these.
  • USDA loans: These loans also typically don’t require a down payment and are backed by the U.S. Department of Agriculture’s Rural Development Program. The loans are for rural and suburban homebuyers who meet specific eligibility requirements and income limits.
  • Conventional loans: The U.S. government doesn’t back these loans. They typically follow the down payment guidelines established by Fannie Mae and Freddie Mac. The down payment required will vary but can be as low as 3%.

If you are able to put 20% down, you’ll be able to avoid paying for what’s called private mortgage insurance (PMI). PMI helps protect the mortgage company in case you aren’t able to make your payments and end up in foreclosure. Mortgage insurance, paid as both an upfront cost and ongoing annual fee, can range from about .35%-1% of the total loan amount. 

On conventional loans, you can generally file a request with your lender to cancel PMI once you have at least 20% equity in your home. By law, PMI cancellation will happen automatically once your mortgage balance drops below 78% of the original loan amount. For FHA and USDA loans, however, the extra insurance payment can stay with you throughout the life of your mortgage, at least until you qualify for a cancellation or refinance, so avoiding PMI can save you significant money down the road.

Step 6: Shop for Mortgage Lenders and Rates

Now that you know your budget and credit score, you’ll want to begin shopping for a mortgage lender to get the lowest rate. Take your time and shop around and compare lenders. 

When evaluating lenders, also keep customer service in mind. Having a reliable, knowledgeable point of contact can help ensure all the loan paperwork stays on track throughout your home buying process. 

During this process, also determine the type of mortgage you’d prefer. The two main loan types are fixed-rate mortgage and adjustable-rate mortgage (ARM). 

A fixed-rate mortgage has a set rate that will not change throughout the term of the loan. This allows for predictable monthly payments. 

The rate of an ARM loan can change after the end of the introductory period. While these loans often start with a lower rate than a fixed-rate mortgage, the rate can increase significantly. If you plan to pay off the loan before interest-rate adjustments occur, this may be a good option.

Step 7: Get Pre-approved (Not Pre-qualified) for Your Loan

Once you know the lender and loan you want to consider, you’ll want to get pre-approved by your lender. Pre-approval shows sellers that you’re able to obtain a loan to buy a home. This step is particularly helpful in competitive markets and for first-time homebuyers. 

To be pre-approved, you’ll need to apply with your lender. The lender will ask questions about your assets, income, and the type of home you want to purchase. They will also check your credit score and require various documentation, such as W-2s, proof of identity, and pay stubs. 

After you’re pre-approved, you’ll receive a pre-approval letter stating that you conditionally qualify for a specific loan amount based on the information presented to the lender. This letter shows sellers that you’re serious and that your income, assets, and debts have been verified.

Pre-approval carries more weight than being pre-qualified since that information isn’t verified.

Step 8: Find the Right Agent for You

Whether you’ve owned a home or are a first-time buyer, the process can be complicated, emotional, and confusing at times. The right agent can help you navigate all the steps of buying a home. Throughout the homebuying process, they are your representative from finding the right house, negotiating your offer, and closing on the home.

Talk to friends and family for recommendations. Then, talk to several agents to find out if they are a good fit. Be sure to ask questions about their experiences and qualifications. 

Be sure they are familiar and knowledgeable about the area you’re interested in. You’ll want an agent that sells or lists homes in the neighborhoods where you want to live. Assess their communication style and find out how they typically work with buyers. Ask how many homes the agent has sold, whether they’ve sold any in the current market, and ask for additional references. Also, make sure you’re working with a licensed agent. 

Step 9: Start Looking for Houses that Fit Your Needs

You’re now ready to start looking at potential homes. When searching for a house, be sure to do your research and use various methods to find possible houses that fit your needs. 

Search online

One easy way to search is online. This option allows you to search through listings in your desired area quickly. Additionally, most online listings provide multiple images of the house’s interior and exterior. Some even provide a video tour. As a result, you can easily narrow your options by ruling out options that don’t fit your needs without leaving your home. You can also create a list of properties that you want to see in person.

