A 10-step roadmap to buying your first home

November 9, 2020

Buying your first home is so exciting, but it’s a messy process even for veteran homebuyers. And because a home is likely the biggest purchase you’ll ever make, it’s important to know what to expect and how to deal with problems.

Below, we’ve provided a 10-step roadmap to your first home purchase (complete with Pro Tips throughout to make you even more comfortable with the process). Let’s get started on this journey together!

1. Prepare financially

The first step to buying your first home is to make sure you’re financially prepared! This step might take you the longest and depends on a lot of factors, so we’ve broken it down into two “sub-steps” to make it easier.

Boost your credit score

To improve your mortgage eligibility, you need to have sufficient credit history and a good credit score. Most lenders will treat your credit history as a major factor in determining your dependability as a potential borrower. And the better it is, the more favorable the terms of your home loan will be.

Boosting your credit history can be confusing, though. Your credit score is determined by a variety of factors such as your payment history, the amount of time your credit accounts have been open, and the amount of debt you carry on a revolving basis. If you need help building your credit score before embarking down this road, Loqbox can help you do this. Find out more about how we can help you improve your credit history while also boosting your savings here.

Kickstart your savings

The next step is to figure out exactly how much home you can afford. There are additional costs to owning a home that many first-time homebuyers aren’t aware of, and these should be factored into your financial preparations. Costs in addition to the principal and interest on your mortgage payments include:

  • Home insurance
  • Property taxes
  • Private mortgage insurance, often referred to as ‘PMI’ (PMI is necessary if your down payment is less than 20% of the home price)

Most lenders agree that you shouldn’t spend more than 28% of your gross monthly income on your mortgage payment. For example, if your gross monthly income is $4000, your mortgage payment shouldn’t exceed $1120 (including the costs listed above).

You also need to plan for the down payment and closing costs. First-time homebuyers can usually put as little as 3-5% of the home price down, while closing costs average around 3-4% of the home price. So if you purchase a home for $200,000, your down payment might be $6,000, while closing costs could be as high as $8,000. Closing costs may (but not always) include:

Of course, the COVID-19 crisis has caused many potential first-time homebuyers to reevaluate their plans. The supply of homes on the market has remained low, meaning that the amount you’ll need to pay for a home is still quite high. And even though interest rates have plummeted, many first-time homebuyers are holding on to their down payment savings as emergency funds while they wait to see how the pandemic affects their jobs.

Pro Tip: Save a little more for your down payment and closing costs than you calculate in your preparations. If you don’t end up needing it all, the extra money you save will be a great addition to your emergency fund, which every new homeowner needs (just in case the AC unit goes out in July).

2. Obtain a prequalification

Once you have a rough idea of how much home you can afford, you should get a prequalification, which is an estimate of the mortgage loan amount you could potentially be approved for. You can obtain a prequalification from a banker at your local bank branch. You won’t need to end up using your bank as your mortgage lender, so you’ll still be able to shop for a more suitable lender down the road if necessary (see step 4).

Prequalification is not the same as a preapproval letter, and is based on consumer-submitted information. So you’ll verbally provide your income and the debt you carry, but the lender doesn’t request documents verifying this information or check your credit yet. Once you start looking at homes, sellers will want to know that you have a pre-approval letter to know that you’re a serious buyer.

It’s important to be honest during the prequalification stage so that you get an accurate understanding of how much you can be approved for. Once you have this number in mind, you’re almost ready to start looking at homes that are within your price range.

Pro Tip: Sometimes, a prequalification will show that you can be approved for a loan that’s much higher than what you can comfortably afford. Be sure to have calculated your financial preparations before this stage so you know what you can really afford.

3. Shop realtors

Working with great professionals is an essential part of the home buying process. Your realtor should be with you every step of the way, and you want to make sure you’re working with someone who won’t pressure you into a decision you’re not ready to make.

If you don’t already have a realtor in mind, we recommend using Zillow. When you click on Zillow’s Agent finder, an agent in your area will call you. You’ll only get a call from one agent, who will be able to see the homes you’ve viewed on Zillow. You’ll also be able to see their scores and areas of expertise. And if you don’t love the agent right away, you can use the “Agent finder” feature as many times as you want!

