Step-by-Step Guide for First-Time Home Buyers

Step-by-Step Guide for First-Time Home Buyers

Buying a home is an exciting experience, but it can be fairly stressful and overwhelming, particularly for first-time home buyers. While you are thrilled to have a home of your own, one wrong decision can lead you to regrets. Therefore, it's important to do thorough research, seek professional advice, and carefully consider all the aspects of the home-buying process before making any major decisions.

In this step-by-step guide devised especially for first-time home buyers, we'll cover everything you need to know to make an informed decision and purchase your first home with confidence. We'll start with the basics of home buying, such as determining your budget, understanding your credit score, and getting pre-approved for a mortgage, and move on to guide you through the process of making an offer, negotiating the price, and completing a home inspection.

Whether you're a first-time home buyer or simply looking to refresh your knowledge, this guide is designed to provide a comprehensive overview of the home-buying process. So, let's start our home-buying search today!

Overview of the Home-Buying Process

The following chart briefly overviews the eight major steps to buying a home. Completing each step successfully will lead you to the perfect home for you.

Step-by-Step Guide to Home Buying

Let's discuss each of these steps in detail now, especially for home buyers who are going through the home-buying process.

1. Planning, Questioning, and Foreseeing

Home buyers must plan and engage in self-talk, asking themselves a few essential questions. This stage is imperative because it helps create a clear picture of their unique circumstances, which can prevent many expenses and losses down the road.

Here are some of the most important questions all home buyers should ask themselves:

• Are you going to be the sole owner of the house?

If you are the sole owner, you can go any way you like. However, if you are buying a home with a family member or partner, you must make mutually agreeable decisions to avoid potential conflicts of interest. It is wiser to discuss and decide everything up front. Matters regarding finances and the division of assets can lead to severe disagreements, thus requiring careful decisions.

• How long do you plan to live in the new house?

While most people buy a home with the intention of living in it for a lifetime, some individuals need a home for a definite period of time. For various reasons, such as job or lifestyle changes, financial considerations, investment opportunities, and flexibility, you may choose to buy a home for a set number of years rather than committing to it for the rest of your life.

If you have any such reason, considering a small home at a low price point or waiting until a time you think you don't have to relocate any longer and can decide to settle may make more financial sense. This could be especially true for people who enjoy traveling or who like the idea of being able to move to a new place every few years.

However, buying a home doesn't require just money, but also time and effort. So, before you start your home search, always ask yourself if you need a permanent or temporary residence. In case a temporary residence seems to be a more suitable option for you, you can also consider renting a house instead of buying one.

• Can your family size change?

The size of your family is a crucial factor to consider when evaluating how big of a house you need. Most home buyers might be in trouble if they don't foresee their family growing. The same may apply to keeping pets since only some homes are pet-friendly.

Since a house is a long-term investment, consider how your family might look in the next two, five, or ten years. In short, when buying a home, it's essential to consider your future needs rather than just your present ones.

• Are you aware of the cost overruns?

If you are a first-time home buyer, you should pay closer attention to finances. Unlike living in a rental, every damage, repair, maintenance, and security goes from your pocket when you are the owner.

Buying a home will exceed your budget when you factor in the insurance, repairs, moving-in, and furnishing costs. Ensure that you have sufficient funds to cover these hidden costs.

Now that you have successfully created a blueprint for your home-buying process by answering these questions, let's move on to the second step.

2. Assessing the Finances

Sketching the correct financial picture is the most crucial step in home buying. It is not as easy as saying: "I have enough money, and I am ready to buy a house." What seems enough to you may not qualify as "enough".

The following are the main points for home buyers to keep in mind when gauging their financial standing:

• Income vs. Expenses

You can calculate how much home you can afford by estimating your monthly expenses, including property taxes, insurance, and maintenance costs. It's essential to be realistic about your finances to avoid falling in love with a home that is beyond your means.

A good measure is a thorough analysis of your income vs. expenses. While you may buy a house with your savings, you cannot truly afford it if it adds to your costs and exceeds your income. A good rule of thumb is to limit your debts to 33% of your monthly income.

Let's say you're considering buying a house, and your monthly income is $4,500. According to the 33% rule of thumb, you should limit your total monthly debt payments, including your mortgage, to $1,485 (33% of $4,500).

Assuming you have other monthly debt obligations, such as credit card payments or student loans, you'll also need to factor those in. If your total debt payments are already close to the 33% limit, you may need to consider a less expensive home or delay the purchase until you've paid down some of your existing debts.