Consult with your agent

A real estate agent can also give you an advantage when searching for homes. Through their involvement in the local real estate network and relationships with other agents, they often know about opportunities before a house goes on the market. They also can consult the Multiple Listing Service (MLS). This registry contains a list of available homes in a set area and is compiled by member brokers. 

Research neighborhoods in your target area for a good fit

Walk or drive through neighborhoods you’re interested in to see if any homes are for sale. Additionally, research them to make sure they are a good fit for you. For instance, calculate your commute time, assess noise levels, and see how far it is to places like the grocery store. 

Also, your agent can give you information on crime rates and the quality of the local schools. 

Attend open houses or schedule a tour

As you find homes you’re interested in, go to open houses. Even if the home isn’t the right one for you, this provides you an opportunity to learn more about the neighborhood. 

When touring a home, take a copy of the property information sheet or bring a notebook so you can make notes on what you like and dislike. If you’d like to take any pictures, ask the hosting real estate agent first to make sure it’s okay. Your notes will make it easier to keep track of the different houses you see.

Be sure to ask any questions you have during the open house. You’ll want to learn as much as you can about the property if you’re considering placing an offer.

Step 10: Make an Offer on a House That’s in Your Budget

Since you’re pre-approved, you and your agent can proceed with making an offer once you’ve found a home you’d like to buy.

Your agent can help ensure your offer is competitive while staying within the home’s value and your budget. Also, during this time, buyers can sometimes make emotional, impulsive offers that are higher than they mean to make. Your agent can be a valuable resource to help you stay on track with your budget, even if you end up losing an offer. 

When you make an offer, you will submit an offer letter in writing. This letter contains details about yourself, including your name and current address, the price you will pay for the home, a deadline for the seller to respond to the offer, and more. 

If you have an agent, they will typically write the offer letter for you. Your agent will then contact the seller or the seller’s agent to submit your offer.

The seller can respond by:

  • Rejecting your offer
  • Accepting your offer
  • Making you a counteroffer

If they accept your offer, you will continue with the buying process. However, if they reject or make a counteroffer, you now have decisions to make. 

Having an offer rejected doesn’t necessarily mean you don’t have a chance to buy the home. You can make a new offer, especially if you or your agent understands why your initial offer was rejected. You may also decide that you’ll move on and make an offer on a different house.

If you receive a counteroffer, you can decide to accept the seller’s offer, make another counteroffer, or reject it. The negotiation stage between you and the seller can go through multiple rounds. Your real estate agent is a valuable resource during this time. They will help you manage the negotiations, answer your questions, and can be a sounding board about what you want to do. 

Remember, you can walk away if you and the seller can’t come to an agreement. 

Step 11: Make an Escrow Deposit

An escrow deposit (sometimes called earnest money) is a specific amount of money the buyer sets aside after a seller accepts the buyer’s offer. This money is essentially a good-faith deposit. For instance, if the contract falls through due to a problem with the buyer, the seller typically gets to keep the money. However, if the buyer purchases the home, this money is applied to the buyer’s down payment.

An escrow account is established to protect both parties by holding the deposit until the house transaction closes. The amount of the escrow deposit often ranges from 1% to 2% of the price of the home being purchased. However, the percentage can go much higher depending on your location and the real estate market.

The escrow deposit process

The deposit is delivered when the purchase agreement or sales contract is first signed. 

The buyer’s check will be held by a third party, the title company, or the buyer’s agent. The seller will not be given the check at this point. One option is that the third party holds on to it and doesn’t cash it. In this case, you may not need to open an escrow deposit account. However, if the check is cashed at this time, it should go into an escrow deposit account.

Step 12: Prepare to Close

The closing process is the final stage you need to complete before the home is finally yours. While this is an exciting time, you do have several things to do before the day of your closing. 

During this time, don’t forget to reach out to your agent for help and guidance, so all closing contingencies are completed on time. This step will help you avoid any delays due to closing problems. Closing contingencies are the conditions indicated in your contract that must be done before the home transaction can be legally binding.

Here are some common closing contingencies that must be met before the closing.

Get a home inspection

A home inspection may or may not be required, but it’s often included in purchase offers. 

A home inspection helps protect you by allowing an inspector to go through the home to look for any problems. The inspection lets you back out of the purchase or negotiate repairs with the seller without losing your escrow deposit if significant repairs are uncovered.

