While it's an exciting and happy event, there are lots of moving parts to homeownership, which could make you feel confused or overwhelmed.
The National Association of Realtors found that first-time buyers spend about 2.5 months house hunting and look at seven different homes before finding the right one. With this much time and effort involved, having a clear plan becomes essential.
This article walks you through 12 essential steps to buying your first home, helping you approach homeownership with confidence and avoid costly mistakes.
Step 1: Identify Your Ideal Home
Before you attend an open house or speak to a mortgage lender, pinpoint where you want to live. Consider:
- Type of residence: Do you want a single-family dwelling, multi-family building, condominium, or townhome?
- Home features: How much square footage do you want? How many bedrooms and bathrooms do you need?
- Location: Do you prefer city, suburban, or rural living? What town do you want to live in?
- Area amenities: Is it important to have parks or well-rated elementary schools nearby? Would you like to be able to walk to a local coffee shop from home?
Pro tip: Be sure to distinguish between needs and wants. Needs (like multiple bedrooms for a large family) are non-negotiable, while wants (like a pool) can be taken off the list if you find they don't fit your budget.
Step 2: Get Your Finances in Order
Buying a home involves an initial and ongoing financial commitment. If you can't afford to purchase a house in cash, you'll need to take out a mortgage. Your lender will need reasonable assurance that you can repay the debt as agreed.
Here's what you must get in order before applying for a home loan:
- Credit score: Most mortgage programs require a 620 or better credit score to qualify. "One site I recommend to my clients is myfico.com. This site uses the same scoring models as lenders. This site is fee-based, but it is well worth knowing your actual credit scores," says Jeremy Schachter, branch manager at Fairway Independent Mortgage.
- Debt-to-income (DTI) ratio: Your DTI ratio indicates how much of your monthly income goes toward servicing debt, and lenders generally like to see a DTI ratio of 43% or less.
- Down payment: Some mortgage programs, such as USDA or VA loans, don't require a down payment, while others require as little as 3% down. However, putting down 20% or more means you can generally avoid paying for mortgage insurance.
- Closing costs: You'll have to pay to finalize your home purchase transaction, and these expenses could cost up to five percent of the sale price.
- Income: Lenders want to see that you have sufficient and stable cash flow to pay your mortgage.
- Cash reserves: Your lender may require you to have a certain amount of money in the bank after closing so you can afford to make necessary repairs or mortgage payments if you lose your job soon after moving in.
Step 3: Create a Homeownership Budget
You should also create a budget that accounts for all home-related expenses, such as your:
- Mortgage payment: This could cover your principal, interest, property taxes, and homeowner's insurance premiums if your lender offers an escrow account.
- Utility bills: May include electric, water, sewer, trash, gas, propane, oil, cable, internet, and home phone, depending on your location and preferences.
- Maintenance and repairs: "A general rule of thumb is to plan for repairs to be approximately 1% of the purchase price per year," says Susan Einberger, certified financial planner (CFP®) and owner of Enjoy the Ride: Financial and Life Planning.
- Homeowner's association (HOA) dues: These apply if your property is part of an HOA community.
If homeownership feels financially out of reach, research first-time homebuyer programs. These programs could help you cover your down payment or closing costs.
Step 4: Learn About Mortgage Options
There are many types of mortgages to compare, so having an understanding of how they work will help you choose the right one for you. Here are the most common mortgage types:
- Conventional: A conventional mortgage isn't backed by the government, and qualification criteria may be stricter than those for other home loans.
- FHA: Backed by the Federal Housing Administration, the FHA loan is popular among first-time homebuyers and features a low down payment and lenient credit score requirements.
- VA: Backed by the Department of Veterans Affairs, the VA loan is available to current service members, veterans, and eligible surviving spouses. The program doesn't require a down payment and has no minimum credit score to meet (though your lender may impose one).
- USDA: Backed by the Department of Agriculture, the USDA loan is designed for homebuyers who want to live in a rural area. Like the VA loan, you don't need to put any money down for a USDA mortgage.
