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Wouldn't it be nice if life came with step-by-step instructions? Now it does! We break down how to master pretty much any money-related task right here in our "How to Do Everything" series. Whatever the goal, we'll cover the steps to take and things to know to reach your next financial milestone, all in one place.
Here, we cover how to navigate the world of buying your first house.
Maybe you’re relocating for a new job, just got married or are simply ready to plant some roots. Whatever the life circumstance, you’ve decided it’s time to take the plunge into homeownership. Since buying a home is likely to be one of the biggest investments you’ll ever make, it can feel daunting to know where to start in a sometimes confusing and complex process. We’ve got you covered with eight steps that will help lead you to your new home.
1. Determine How Much House You Can Afford
It’s tempting to just start browsing online listings, but that can lead to frustration when you realize that gorgeous Colonial you’ve been eyeing is too far outside your budget. So before you get far along in your search, consider what you have saved for a down payment and what you can reasonably cover in a monthly mortgage payment. From there, you can work backwards to figure out what that means for your total homebuying budget.
Many lenders may use the 28/36 guideline when assessing borrowers for a loan. This means they prefer that a borrower’s housing costs not exceed 28% of their gross monthly income, and their total debt not exceed 36%. Keep in mind, total debt is all your debts combined: that includes your home payment, credit card balances, student loans, car payments and so on.
Not sure what a potential mortgage would cost you? A mortgage calculator is a good place to start, and can help you figure out how big of a home price tag you can comfortably afford. While the urgency of buying a home may tempt you to stretch your budget, it’s probably not a good idea to be so house poor that you can’t make progress on any other financial goals.
2. Get a Mortgage Pre-Approval
A mortgage pre-approval helps validate how much a lender is willing to loan to you should you decide to take out a mortgage. Keep in mind you don’t actually have a loan in hand when you get a pre-approval (you’ll still need to formally apply later) but it helps show sellers that you’re a serious buyer with sufficient funds lined up.
A pre-approval requires a bit more paperwork than a “pre-qualification,” but it’s preferred because it typically means the lender has done a more thorough review of your financials. Keep in mind, though, that just because you’re pre-approved for a certain amount doesn’t mean you should borrow that much. You still need to determine how much you can afford given your personal situation.
3. Find a Real Estate Agent
While it might be tempting to DIY your first home purchase, homebuyers should really consider working with their own real estate agent rather than relying on the seller’s agent — you want to make sure someone is negotiating on your behalf. Ask family and friends for recommendations. If you’ve decided on a certain neighborhood, ask around to find an agent who specializes there or drive around and see whose name is on most of the real-estate signs. You can also ask your lender for recommendations — they often know the ones who have a good reputation for being fair, honest and easy to work with.
Consider interviewing at least three prospective agents to make sure you’re comfortable with them and confident in their expertise. You’ll be spending a lot of time together under potentially stressful circumstances, so it’s best to find someone with whom you can establish a rapport.
4. Create a List of 'Needs' and 'Wants'
Every time you look at a house, you’re bound to expand your list of desired features — an in-bedroom fireplace! An outdoor kitchen! — but often those are actually “wants.” Start with a list of priorities to focus on what matters most.
Consider elements such as number of bedrooms and bathrooms, attached garage, fenced yard, school district, proximity to transportation — structural and locational features you know your ideal home or neighborhood must have. That will help you narrow down what can be an overwhelming number of potential properties and ensure that you’re not overlooking the “steak” for the “sizzle.”
5. Start the House Hunt
The house search process will be much easier now that you have your budget and list of prerequisites in hand. The first place you’ll likely start is online for an overview of what’s available at general price points in your local market. But remember that what you see online isn’t always what it seems — those real estate photographers have been known to use some “creative” angles that can make rooms seem more spacious than they really are. Nothing can substitute for a walk-through.
As you visit homes, whether by appointment or wandering through open houses, make sure to take your own photos, videos and notes. Property details have a way of blending together when you are visiting several at a time.
6. Narrow Your List and Make a Second (Or Multiple) Visits
An initial visit is usually enough for you to decide whether a home is worth a serious look. After your tours, revisit your notes and visuals and compare the homes, ranking them against each other to help narrow your hunt even further.
Once you’ve settled on your top three to five, make an additional visit — or more — so you can spend adequate time opening closets, flipping light switches and envisioning your own furniture in that bedroom. (Don’t get distracted by savvy staging.)
Ask for any maintenance information you can get on the house, such as the age of the roof, utility costs and repair history of major systems. It’s also smart to visit at various times of the day to check nearby traffic and noise levels you might not otherwise notice. Remember, this is a major decision, so don’t skimp on your research.
7. Make an Offer
So you’ve found “the one,” and it’s time to make an offer. Of course, you’ve seen the listing price, but often that’s only the beginning of the negotiation. The best way to know you’re making a fair offer is to seek the advice of your real estate agent, who is tuned into the market in a way you’re not. They will know if a certain neighborhood is hot or a home is overpriced based on comparable homes and can help provide guidance on making a fair offer.
An offer isn’t just one figure either. Your “purchase agreement” will include the monetary offer you’re making (including your down payment) and other information such as contingencies (conditions that have to be met in order to complete the sale, such as the results of an inspection); any items that you want to remain with the home, such as appliances; and your ideal closing date (the more flexible you are, the more attractive you’ll be to a seller who is considering various bids).
Some buyers also like to include a “love letter,” which explains why they would be the perfect person to live in the home.
Your offer will also include “earnest money,” basically a good-faith deposit that shows you're serious about buying the house. At closing, the money can then be applied toward your down payment — but typically, the seller keeps the earnest money if you back out of the deal. Make sure to talk to your agent about every aspect of the offer so that you fully understand it, including the ramifications if you change your mind at any point.
Be careful not to lowball or insult the seller, as they might turn to any offer but yours. And be ready for some potential back-and-forth negotiation; it can be stressful, but it’s a common part of the process.
8. Prepare for the Closing
Get ready for the home stretch. The closing itself is where you’ll sit down to finalize the paperwork and part with your hard-earned cash. Thanks to the “Know Before You Owe” law, your lender is required to send you your Closing Disclosure three business days before closing, so take time to review it and seek clarification if you have questions before you arrive at the closing table.
Then make sure you have your finances prepped — ask your mortgage advisor how much money you should have accessible, including your down payment, closing costs, inspection fees and any other amounts. The room can get crowded; along with you and the seller will be your respective agents, the mortgage lender, title agent and sometimes an attorney. Ask your lender to walk you through the process so you feel confident heading in.
And then get ready to flex that signing hand — there will be a blizzard of papers to autograph, but at the end awaits the key and your first exciting walk across the threshold. Home sweet home!