Still, if you familiarize yourself with what it takes to buy your first home beforehand, it can help you navigate the real estate market with ease. So let's get started! In this step-by-step guide, you'll learn what it takes to buy your first home from beginning to end. Whether it's your first time in the real estate market or you're an experienced homeowner who wants to brush up on their skills, this list has you covered.
First-time home-buyers are sometimes surprised when they see how closing costs can add up. The average amount is 3% to 6% of the price of the home. Given that range, it's a wise idea to start with 2%-2.5% of the total cost of the house, in savings, to account for closing costs. Thus our $300,000 first-time home buyer should sock away about $6,000-$7,500 to cover the back end of their buying experience. Tallying the recommended savings so far, the amount comes to $36,000-$37,500.
If your offer called for a home inspection, this is a big day. Sure, you get to have a home inspector look over the home to make sure there are no unseen defects you want to negotiate to have fixed. But more importantly, this is the most time you’ll get to spend in your new home until closing. Go ahead and start measuring things and figuring out what goes where. This may be the last time you are inside the home until it is yours, several weeks from now.
A first-time homebuyer is defined as a buyer who has not bought a home over the past three years. In that sense, bounce-back buyers, those who had a short sale or foreclosure, are also entering the marketplace. A CoreLogic report says about one-fourth of all foreclosure and short sale homeowners are back in the market, and those numbers average about 150,000 per year.
What to do instead: Ask your real estate agent to help you track down neighborhood crime stats and school ratings. Measure the drive from the neighborhood to your job to gauge commuting time and proximity to public transportation. Visit the neighborhood at different times to get a sense of traffic, neighbor interactions and the overall vibe to see if it’s an area that appeals to you.
Right from an escrow account to real estate attorney, all involved services and entities cost money which can snowball into a big amount. Many such services take advantage of consumers' ignorance by charging high fees. Junk fees, a series of charges that a lender imposes at the closing of a mortgage and is often unexpected by the borrower and not clearly explained by the lender, are a big cost. They include items like administrative fees, application review fees, appraisal review fees, ancillary fees, processing fees and settlement fees. Even fees for legitimate closing services can be inflated. If you're willing to speak up and stand your ground, you can usually get junk fees and other charges eliminated or at least reduced.
For most buyers, this is when the butterflies really show up. Once you’ve found a home you want your agent will work with you to craft an offer. Remember, the listing price is only a starting point. Your agent will understand the market and help guide you to make the most attractive offer, whether it’s below, at or above listing price. Are there any contingencies to your offer? Will you require an inspection? These are all things your agent will help you with. Once you’ve submitted the offer you get to wait. It will seem interminable. You may get neither a simple yes or no but a counteroffer to consider. It can be something of a dance. If you get a solid “no,” it’s back to Step 5. If you get to a “yes,” celebrate!
The fastest-growing metro area in Arkansas takes the No. 5 spot. Residents spend 25.47 percent of the blended annual household income on a mortgage or rent and utilities. Also coming in the overall Best Places to Live list at No. 5, Fayetteville is seeing significant population growth, plus a short commute time and low crime rate contribute to its appeal among the 100 largest metro areas in the U.S.
I often also recommend using the site, LendingTree to quickly get four or five competing mortgage rates from different banks. These rates will be more accurate than the ones you see in advertisements and websites because banks provide real rates based upon your credit profile and the location and value of the home you want to buy. Learn more about getting mortgage quotes and pre-approval from LendingTree.
Speaking of mortgages, Gilmour recommends that payments generally not exceed 28% of your monthly gross income—but if you have other high costs, such as private school tuition, it can be wise to pare down this percentage even more. If you're not sure what's realistic, consider seeking help from a financial professional, who can help walk you through an appropriate breakdown, based on your individual situation.
Speaking of defects, now is also the time when you'll get the home inspected, which typically costs between $200 and $500. If there are issues, such as a non-functioning fireplace or an old boiler, you may be able to ask for a price reduction to help cover the cost of repairs. And if you find any deal breakers, such as an unstable foundation or serious mold, you have the option of backing out now.
A mortgage is defined as a secured loan that uses your home as collateral. The key here is to identify what monthly mortgage payment you can afford without losing any sleep at night. Expect that figure to be around 15%-to-30% of your monthly income (depending on your local tax rates and the amount of your homeowner insurance). This step ties into step one -- the more money you save, the less you'll have to pay on your mortgage loan interest (see next step below.)
