Deciding to purchase your first home is a really exciting time, but the process itself can be a bit of a black box. This step-by-step guide demystifies the process and walks you through the basics on what actually goes into buying a home.
Making the Move: Renting to Buying
Making the jump from being a renter to being a homeowner is a big decision, so don’t be afraid to take your time with it. There are pros and cons to both renting and buying. Being a homeowner has many benefits, like increased privacy and being able to paint your walls bright yellow if you feel like it. But with that added flexibility also comes added responsibilities.
As a homeowner, you’ll be 100% responsible for the maintenance and upkeep of your home. No 1:00AM calls to a landlord asking to let you into your home. You ARE the landlord!
You also won’t be able to pick up and move to a brand new area as easily. So before even embarking on the journey to homeownership, it’s really important to know what you are getting yourself into so that you can make the best financial and life decision.
Getting Your (Financial) House in Order
The process of buying a home starts months or even years before you actually put the key in the door. Depending on where you are financially, it may take some time to get your finances in order so that you are ready and able to purchase your first home when the time comes.
The two biggest items are your credit and saving enough for a down payment and closing costs.
When you go to get a mortgage, banks will look at your credit score, payment history, and your credit balances among other things. They’re making sure that you have a history of paying back your financial obligations on time.
They also want to make sure that you have enough cash at the end of every month to cover your new mortgage payment. They will be looking at your debt-to-income ratio. What is debt-to-income ratio? This is the total monthly payments for all of your debts divided by your total monthly income. If your monthly debt payments are too high, you might have to spend some time paying down debt before you are able to qualify for a mortgage.
You’ll also want to make sure that you have enough money saved for a downpayment and closing costs. The amount that you will need for those expenses will vary depending on what type of mortgage you get and the amount of the mortgage. The less money you put down on the home, the more you will pay in interest over the life of the loan. Even if you don’t know how much you want to spend on a house just yet, you can still start saving towards your homeownership goal.
Ok, How Much Can I Spend on a House?
Ideally, you want to head into the home buying process knowing exactly how much you want to pay for a house. Set your budget in advance. No one knows your financial situation better than you do. In deciding to purchase your first home, it’s a great idea to create a sample budget with your new house payment, any added expenses, and your other financial goals.
Your budget will quickly reveal just how much house you can comfortably afford – a number that might be drastically different (as in lower) than the size of the mortgage loan your income could qualify you for. You’ll want to include your new mortgage payment, taxes, insurance, increased utility bills in addition to any goals you are already working towards, like saving for retirement.
And don’t forget to include the costs of moving, decorating your new home, and purchasing all of those things that you never needed before becoming a homeowner (like a lawn mower).
Research and Priorities 101
Now that you know your budget, you can start thinking about your priorities when it comes to buying a house. What are your housing dealbreakers? Do you like galley kitchens or are you a kitchen island or bust kind of homeowner?
Think about where you want your house to be located and the potential commute. Also think about how many bedrooms, bathrooms, and other features you would like your house to have. Online real estate sites like Zillow and Redfin are a great place to start your research. This is also the perfect opportunity to see just how much house and how much of your priority list you can fit into your budget.
Consider planning ahead for the size house you will need over the next few years. Do you often have visitors or plans for a family expansion? You may need an extra bedroom or two. Already have a family of 5? That extra bathroom may be perfect.
Even though you might have some time before you are actually ready to buy a house, you can get to know the housing market by attending open houses in various neighborhoods. Drive around at different times of day. Speak to the neighbors to really learn about the area.
When the time comes for you to actually buy your house, it’s a good idea to get prequalified with a bank. That way if you find a house that you really like, you are able to put in a solid offer that includes your prequalification letter. You’ll want to apply to several lenders to see which one will offer you the best terms. Don’t be afraid to negotiate with lenders to get the best deal you can on your mortgage.
The other benefit of getting prequalified before you start shopping for a house is that it can identify potential issues before your dream house is on the line. The lender will look at your credit, finances, and employment history and let you know if there are any items that could prevent you from getting a loan and how to correct them.
Finding Your Dream Home
Now we get to the fun part! This is where you actually go out and find your first home. If you are interested in working with a realtor, now would be the time to hire one. You might get lucky and find the perfect house early on in your search. Or it might take weeks or months for the right house to come along. Buying a house is a long-term decision so you’ll want to take your time and make sure that you find the house that best fits your needs.
A house that is perfect right now will often cost more than one that needs some work. With your first house, you might not know exactly how you want a house to look. Remember that you’ll probably be living there for years and it’s ok for you to take your time to decorate and style the house to your liking. Plus, you can always change up your style!
Going Under the Contract
When you find the right house, you’ll then put an offer in. This is the stage where you negotiate on the price of the home, repairs, and any other terms of the transaction. After you have a signed contract, you’ll want to get the home inspected. You can opt to have a single inspection performed by a general inspector. It’s also a good idea to have specialized inspectors come in, particularly if you plan to use the results of the inspection to negotiate on the price or repairs.
Closing and Moving Into Your New Home
After the contract terms have been finalized, the next step is to work with your bank to get final approval on your mortgage. The bank will ask you to provide the documents it needs to confirm the information that you provided during the prequalification stage. There will also be an appraisal done to confirm the value of the house. Once the bank approves your loan, the next step is to close on the loan by signing all of the legal documents. Once the closing company receives the funds from your mortgage company, they’ll hand you the keys to your new home.
Settling into that Homeowner Life!
It’s been quite a journey but, congratulations, you are now a new homeowner! Just remember, the financial considerations of buying your first house do not end when you move in. Those new homeowner purchases can quickly spiral out of control if you aren’t careful. So go ahead and dust off that budget estimate you made when your new home was just a spark in your eye and make sure to implement it!