When choosing a realtor, you want to have chemistry with them. You’ll need to ask them tons of questions and schedule last-minute showings, so you should be comfortable spending time with this person. You also want to make sure they have your best interests in mind. Your chosen realtor should be upfront and honest when you ask them hard questions.

Pro Tip: Contact at least three realtors. Ask a potential realtor what the risks of homeownership are. If the realtor answers frankly, you can likely trust they won’t try to sell you a faulty home or a property you don’t really want just to make a sale.

4. Shop lenders

The same goes for lenders. There are different types of lenders to choose from, with two of the most common being mortgage lenders and mortgage brokers. Mortgage lenders create, fund, and service their own loans. So if you have a mortgage loan through Chase Bank, they will only offer you loans that they originate and service.

Mortgage brokers, on the other hand, don’t originate or service the loans they sell. Instead, mortgage brokers shop the market and find you a loan with the best rate and terms based on your creditworthiness and other factors. Mortgage brokers have more options available to them, so they are more likely to find a loan with the best favorable terms. On the other hand, you want to make sure they’re not trying to sell you a loan with undesirable terms or rates just to earn themselves a bigger commission.

Your lender (or potential lenders) will be able to provide you with a preapproval letter. The preapproval letter is similar to the prequalification, but it’s more robust because the lender will actually pull your credit report this time. They’ll also request documents from you to verify your financial situation, such as pay stubs, tax returns, and bank account information. Keep in mind that the preapproval doesn’t automatically guarantee you’ll be approved for a loan (more on this in Step 9).

Like realtors, good lenders should work for you whenever you need them to. Once you find a home you love, the process moves really quickly in today’s seller’s market. To find the perfect lender, start by asking your real estate agent for a recommendation. They typically have lenders that they work with often and, if they have your best interests in mind, they probably won’t steer you wrong. You can also use Zillow’s Agent finder to get matched with a lender as well!

Pro Tip: Get loan estimates from at least three lenders. Ask each lender to compare their loan estimate against the other two. If a lender can’t clearly explain why their loan estimate is better, they’re not trustworthy.

5. Shop homes (yay!)

Now for the fun part: house shopping! You can continue looking at homes online using real estate sites like Zillow or Redfin. But your realtor may have access to more complete home inventories, so be sure to share with them exactly what you’re looking for (and not looking for) in your first home.

Plan to spend at least a couple of weeks looking at homes so you can be sure you find the right one. Sometimes first-time homebuyers get so excited at the mere prospect of home shopping that they forget to ask important questions and keep an open mind. You’ll probably be in this home for at least 3-5 years, so you need to absolutely love it before making a commitment to a mortgage payment.

Pro Tip: Make a list of “must-haves” before touring homes so you don’t get overexcited when you’re actually in a home.

  • Is storage space important to you?
  • Do you need at least 2 bathrooms?
  • If you plan to start a family soon, is there enough space in the home to welcome a new human?

You should also have a list of “nice-to-haves” that you would prefer in a new home, but you’d be willing to compromise on.

6. Make an offer

Once you find a home you’re in love with, it’s time to make an offer. Depending on market conditions, home inventory in your area, how much you love the home, and your financial capacity, you have to decide how to proceed with the offer. It’s not usually as simple as just matching the seller’s listing price.

For example, most areas in the U.S. right now are experiencing seller’s markets. Even with the COVID-19 crisis, the housing supply remains so low that buyers are having to compete with each other to purchase homes in their area. It’s possible that when you’re ready to make an offer, the seller may already have received offers on their home – your realtor can get this information from the seller’s agent. In this case, you may want to sweeten your offer to make it more desirable than others.

If you can afford to sweeten your offer, there are several key ways to do this. A simple tactic you might employ is to increase your offer above asking price. Another option is to waive the appraisal contingency, which means that you would pay cash up to a certain amount to cover a difference between the appraised price of the home and the offered price (more on the appraisal in Step 9).

For example, if you make an offer at $330,000, you might sweeten your offer by agreeing to pay an additional $5,000 if the home appraises lower than $330,000. This method should only be used if you have the cash to meet the obligations you’ve promised.