Choose Your Loan Terms and Structure
Once you select your mortgage type, you must choose your loan term and interest rate structure:
- 30-year mortgages: Popular because they feature lower monthly payments, but you'll pay more in interest over the life of the debt.
- 15-year mortgages: Cost more each month but less overall, and you'll own your home free and clear sooner.
- Fixed-rate mortgages: Give you predictable monthly payments for as long as you have the mortgage.
- Adjustable-rate mortgages (ARM): Feature a lower, fixed interest rate for the first several years of the loan, but your rate could change each year after the initial period, potentially causing your mortgage payment to increase.
Step 5: Choose and Hire a Real Estate Agent
"Your agent can make or break your homebuying experience, so select wisely. Try to find someone who specializes in your target market and has worked with first-time buyers," says Jonathan Ayala, licensed real estate agent and founder of Hudson Condos.
Ayala suggests asking potential agents about their:
- Availability: "I prefer working with an agent who is productive enough to know the ropes but not so busy that they can't give their clients personal attention. Four to maybe 12 transactions a year is a good number," says Casey Fleming, Silicon Valley mortgage advisor and author of Buying and Financing Your New Home.
- Negotiation skills: A persuasive agent can help you get the best deal.
- Professional network: A well-connected agent can recommend service providers such as lenders or attorneys, saving you time.
"Chemistry matters too. You're going to spend a lot of time together, and you're going to be making big decisions. Look for someone who responds to your needs and isn't just trying to close a deal fast," says Ayala.
Pro tip: Don't forget to ask about your agent's commission structure. While you may be able to get the seller to cover this cost, it's good to be aware of the potential expense upfront.
Step 6: Get Pre-Approved for a Mortgage
A mortgage pre-approval, while not a guarantee of loan eligibility, will give you a good idea of how much you're qualified to borrow. Plus, having a pre-approval letter in hand shows sellers that you're a serious buyer, which can make your offer stand out in a competitive market.
To get pre-approved, you'll need to provide the lender with proof of your income, like pay stubs and tax returns, and authorize them to check your credit. Your pre-approval letter will be valid for 60-90 days, so don't complete this step until you're ready to go house shopping.
Pro tip: Your pre-approved amount is the most you can spend, but you don't have to use all of it. Your budget will tell you how much home you can comfortably afford.
Step 7: Start House Hunting
There are many ways to discover potential homes, such as:
- Online real estate platforms: Use websites like Zillow, Trulia, and Realtor.com to browse available properties.
- Real estate agent recommendations: Your agent can suggest properties that match your criteria and may have access to listings before they go public.
- Driving around neighborhoods: Look for sale signs and open house advertisements in areas you're interested in.
As you find homes that may work, ask your agent for property tours. While in each house, ask yourself: "Can I picture myself living here in five years? How does the feeling of this home compare to others I've looked at? The right one for you should tick your logical and emotional boxes," says Ayala.
Pro tip: Schachter recommends, "looking at the home at night, on weekends, during rush hour, and off rush hour [because doing so] gives you a sense of the noise and other variables that may make you decide if the home is right for you."
Step 8: Make an Offer on Your Chosen Home
Once you've found "the one," have your agent submit an offer. If the seller accepts your offer, the home is considered under contract. You may need to put down an earnest money deposit of one percent of the sale price to show you're serious.
Include Protective Contingencies in Your Contract
A real estate contract is binding, so ensure it contains protection clauses. You want to be able to back out of the sale and get your earnest money back if:
- Mortgage financing falls through: You can't get approved for a mortgage.
- Appraisal comes in low: The home doesn't appraise for at least as much as the purchase price.
- Inspection reveals major issues: A home inspection reveals major defects that the seller won't or can't repair in a timely fashion.
You also want the document to clearly define your closing date and what items stay in the house, such as appliances and furniture.
"If something is unclear, ask your agent or real estate attorney. Upfront clarity is better than expensive surprises later," says Ayala.
