Buying your first home is exciting, but it can also be a little overwhelming. Credit checks. Mortgage applications. Home listing after listing after listing. Where do you begin?
With these seven steps, of course.
1. Research Prices in Your Area
This is something many first-time home buyers don’t do. But skipping this step can result in heartache down the road. You may find that you can’t get nearly as much for your money as you thought. This means you’ll either have to scale back your expectations or wait a bit longer to buy a house.
Not sure what the market looks like in your area? This heat map of current median listing prices from Trulia is a good place to find a statewide overview. But that’s just the beginning because prices can vary dramatically from one section of a state – or of a city – to the next. Another place to start is with Realtor.org’s “Metropolitan Area Median Prices and Affordability” report, which is published every quarter. It gives more specific information for major metro areas.
Really, though, the best way to find out what homes cost in your area is to look for yourself. Check out listing prices in local news publications or by searching on Realtor.com in the area you want to live.
2. Make a list of needs and wants
Now that you know about what a home of a certain size and quality costs in your area, you can make a realistic list of needs and wants. For first-time home buyers, especially those on a budget, keep these lists as simple and down-to-earth as possible.
You should have some specifics, such as square footage, number of bedrooms, number of bathrooms or type of construction (detached vs. townhome, for instance) on your list.
It’s also OK to dream a little: add a few wants – hardwood floors, new kitchen cabinets, a walk-in master closet, etc. Just don’t be too picky and rule out homes because they don’t meet all your specifications.
Not sure what all should go on your list? Check out this helpful wants and needs worksheet from the Canadian Home Builder’s Association. It’ll help you decide exactly what you need and want in your first home.
3. Check your credit
Before you take another step, it’s time to check your credit history and credit score. Both you and your spouse, if you’re applying for a loan together, will need to be sure your credit is as polished as possible before applying for a mortgage.
The first step is to pull your credit history. You can get a free credit report from each of the major reporting bureaus – Experian, Equifax and TransUnion – once a year. Get your credit report and credit score from each bureau, as well as your official FICO score, even if you have to shell out a bit of cash to do it.
You never know which report a potential mortgage lender will use, and sometimes they contain different information – and different mistakes. First, check your reports for mistakes and have them fixed if necessary. Then, see if your credit score is high enough for a mortgage.
According to a survey from the Home Buying Institute, to be approved for an FHA loan, you need a credit score of 600 or above and to be approved for a conventional mortgage, your score should be at least 640. Those are rock-bottom figures, though, and many of today’s lenders shy away from anyone with a score under 700.
However, any increase in your credit score could mean a decrease in your mortgage’s APR and huge savings throughout the life of your mortgage. So it’s worth your while to brush up your credit score, even if it means putting homeownership on hold for a while.
4. Know what you can afford
It’s surprising, but sometimes mortgage lenders will offer to loan you more money than you can afford to repay. So, it’s important to understand how much your monthly mortgage payment would be and how that fits into your budget.
In some areas of the country, buying a home can be cheaper than renting one. But in others, your monthly costs will rise with homeownership. Plus, as a homeowner, you have to worry about expenses that you didn’t need to be concerned with as a renter – all the utilities (many apartment complexes pay at least part of them), repairs, taxes and more.
This article from Kiplinger can give you some idea of the costs that go into first-time homeownership. So take a hard look at your budget before you talk to a mortgage company. Otherwise, you may end up taking out an unrealistically large mortgage just because the lender offers it.
5. Get preapproved for a mortgage
There are lots of online mortgage calculators where you can run the numbers for yourself and see how much home you can afford. But only your potential lenders will be able to tell you how much they’ll loan you.
So now, it’s time to apply for a mortgage. You’ll want to talk to several lenders – at least three or four – because each might offer you slightly different terms. (Apply with all the lenders within 30 days to avoid a big hit to your credit score.)
If there are extenuating circumstances surrounding your loan, you may want to apply to banks and lenders where you can talk to someone in person from the start, instead of starting with an online form. For instance, if your credit isn’t great but you have no other debt and a big down payment, you’ll get better offers if you can explain that information to lenders.
Keep in mind that preapproval doesn’t guarantee that you’ll get the loan when it comes time to close on your home, but it’s pretty close. If your credit or income situation changes during the home buying process, your loan could be yanked.
Still, preapproval, says one New York Times article, is more important than ever. A preapproval letter gives you more weight with sellers who want to see that you’re prepared to buy before signing a contract.
6. Find the right Realtor
Realtors are legally obligated to work to your best interests, but that doesn’t mean that some won’t push you too quickly or into a too-expensive home to get a better check for themselves. When it comes to finding a Realtor, look for one who is used to working with first-time home buyers, whose needs are different from experienced buyers.
Also, look for a Realtor who will take the time to educate you about buying a home. This is a huge decision, and you don’t want to do a single thing unless you understand exactly what you’re doing.
This article from Bankrate.com outlines the best ways to find a Realtor, including getting referrals from local friends and family members, choosing a broker or agency, and choosing a Realtor who really listens to your needs.
7. Be open-minded
Finally, here’s a small tip from personal experience: be open-minded but smart when shopping for a home. You would be amazed at how many buyers like a home, except for very minor things like paint colors or appliances.
Find a home whose “bones” you like, because a major remodel is pricey, but whose details you can live with. You can always redo flooring, paint colors, landscaping and other details as you settle into your new home (and save the money for these steps). Being a little broader in your expectations could lead you to find a gem you might not have otherwise.
There you go. Your extensive guide to what you need to do before you purchase your first home. It’s a big list, and you should probably start dreaming and dealing with financial issues at least six months before you plan to buy. But if you go through this list and take your time with each step, you’ll make a smarter home buying decision that you’ll love for years to come!