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10 steps to buying your first home
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It’s that time. You feel like you’re old enough. You have a stable job. You’re nervous, but you feel ready to take that huge leap into the real estate world.
Buying your first home can be a little tough. You don’t have equity in an existing home to apply toward a down payment. Not to worry though. Everyone who has ever bought a home has stood in your shoes. There are some simple steps to ensure that you will be able to buy your first home, even without help from your parents:
- Get pre-approved for a loan. It’s easy if your credit is good (if it’s not, see my last column). Go to a licensed mortgage broker. I recommend an independent broker. They will have many more options than a bank. Be prepared with 2 years of tax returns. The application takes about 20 minutes and you should have your answer within a couple of days at the most.
- Establish your budget. Pre-approval isn’t enough. Only you know your spending habits. Can you really make that jump from $1000 per month in rent to a $2000 PITI (principle, interest, taxes and insurance) payment? Ask your mortgage broker to help you or use this affordability calculator.
- Do not start shopping until you are pre-approved. Most real estate agents won’t even show you property without a pre-approval letter from a mortgage company. You don’t want to waste their time, but more importantly, you don’t want to set yourself up for disappointment. There’s nothing worse than finding the perfect house and then realizing that everything within your price range pales in comparison.
- You will need to have upfront money. In an ideal world, you would have a 20% down payment and a few extra thousand for closing costs. However, very few people are in that situation, so the Federal Housing Administration has loans that cover 97% of the home, with closing costs built in. There are also some grants designed to help first time home buyers, who are defined as anyone who hasn’t owned a home in the last three years.
- Make a list of what you need in a home, not just what you want. Do you have kids or are you planning on having them in the near future? Then good schools and low crime rates will probably be a bigger priority than proximity to nightlife. If you’re looking to green your life, then access to public transportation will be a priority. Are you prepared to maintain the property? If not, you might want to look at condos or townhomes, where outside maintenance is taken care of (at a price) for you. Do you have a dog? You might need a house. How many bedrooms do you need?
- Now that you know your price range, neighborhoods and other requirements, it’s time to talk to a real estate agent. The best way to find one is through referrals, but you want someone who is expert in the neighborhoods you are looking. If you don’t know anyone in those neighborhoods, attend open houses. If the open house is poorly run (dirty house, no or unprofessional marketing materials) or if the agent is aloof, move on. However, if the agent is professional and attentive, ask for a card.
- It’s time to look at properties. You can narrow some down on Realtor.com. They list all asking prices, details and pictures. Don’t look at more than about 5 houses a day in person. Take complete notes. If you find a home that meets all your criteria and you like it…stop right there. You probably won’t do any better.
- MAKE AN OFFER. It’s your real estate agent’s job to do this for you. Your first offer is generally somewhere below the initial asking price and should be based on what comparable homes have sold for in the neighborhood (your agent can look that up). Usually it will include some sort of contingency, like the home must pass an inspection. Be prepared to go back and forth a couple of times.
- Once your offer has been accepted, congratulations! You will need to come up with some earnest money, or a deposit. The amount can range from several hundred dollars to a couple of thousand. This money will be put in escrow (savings) and applied toward the purchase price of the home. Then you will need to get an inspection. An inspector will make sure the house is in good condition. They will cost you at least $200-$250, a small investment for peace of mind. If the inspector finds problems, but the problems are reparable, have the owner make the repairs. If they aren’t reparable, you should move on to another home.
- It’s time to close. Your agent and your mortgage broker will set up a closing date for you. You will be asked to bring a certified check to cover all closing costs. It never hurts to have an attorney look over the paperwork.
Congratulations! The home is yours. Now the fun of moving begins. We’ll cover that tomorrow.
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