The material provided on this website is for informational use only and is not intended for financial, tax or investment advice. Bank of America and/or its affiliates, and Khan Academy, assume no liability for any loss or damage resulting from one’s reliance on the material provided. Please also note that such material is not updated regularly and that some of the information may not therefore be current. Consult with your own financial professional and tax advisor when making decisions regarding your financial situation.
You might have some empty rooms for a little while, but your budget and your future selves will thank you! And if you find yourself thinking, Oh well, I’ll just put it on credit—stop right there! Debt is dumb. Plus, taking on new debt in the middle of buying a house could delay your approval for a mortgage and make you miss out on the perfect home. Don’t do it!
When you find the home you want—and you will—it’s time to make an offer. Talk to your agent about the right price to offer; it's common to make the first offer below the listed price, but in a very competitive market, you may need to offer the asking price or even more. Your real estate agent can help you gauge this, and often can get the scoop on how much competition there is for a certain home.
Once you've got your savings growing, your down payment set, and you are pre-qualified and pre-approved, start the search for your home. Begin by using sites like Zillow.com or Realtor.com to zero in on the home you want and the community you want to live in. Factor in key lifestyle needs -- like good schools, decent commute to your job, manageable property taxes, and ultimately, a home that has a good chance of appreciating in value if you ever want to sell it.
In any case, consider picking a mortgage with a fixed rate for the longest time that you think you'll be keeping the home. That's because you could see your monthly payments jump up on a variable rate mortgage if interest rates keep climbing. On the other hand, fixed rate mortgages start with higher interest rates so it may not make sense to pay more to lock in a fixed rate for longer than you need it.
Because while house hunting for the first time can be exciting, tales of regretful home-buying mistakes and the not-so-distant housing market meltdown have also given it a bad rap for being a stressful and confusing process. It doesn't have to be—that's why we created this handy nine-step checklist, which helps explain how to prepare to buy a house—and help safeguard your finances in the process.
As a buyer, just keep in mind that mortgage pre-approval is different from mortgage pre-qualification. Pre-qualify, and you're undergoing a much simpler process that can give you a ballpark figure of what you can afford to borrow, but with no promise from the lender. Getting pre-approved is more of a pain since you'll have to provide tons of paperwork, but it's worth the trouble since it guarantees you're creditworthy and can truly buy a home.
Once the property enters escrow, the purchase should be contingent upon it passing a home inspection. Once your offer is accepted, arrange to have an inspector visit the property and identify anything that needs to be fixed. Both you and the seller should receive a copy of the inspection report, after which you can renegotiate with the seller in case anything needs to be fixed. In worst cases, the contingency also protects you in the event that you would like to withdraw your offer.
The best way to pay for a home is with cash! Not only does it set you up for building wealth, it streamlines the real estate process. If you did get a mortgage, you’ll have a final step before you can close on your home: getting final approval. Your lender will dig through the details of your finances to finalize your mortgage. Whatever you do, don’t open a credit card, take on more debt, or change jobs once you’re under contract. That’s a stupid idea anyway! Plus any changes in your financial situation can jeopardize your loan process.
“Transfer documents” refers to the documents relating to the transfer of ownership from the seller to the buyer. Most documents will be signed by the seller and delivered to the buyer for your review. Documents include: 1) deed, 2) bill of sale, 3) affidavit of title (or seller’s affidavit), 4) transfer tax declaration, 5) transfer tax declaration, and 6) buyer / seller settlement statement. It’s important that you do your due diligence and read through the transfer documents to make sure everything says what it should say.
Several years ago I remember a friend advising me to purchase a house before I was ready, and now I have been curious about the repercussions of purchasing a house outside your financial capabilities. I appreciate that you specifically pointed out that you should never stretch to buy your primary residence thinking that you can take cash out or flip it for a quick profit in a few years. Thank you for the advice regarding financial planning in purchasing real estate!
Next, decide which mortgage makes the most sense for you. There are plenty of different options to consider. Although Gilmour advises choosing one of the most common two: a fixed-rate mortgage, in which your interest rate remains steady for the duration of the loan, or an adjustable rate mortgage (ARM), in which your rate fluctuates to reflect market changes.