During the inspection, the inspector will test the windows, check the condition of the roof, inspect fireplaces, check the foundation for cracks, check the electrical system, and more. They will also look for any health hazards such as lead paint and mold. 

You’ll receive a list of issues found when the home inspection is closed. Be sure to go through all the results with your agent, and keep an eye out for major repairs that need to be done. 

If the home needs expensive, necessary repairs, like replacing the roof, you may want to rethink whether you can afford the house at this time. Another option is to renegotiate your offer. You can request the seller to make the significant repairs found, renegotiate the price, or ask for a seller’s credit.

You’ll want to consult with your agent to determine the right option for you. Remember, once you buy the house, you’ll be responsible for any remaining repairs. 

Schedule the home appraisal

Your lender will require a home appraisal. The appraisal keeps the lender from loaning you more money than the house is worth. You or your agent can schedule a professional appraiser to estimate the house’s current market value. Typically, the appraisal fee is included in your closing costs. 

If you’re making a cash-only offer, you won’t need a home appraisal.

Ensure your loan documents are in order

You’ll want to have all your documents easily accessible and organized. This step can help you avoid closing delays. You can consult with your lender for a complete list of documents you’ll need.

Documents typically required include:

  • An identification card or driver’s license
  • Income statements such as W-2 forms or pay stubs
  • Statements showing your assets like investments and bank accounts
  • Insurance forms
  • A complete copy of the contract

Obtain homeowners insurance

Homeowners insurance covers the cost of repairs, rebuilding, or replacing items if your home or items are destroyed or damaged. These policies may also provide liability coverage against accidents in your home or on your property. 

Your lender may make you get homeowners insurance. The cost is often included in your monthly mortgage payment. Shop around to find the right policy to fit your needs.

Review your closing disclosure

Your lender will send you a closing disclosure at least three business days before your closing. This document will list all final terms of your loan, including closing costs, who pays money at the closing, and who receives money. 

Review the costs carefully before the day of the closing. Compare each cost listed to your loan estimate. If anything has changed, talk to your lender to find out why before the closing.

Complete the final walkthrough

Your agent will schedule the final walkthrough so you can make sure the house is in the expected condition. The final walkthrough often takes place 24 hours before the closing meeting. 

During the walkthrough, you’ll want to make sure the house’s condition matches the agreements made in the contract. For example, you’ll want to test light fixtures, doors, windows, appliances, water faucets, flush toilets, open garage doors, and more. Take your time. Ask your agent about anything else they think you should check. Also let your agent know if something is damaged or if any items that were supposed to remain with the house were removed. 

Step 13: Attend Your Closing Meeting

During the closing meeting, you’ll need to sign a lot of paperwork. Ask any questions about the documents during the meeting before you sign.

On the day of the meeting, you’ll want to bring: 

  • Your photo identification
  • Any paperwork that the title company or mortgage loan officer needs
  • A copy of the proof of funds for your closing costs
  • A copy of your closing disclosure
  • Your cashier’s or certified check made payable to the title or closing company to pay for closing costs 

During closing, you will:

  • Pay any remaining closing costs and make your down payment
  • Sign a settlement statement that lists the costs related to the home sale
  • Sign a mortgage note that you promise to repay the home loan
  • Sign a mortgage or deed of trust to secure the mortgage note

The seller will sign paperwork, like the deed, that transfers the property to your ownership.

After the meeting ends, you’ll officially be the new owner of the home.

Buying a Home Is a Process, But Doesn’t Have to Be Overwhelming

Purchasing a home takes time and preparation, but it doesn’t have to be stressful. By understanding each step of the process, you’ll know what to expect, how to prepare, and how to determine when you’ve found the right home for you.

Ready to find your next home? REX can help you with every aspect of your real estate journey, whether you’re buying, selling, or both. 

With REX, your get the knowledge and expertise of our top local real estate agents, competitive rate comparisons and fast pre-approval from REX Home Loans, and in-house title and escrow services to help ensure a smooth close. We can even help with your move. Here, you have everything you need to move on from the home you’re in and find the home you’ll love next.

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