Homebuying can be an exciting experience. You’ll have a place of your own, with your monthly payments going toward paying it off. If you’re a first-time homebuyer, you need to learn what’s involved in getting preapproval for a loan, finding your dream home and finalizing the deal.
How to Buy a Home
If you're a first-time homebuyer, the biggest thing that sets you apart in the homebuying process is that you don’t have a home to sell. That makes things less complicated, since you don’t have to deal with putting your house on the market. But you still need to get a mortgage lender to loan you the money to buy a house.
Before you start shopping, get a lender to provide you mortgage preapproval you so you know how much of a home you can afford. With your preapproval letter in hand, you can then can start looking for a real estate agent who can help you find the home you want.
Read More: Buying a Home: The Process
Saving for Your First Home
As soon as you decide you want to buy a home, it’s important to get your finances in order. A lender can tell you how much of a down payment you need to pay to qualify. Typically, this is at least 3.5 percent of the amount you’re borrowing, but it can vary based on your credit score and the type of loan. You should also ask how much you need to put down to avoid paying private mortgage insurance (PMI) in your monthly mortgage payment.
You should also check into closing costs which add another 2 to 5 percent to your out-of-pocket costs. If you don’t have that kind of money on hand, check around to see if you can find a lender who can either include those in your loan or connect you with an FHA loan, which can have lower closing costs.
Read More: Buying a Home With No Money Down
Using a Real Estate Agent
As a first-time homebuyer, a real estate agent can be your best resource. These professionals represent you when finding a house and negotiating the home price. They also walk you through all the paperwork involved. At closing, your agent is by your side, looking out for your interests and asking any questions you have.
But the real estate agent’s work begins long before you find the house you want. An agent has access to the latest listings and can help track down the house you want. You also get information a seller won't tell you about a neighborhood and the property itself, such as a history of flooding or crime in the area.
Buying a New Home
Before you start looking for a new house, decide whether you want to purchase one that is newly constructed or one that has had at least one owner. There are pros and cons to each, but the biggest benefit to a new house is that you’ll have the current home décor styles, like taller ceilings, open floor plans and bright, airy kitchens.
The biggest benefit of a new home is that everything is new. This includes your HVAC system, roof, plumbing and electrical wiring. You won’t have to worry about maintaining or replacing items that were installed years or decades ago.
Buying an Older Home
You can often get a better deal on an older home, especially if you’re willing to buy a fixer-upper. If you can do a lot of the work yourself, you can increase the value of the home with minimal expense. Before moving into an older home, though, make sure you get a home inspection to identify any major problems the seller isn’t disclosing.
One rarely-mentioned benefit of an older home is that it probably comes with items like towel racks and draperies, and sometimes even added extras like built-in bookshelves. Some new houses can have these, too, but you might pay extra for them.
Custom Homes vs. Builder Models
Once you’re preapproved, there’s one way you can start looking around at houses. Homebuilders often prefer to buy a large chunk of property, then put numerous homes on it. These are called production homes, and these builders are called production builders.
With a production home, there’s typically a builder model home that you can walk through. You can let the person representing the builder know what you’re looking for and get some floor plans. If you choose to proceed, you pick out a lot, then choose from a small selection of countertops, flooring types and exterior features like shutter and door colors.
The alternative, when buying a new home, is to go for a custom build. In this case, you buy the lot, then pay someone to put a house on it. This can be significantly pricier than buying an older home or choosing from a selection of production homes, but it allows you to get exactly the floor plan and extras you want.
Read More: Buying a Builder Home
Searching for a Home
Looking for the perfect house is one of the best parts of homebuying. Your real estate agent will send you listings that might interest you. If you find one you want to see in person, you can take a tour of the property.
You don’t have to wait for your real estate agent, though. You can use sites like Zillow and Trulia to search for listings on your own. If you see one you like, let your real estate agent know so you can do a walk-through.
Attending Open Houses
In some cases, you don’t have to schedule a time to take a look at a property. Many real estate agents hold open houses for the homes they’re selling. These are typically scheduled for weekends and advertised online and through signage near the home.
First-time homebuyers can use open houses to get a feel for what they want and don’t want in a house. It’s also a great way, before you’ve aggressively started your home search, to familiarize yourself with the process of walking through homes. It’s best to have your agent with you at open houses, but you can attend without one.
Types of Mortgages
When you’re shopping around for a home loan, it’s important to make sure you’re getting the best mortgage rates available. The mortgage rate describes the interest you’ll pay on that loan over the time you’re in the house. Even a small change in the interest rate can make a big difference in how much you pay.
A conventional loan is a loan that’s provided directly from the lender. You typically need a credit score of at least 620 to qualify. As a first-time homebuyer, there are programs that can help you get into a home.
First-time homebuyers should look into an FHA loan, which accepts borrowers with credit scores as low as 500. Your down payment can be as low as 3.5 percent with an FHA loan, and closing costs may be lower than with a conventional loan.