Pro Tip: Decide beforehand the maximum offer you’re comfortable making. It’s important to have this number in mind so that you don’t let your excitement get the better of you.

7. Inspect the home

If your offer gets accepted, congratulations! The next step is to inspect the home. This means you need to find yet another great professional to work with, as you want to hire a home inspector that knows their stuff and is honest about what they find. Home inspectors will check for any defects in the home, including the house’s foundation, flooring, windows and doors, HVAC system, electrical and plumbing systems, and many other things.

You should plan to attend the home inspection, which usually takes 2-4 hours to complete. This will give you a chance to explore your potential new home even more and ask questions about it. Also, don’t expect the home inspection to come back squeaky clean. The inspector may find issues that are relatively minor and would be true of any home, so talk with your realtor about which issues are potential deal breakers.

Keep in mind that in some states, home inspectors don’t need any sort of licensing to perform inspections. But home inspections can reveal whether or not the house you’re looking at is secretly a lemon – and you don’t want a mortgage on a lemon. The results of the home inspection give you a chance to back out of the sale if you need to.

Pro Tip: Check your state requirements about licensing. If your state doesn’t require a home inspector to be licensed, stay away from Google when it comes to searching for one. Referrals from friends and family can help you avoid hiring a dud, or your realtor can usually recommend trustworthy home inspectors.

8. Negotiate

Negotiations can happen at any time and throughout the home buying process, but they’ll typically start after the inspection. The inspection might reveal defects in the home that you’d like the seller to fix before you move forward. Common negotiations might include home repairs such as replacing an older roof, updating heavily used flooring, or replacing sticky windows or doors.

Other negotiations we’ve seen before involve leaving or replacing appliances, choosing an earlier or later closing date, and who will pay for certain closing costs. These negotiations are partly why we hire realtors to help us through this process, because they are skilled at writing up negotiation proposals and acting as a mediator with the seller’s realtor.

Keep in mind that the seller is not obligated to update or repair anything, even if items of concern come back after the home inspection. If the seller doesn’t accept responsibility for these items, it’s ultimately up to you to decide whether you can take responsibility for these costs after closing, or if it’s time to move on to another home.

Pro Tip: If you feel uncomfortable negotiating, just remember that the seller wants to sell at the highest price they can. And you want to get the most bang for your buck. The real estate agents work to find a middle ground where both parties are happy.

9. Get approved for your mortgage loan

The appraisal of the home may sound similar to the inspection, but it’s more for the mortgage lender than for you (although you benefit as well). The appraisal determines the value of the home, and if it appraises lower than the seller’s asking price, no lender will provide a loan for that price. Furthermore, you wouldn’t want to purchase a home for more than it’s worth.

It’s also at this point that you’ll find out if you get approved for the mortgage loan. Your loan application will be sent to an underwriter, who verifies everything that’s needed for loan approval. The underwriter will verify all the documentation needed from you, the potential borrower. They’ll review your credit report, your employment verification, and your financial information.

The underwriter will also review the appraisal and, in some cases, the home inspection results to make sure there are no major property defects such as the home’s foundation that could put them at risk if you default on your loan.

Pro Tip: If the appraisal comes back lower than expected, you still have options to proceed. You can negotiate with the seller to lower the home price or pay the difference with cash. But if the home appraises low and negotiations with the seller don’t pan out, it may be time to reconsider purchasing that home.

10. Enjoy closing!

Once everyone is happy and your loan has been approved, it’s time to pop the champagne, because this is the day you get the keys to your new home! Expect closing to take a few hours. There will be plenty of documents to sign and a whole lot of money handed over.

Typically, your realtor will attend closing with you. The escrow/closing agent will also be present, as well as a title company representative, the seller’s real estate agent, and your lender. You will sign documents such as:

Pro Tip: Breathe. Your realtor will be at closing to help with your nerves and explain anything you’re not sure about. Here’s to your future home!

Hopefully by now, the homebuying process is more clear. Unexpected scenarios are always possible (especially around inspection time), but partnering with great professional realtors and lenders will help make the process easier.

Loqbox is no longer available in your state. If you're an existing member you can still access Loqbox here.