Buying your first house can be exciting, but it can also be intimidating because of all the financial steps and real estate procedures you need to prepare for. Here’s what you need to know.
Are you ready to buy a house?
Going to open houses on Sunday afternoons is one thing. But getting serious about making a home purchase is another.
“You should have some level of job and income security before venturing into the market,” said Joe Parsons, senior loan officer with Pinnacle Home Loans in Novato, California.
“Also, you should plan to stay put for at least a few years. Selling a home is not something you can accomplish overnight — it takes three to four months from beginning to end,” he said.
That doesn’t mean you have to be ready to commit to your “forever home,” especially if you live in an expensive area for real estate, said real estate agent Katie Wethman, managing director of the Wethman Group at Keller Williams in the Washington, D.C., area. But if you’re considering a major career change or going back to school, you’ll probably want to wait to buy a home until your financial situation is more stable, she said.
While mortgage lenders will allow a few dings on your credit report, if you’re struggling to stay current on your financial obligations, get them under control before taking on a mortgage, Parsons said. High credit card balances are another problem — they can push down your credit score and limit the mortgage amount you’ll qualify for. (Learn more: Handling credit card debt)
But it’s not impossible for a normal person to get a mortgage loan and buy a home, Parsons said. Real estate lenders are not cherry-picking the best applicants, and you don’t need a large down payment.
“Owning a home has always been the American Dream,” Parsons said. “It is more accessible than you might believe.”
Determine your budget and get preapproved
Before you hit the real estate market and start shopping, team up with a mortgage loan officer to get an idea of what your budget is, Parsons suggested. “You want someone with whom you feel comfortable, who answers your questions, and who returns your calls and emails.”
The next step is to get an initial mortgage loan preapproval by providing your tax returns for the last two years and your current month’s paystubs to document your income, as well as bank statements to show where your down payment for a home will come from.
“Most first-time home buyers don’t talk to a lender early enough in the process,” Wethman said. You need to understand the all-in costs of homeownership, including insurance and taxes, as well as the real estate closing costs you’ll need to come up with in addition to your down payment. (Related: Home down payment do’s and don’ts)
Parsons said waiting to talk to a mortgage lender until you’re under contract to buy a home is a mistake. Being preapproved not only makes offers more appealing to sellers, it also minimizes the chance that you’ll be disappointed by setting your heart on a property you can’t get loan approval for.
Also, especially if you are working with a spouse or partner to purchase a home, this is the point to look at life insurance options. You want to make sure that neither of you faces an unmanageable debt obligation should misfortune strike. (Related: 4 times when term insurance may be the answer)
Choose a location
“Once someone determines an appropriate price range, the search is always going to come down to condition versus location,” Wethman said. Prioritize things that can’t be changed: the home’s overall location, its place on the street, how it’s sited on the lot, and yard size.
Condition can be changed through renovations — but don’t choose a home that has more problems than you can afford to fix. Also, lenders won’t approve a mortgage for a home in poor condition.
Even if you hope to move into a bigger, better home one day, choose a home now that you’d be willing to stay in longer than you plan to if the real estate market or your financial situation don’t do as well as you expect.
“I think today’s buyers are more realistic that the market doesn’t necessarily go up forever,” Wethman said. “They saw family members and friends get burned in the last downturn.”
Find a real estate agent
Today, anyone can go online and see what homes are on the market. Often, you can see high-quality photos of the entire property and even get details on crime rates, taxes, and school districts. But you still need a real estate agent.
Work with a buyer’s agent, who will represent only you in the transaction — don’t use the seller’s agent, who has a conflict of interest. The seller’s agent will split the commission with your agent; you pay nothing for a buyer’s agent’s services.
Their free help is valuable: you’ll need an agent to tour the homes you’re interested in, to notify you about properties before they hit the major real estate websites (whose listings are often outdated), to help you write and negotiate a purchase offer, and to help you deal with any hiccups in the process, such as renegotiating the purchase price later if the pre-purchase home inspection reveals problems.
Make an offer on a home
The seller’s price for the home you’re interested in won’t necessarily be what you offer. Your real estate agent will give you a list of comparable sales: homes in the area that have sold recently and are similar to the one you want. You’ll then decide how much to offer based on the area’s going rate, what you can afford, and how badly you want the home.
You might submit your best and highest offer if you’ve found your dream home or if you’re in a competitive real estate market with multiple offers. You might submit a lowball offer if you’re shopping in a slow housing market, you think the home is overpriced or you want to get a bargain. Make sure you’re willing to walk away if the seller balks or another buyer submits a higher bid.
Once you get a home under contract, there will be a home inspection and more loan paperwork. There might be additional bargaining over the sale price of the home or allowances for repairs depending on what the real estate inspection turns up. (Learn more: Home down payments)
Expect lots of waiting, interspersed with moments where you have to act quickly. At times it will be stressful and you’ll wish you’d never come up with the crazy idea to buy a home. But eventually, the deal will close, you’ll get the keys, and you’ll become a homeowner.
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This article was first published in April 2016. It has been updated.