Buying a house across the street from a high school didn’t seem like such a bad idea when you saw how nicely renovated it was. But when you don’t have kids and Friday night football games are keeping you up later than you would like, you realize you should have made a pros-and-cons list regarding the location. Don’t let a charming interior override a location you dislike or a lot that will give you flooding problems. “If you don’t like your lot, don’t buy the house, because you cannot change that,” says Kim Wirtz, a Realtor for Century 21 Affiliated in Lockport, Illinois.
Ask to be present during the inspection, because you will learn a lot about your house, including its overall condition, construction materials, wiring, and heating. If the inspector turns up major problems, like a roof that needs to be replaced, then ask your lawyer or agent to discuss it with the seller. You will either want the seller to fix the problem before you move in, or deduct the cost of the repair from the final price. If the seller won't agree to either remedy you may decide to walk away from the deal, which you can do without penalty if you have that contingency written into the contract.
This is the fun part! As a buyer, you can peruse thousands of real estate listings on sites such as realtor.com, then ask your agent to set up appointments to see your favorites in person. Since the sheer number of homes can become overwhelming, it's best to separate your must-haves from those features you'd like, but don't really need. Do you really want a new home or do you prefer a fixer-upper? Make a list of your wants and needs to get started, and whittle down your options.
When you get a mortgage, your lender may require you to set up an escrow account. A monthly escrow amount is added to your mortgage payment. The escrow payments goes toward real property taxes and insurance that you would otherwise have to pay once or twice a year. Instead, you generally will pay a monthly payment and the money sits in escrow to be paid by your lender when it’s due. This escrow payment is above the principal and interest portion of the mortgage payment and is required.
Once negotiations have finalized, the contract has been signed and you’ve provided a small amount of cash as a deposit or earnest money, you’ll have a few days to conduct your due diligence on the property. That includes the home inspection, which will tell you if there are any issues with the property that could affect the amount you’re willing to pay or if there’s anything that should be repaired before you move in.
A conventional loan is a loan that is not backed by the government (meaning that the government doesn’t make any guarantee that you will pay the mortgage), and therefore, carries private mortgage insurance if you put less than 20% down. Conventional loans adhere to guidelines set by Fannie Mae and Freddie Mac and are available to everyone, but are more difficult to qualify for than VA or FHA loans (you need better credit and a steady income, for example).
As your closing date nears, everyone involved in your real estate transaction should check its progress on a daily basis, because staying on top of things means you'll know immediately if there's a problem that must be dealt with. Here's a bit of information that focuses on a few common problems that home buyers must deal with before they close on a house.
A lender or broker will assess your credit score and the amount you can qualify for on a loan. He or she will also discuss your assets (savings, 401(k), etc.) and debt, as well as any local programs that might be available for down payment assistance. That's where your homework on first-time homebuyer programs can help. If you think you qualify, look for a lender that handles the program you hope to get.
Buying your first home can be a daunting task. But millions of people have been there before you and survived. If you do your homework, you'll have the best possible chance of finding a place you can afford for a price you can handle. The big surprise for many first-timers is that they need to finish the first five steps on this list before they can even begin to look for a home.
Want a trusty home-buying guide by your side? Most first-timers will want a great real estate agent—specifically a buyer's agent, who will help you find the right houses, negotiate a great real estate deal, and explain all the nuances of home buying along the way. The best part? Their services are free to first-time home buyers (since the seller pays the sales commission). Here's how to find a real estate agent in your area.
The largest metro area to make the Best Affordable Places to Live list, Houston residents spend 26.47 percent of the median blended household income on housing. The Texas metro area also sees a relatively low cost of living despite the significant number of people moving there. Houston's population grew by 6.84 percent between 2011 and 2015 due to net migration alone, according to the U.S. Census Bureau.
Especially when you’re in a seller’s market, where there are more buyers than houses for sale, don’t be discouraged if the first house you bid on goes to another buyer. Heyer says a multiple-offer situation tends to be a double-edged sword: “If they don’t get the apartment they’re going to be bummed, at least in a bidding war, and if they do get it, they’re going to instantly feel like they overpaid, which is also a bummer.”
Before you start looking for a home, you will need to know how much you can actually spend. The best way to do that is to get prequalified for a mortgage. To get prequalified, you just need to provide some financial information to your mortgage banker, such as your income and the amount of savings and investments you have. Your lender will review this information and tell you how much we can lend you. This will tell you the price range of the homes you should be looking at. Later, you can get preapproved for credit, which involves providing your financial documents (W-2 statements, paycheck stubs, bank account statements, etc.) so your lender can verify your financial status and credit.