Step 9: Apply for Your Final Mortgage
You don't need to get a mortgage from the same financial institution that pre-approved you. It's smart to shop around. Getting a few quotes can help you secure the best loan for your situation.
"Rates can vary by as much as 1% for the same loan, and this can amount to tens of thousands of dollars over the life of the loan. For an 'apples-to-apples' comparison, obtain quotes for the same term loan, without points, and within a few days of each other (if market rates are changing)," says Einberger.
The lender you choose will require you to prove your identity, income, debts, credit standing, and assets. Be sure to respond to their requests for information as soon as possible so you don't have to delay closing.
Step 10: Get a Home Inspection
You should always get a home inspection—even if the seller has stated the home is for sale as-is. The inspection will cover the home's major components, such as the roof, foundation, electrical system, HVAC system, and plumbing.
Ultimately, you'll discover if the property needs extensive (and expensive) repairs before you commit to buying.
"Get recommendations for three different inspectors who act in the buyer's best interest. Remember that your realtor's recommended inspector may not be the best choice since they're incentivized to close the transaction. Ask to see inspection report templates to understand what you'll receive," advises Einberger.
Step 11: Complete Final Steps and Close
Appraise Your Home
Your lender will likely order a home appraisal before agreeing to issue you a mortgage for the property. The appraisal will determine the home's current market value.
You're in good shape if the home appraises for the sale price or higher. However, if it appraises for less, you'll have to put more money down to make up the difference, ask the seller to lower the price, or walk away from the house.
The lender will never give you a loan for more than the home is worth because they won't be able to recoup their losses if you default and they need to sell the property.
Get Homeowner's Insurance
A homeowner's insurance policy protects your investment—and your lender's. If you experience a qualifying event, the insurance will cover:
- Home repair or rebuild: Coverage for your home if it gets damaged.
- Personal belongings replacement: Coverage for stolen or destroyed belongings from the building.
- Liability claims: Protection if someone gets injured on your property.
Your lender will likely require you to purchase coverage before closing. It's wise to get multiple quotes before committing.
Pro tip: "Consider adding an insurance contingency clause to the offer—that is, if you can't get insurance or adequate coverage, you can walk away," advises Einberger.
Close on Your New Home
Closing day is the date the home officially becomes yours. During the meeting, you can expect to sign a lot of paperwork and submit a certified check to cover your closing costs and down payment (if applicable). You may be able to roll some of your closing costs into your mortgage, but doing so will result in more debt and a larger monthly payment.
Pro tip: A day or two before closing, you'll likely do a final walkthrough of the property to ensure it's in the same condition as when you made the offer.
Step 12: Move In and Set Up Your New Home
After closing, Ayala recommends that you:
- Change the locks: Ensure your home's security by replacing all exterior door locks.
- Turn on utilities in your name: Transfer electric, water, gas, internet, and other services to your name.
- Submit a change of address form: File with the post office to redirect your mail to your new home.
- Store your mortgage documents: Keep all closing paperwork in a secure, accessible place.
- Create a home maintenance schedule: Plan regular upkeep to protect your investment.
- Make timely payments: Stay current on all home loan, property tax, and homeowner's insurance payments.
Pro tip: "Ensure that you have the correct information if you live in a community with an HOA. The lender doesn't collect this fee in your mortgage payment, and if you don't have the correct information, it can lead to some violations with past due payments," says Schachter.
Frequently Asked Questions
How much should I save for a down payment?
Down payment requirements vary by loan type. VA and USDA loans require no down payment, while FHA loans require as little as 3%. Conventional loans typically require 5-20%, but putting down 20% or more helps you avoid mortgage insurance payments.
How long does the home-buying process take?
From start to finish, the home-buying process typically takes 30-60 days once you're pre-approved and have found a home. However, the National Association of Realtors found that first-time buyers spend about 2.5 months house hunting before finding the right property.
What credit score do I need to buy a house?
Most mortgage programs require a minimum credit score of 620, though some FHA loans may accept scores as low as 580. A higher credit score typically means better interest rates and loan terms, so it's worth improving your score before applying if possible.