A Step-by-Step Guide to Buying Your First Home
Being financially ready to buy your first home is a major milestone, and while it's incredibly exciting to tour properties, the process can often feel overwhelming. There's so much you'll need to learn along the way, including everything from calculating budgets and finding an agent to organizing inspections and paying closing costs. As a first-time homebuyer, the process can feel daunting. Luckily, with a little forethought, careful planning, and smart budgeting, buying a home doesn't have to be stressful at all. To ensure you understand all that's involved, three experts share the entire process—from start to close—that you'll need to prepare for when buying your first home.
Calculate your budget.
Determining how much house you can afford is the most important thing you need to do once you decide you're ready to purchase a home. Everything from your future home's square footage to where it will be situated depends on this number. Make sure you have enough saved up to cover the down payment and other related fees such as closing, realtor, and inspection costs. Whatever you do, don't overextend yourself. It's crucial to make sure you have a few months' worth of savings, too. "The first step is getting your [financial] foundation in good order. So you should have a fully-funded emergency fund," says Lauren Anastasio, certified financial planner at SoFi. "That means having somewhere between three to six months' worth of essential expenses saved up in cash."
Anastasio says that you really need to have a nest egg to rely on during financial emergencies, which is crucial to keeping you out of debt and in your home should the unexpected happen. While these funds can be used to cover unexpected home expenses, like a blown hot water heater or a central air conditioning repair, the goal is to maintain a cash cushion that will help you cover home expenses should you fall ill or lose your job.
Prequalify for a mortgage.
Shopping around for a mortgage will help you to figure out what your options are for financing your potential home. While prequalification doesn't mean you're formally approved for a loan, it will give you an idea of how much lenders might be willing to loan you. What's more, most sellers won't entertain offers from people who aren't prequalified so make sure you don't forget this part of the process. "Getting prequalified is so important," says Kristina Morales, realtor at BHHS Professional Realty. "It prevents you from falling in love with a house that either you're not able to afford—or it opens up additional inventory for you."
Pick a real estate agent.
Many may wonder whether buying a home with the help of a real estate agent is worth it. The short answer is yes. Real estate agents help you to find a home in your price range and negotiate the entire purchase and complete your paperwork. "Overall, it's always best to work with a real estate agent," says Morales. "The negotiation skills that a real estate agent brings is [a] huge help and they add a lot of value to the process [of buying a home]."
Make an offer.
Once you find your dream home, it's time to make an offer. Just remember that, especially right now, time is of the essence. In a seller's market, which is what we're experiencing today, there is less inventory than there are potential homebuyers. This means sellers can list their homes for more money and generally see multiple high-quality offers at once. In order to be competitive, you may need to offer more money than the home is worth, and you'll need to do so quickly. "When you begin your home purchasing journey, there will be higher home prices due to the demand, the potential for multiple offers, and offers well above the list price," says Christian Wallace, head of real estate services at Better. You'll want to factor these points into your overall budget. If your offer is accepted, be prepared to make a good-faith deposit to show the seller that you're committed to buying that particular home.
Contribute a down payment, but remember that it doesn't have to be 20 percent.
When making a down payment, experts used to recommend putting down at least 20 percent to avoid having to pay what's called private mortgage insurance. But if you're unable to afford it, you can still put down a smaller amount as long as you can afford the higher monthly mortgage payment. "Once upon a time, people wanted 20 percent down on a home. And that's still an ideal scenario, so if you have 20 percent down, good for you, because now you can reduce your overall costs by having that type of down payment," says Anastasio. "However, most people are not going to have that type of capital. So the good news is you don't have to wait until you have 20 percent—you probably need to save closer to about 9 percent to 10 percent of the purchase price, to have the cash you need to go through the transaction."
Have the home inspected and appraised.
Lenders will require that you get the home appraised before giving you a mortgage as a way to protect their investment. "Whether you're buying a house or looking to refinance, knowing the property's actual market value through an appraisal is an essential stage of the mortgage process that occurs during the processing phase," says Wallace. "Appraisals ensure that the home's value does not exceed your loan amount."
Wallace also says that it's important to get your home inspected so that you know the true state of the house. "A home inspection is a review of the overall condition of a home. It's a worthwhile step because it can help you catch costly issues or needed repairs before moving forward with a sale," says Wallace. "Depending on what's found, you may choose to request repairs, renegotiate, or cancel the purchase agreement altogether."
Close on the home.
The last step is closing on the home, which involves a lot of paperwork. This will be your chance to closely review everything to make sure it's all in order before signing. A closing agent will oversee this process, and the cost of these professionals can vary depending on your location.