Read More: What You Need to Know: 15 Year vs. 30 Year Mortgage
Making a Homebuying Offer
Once you find the home of your dreams, your real estate agent makes an offer. This is an official process, with a dollar amount attached to it. The seller can then either accept the offer, make a counteroffer or reject your offer outright.
If your contract is accepted, you move to the “under contract” phase. You give your real estate agent a payment called earnest money, which shows that you’re serious about the offer. Earnest money is refunded after the sale is complete. Then you need to find a lender to take care of funding the purchase.
Read More: How to Buy a Home Without Earnest Money
The Mortgage Approval Process
If you were preapproved by a lender, you’ve probably already filled out an application. But once you’ve found the home of your dreams, you don’t have to go back to that original lender. You can shop around and choose a lender that offers a more competitive interest rate.
To officially apply for a loan, you either complete the application that got you preapproved or fill out a new one with another lender. You need to provide the purchase agreement on the house you’re buying, as well as documentation of the earnest money you put down on the home.
You’ll get an estimate of all the details related to the loan, including the fees you’ll pay. In the days that follow, you may be asked to provide additional documentation, like paystubs and bank statements.
Read More: Credit Score for Mortgage Rates: How It Works
Conducting a Title Search
If you’re buying real estate, a title search is an important part of the process. Who pays for this can be negotiated, but the fee should be in the $75 to $100 range. This will likely be part of the closing process, and the duty will be handed over to a title company or attorney.
A title search looks for any outstanding issues with the home. If a lien has been put on it for a previous owner’s nonpayment of debts, for instance, a title search finds that information. There could also be issues with property disputes and easements that you, the future owner of the home, need to know about before you sign on the dotted line.
Doing a Walk-Through
Before you close on your house, your mortgage company requires a home inspection and property assessment. Both of these protect your lender’s investment, but they also protect you. An assessor ensures that price you’re paying for the home matches its value, and an inspector checks the home thoroughly to identify any issues that need to be fixed before you buy it.
Usually, the inspector finds at least one issue that needs to be addressed. The seller repairs the issues or negotiates the price down in exchange for having you fix them after you move in.
After the repairs are completed, you need to schedule one final walk-through. During this process, you make sure anything you’ve asked to be fixed has been repaired. Also turn on each faucet and electrical outlet to ensure the inspector didn’t miss anything. After this final walk-through, you’re ready for closing.
Grants for First-Time Homebuyers
As a first-time homebuyer, you’re eligible for special government programs that can help you get into a house. Here are a few of the most notable.
- FHA loan: The Federal Housing Administration backs loans through lenders to help first-time buyers get into a home. With this type of loan, you can get into a home with a lower credit score and down payment than you’d find with a conventional loan. You get an FHA loan through a lender.
- Homeownership vouchers: Low-income first-time homebuyers may qualify for these subsidies, which can be used toward a home purchase. You get these through your local Public Housing Agency.
- Section 184: This program is designed to provide backing for mortgages to Native American and Alaska Native families, Alaska Villages, Tribes or Tribally Designated Housing Entities.
- VA loans: If either you or your co-homeowner is a military veteran, check out home loans backed by the Veterans Administration.
- USDA loans: Those buying in rural areas may qualify for assistance programs specific to rural home purchases.
- State loans: Check with your state housing agency to see if there are any locally based government programs that can help you.
Read More: What is a Jumbo Mortgage?
Maintaining Your New Home
Once you move in, you’re responsible for taking care of any issues that arise. If you get a leak in your roof or your heat and air unit goes out, you have to deal with getting the repairs done. You also need to handle any landscaping upkeep, including mowing and removing weeds from your property.
Homeowner's insurance is essential for homebuyers. Your lender sets this up for you during the closing process, ensuring your payments are made on time. Homeowner’s insurance takes care of weather-related damage or loss due to a fire. If you live in an area prone to flooding, hurricanes or sinkholes, though, you need to purchase separate insurance to cover those incidents.
Homebuying simply requires shopping for a property, making sure you have the funds necessary to purchase it and signing paperwork to finalize the transfer. With a good real estate agent by your side, you can easily tackle the challenge.
- HUD.gov: Let FHA Loans Help You
- Experian: What Credit Score Do I Need to Get a Mortgage?
- USA.gov: Mortgages
- USA.gov: Help Buying a New Home
- HUD.gov: PHA Contact Information
- U.S. Department of Veterans Affairs: VA Home Loans
- USDA Rural Development: Programs & Services
- Homelight: What Are Title Searches? How to Sail Through Your Home’s Background Check on the Road to Closing
- Bankrate: 5 Types of Mortgage Loans for Homebuyers
Stephanie Faris has written about finance for entrepreneurs and marketing firms since 2013. She spent nearly a year as a ghostwriter for a credit card processing service and has ghostwritten about finance for numerous marketing firms and entrepreneurs. Her work has appeared on The Motley Fool, MoneyGeek, Ecommerce Insiders, GoBankingRates, and ThriveBy30.