Following the 33% rule of thumb can help you avoid taking on too much debt relative to your income and help you maintain a healthy financial position as a homeowner. This can ultimately make it easier to manage your monthly budget and avoid financial stress.

• Credit Score

As part of assessing your financial standing, another vital factor to consider is your credit score because this directly impacts the housing loan home buyers will qualify for.

A lower credit score might create a negative impression because it means you cannot pay your bills or debts on time. On the other hand, if you have a high credit score, you might also get lower mortgage interest rates, which is a huge advantage.

As an indicator, a home buyer's credit score of more than 650 is considered good and can open up several loan options with cheaper interest rates.

Moreover, mortgage pre-approval, which is essential for securing the most favorable mortgage plans and interest rates, can reduce your credit score. Thus, starting with a higher credit score will always benefit you.

Altogether, if your credit score needs some work, it is always advisable to improve it rather than rushing into the home-buying process.

If home buyers decide to wait, they should remember to factor in inflation which may reduce the value of their money in the next six to twelve months. A good solution is to put their money where they can get some return on it or ensure its consistent value; for example, by buying saving certificates.

• Down Payment

As well as figuring out how much you can afford for a home, it's a good idea to plan for your down payment. A larger down payment means a smaller monthly mortgage and fewer expenses overall.

When planning for a down payment, it's essential to take into account how your credit score can affect it. A high credit score can help you qualify for a better loan and a lower down payment, while a lower credit score might mean you need to pay more upfront. For instance, with an FHA loan, a credit score of 500 could require a 10% down payment instead of the usual 3.5%.

• Mortgage Plan

A mortgage pre-approval from a lender puts you on the list of serious home buyers. The pre-approval process is paperwork for a lot of reasonable returns. A lender will assess your financial capacity to determine how much they will lend you, giving you a more precise idea of your budget. All the financial analysis so far puts you in a better position for the next step in the home-buying process.

After you arrive at a fair deal, you select a mortgage plan. However, it would be best to consider the options against your credit score and overall financial health beforehand. For example, while conventional loans require a good credit score for a lower down payment, jumbo loans will need a high credit score and a high down payment.

On the contrary, FHA loans may suit those with a lower credit score.

Next, come the mortgage terms and rates. Commonly, mortgage terms are thirty years, but with ten or twenty-year terms, you can also enjoy lower interest rates on the payment.

Moreover, the mortgage plan will indicate the rates, which are either consistent or variable. Depending on your financial standing, a suitable lender or mortgage advisor can shortlist the best mortgage plan suited to your budget.

At this stage, you need not select but might want to make up your mind about a mortgage plan you think you can afford.

Prior to proceeding with the next stage of the home-buying process, conducting thorough market research can be instrumental for home buyers to gain a better understanding of the market.

Advertisements in newspapers, online listings, and attending open houses can help you shortlist properties that align with your criteria. Then, It is a good idea to note how long these houses stay on the market and if the seller is changing his offer.

When buying a home, it's important for home buyers to keep in mind that the monthly mortgage payment is just one aspect of the overall cost. Additional expenses, such as utilities, maintenance, and property taxes, also contribute to the total cost of living in the house. Therefore, if home buyers are eligible for a $400,000 loan but do not require that much, it's advisable to refrain from taking on unnecessary debt.

Learn More: Calculate Your Monthly Mortgage

3. Hiring the Right Buyer's Agent

All the thought process that has gone into the home-buying process so far will bear fruit. You can precisely convey your needs to the buyer's agent.

Hiring an experienced and reputable real estate agent can significantly enhance your home-buying experience. Several steps that may seem convoluted otherwise can become more straightforward with the help of a good agent. With their knowledge and expertise, they can help you find a home that falls within your budget, inform you of a fair price of the house, and guide you through the closing process.

If you're looking for a reliable real estate agent, one effective way to find one is by asking friends and family or people who have already worked with an agent for recommendations, including the agent's name, contact information, and any feedback they have.

The best agent is someone who has knowledge of and experience in your desired location, as well as a good reputation for successfully closing deals. Ensure you feel comfortable with their communication style and approach to the home-buying process before signing an agreement.

Since agents get a commission from the seller, they can provide information on properties not generally available on the market. Hence, their expertise can be an indispensable asset in your home-buying process.

Learn More: Find a Real Estate Expert

4. Finding the Right House

Once you have determined your budget and hired an agent, it's time to start looking for your dream home. Begin by creating a list of your must-haves and deal-breakers, considering factors such as location, school district, and proximity to amenities. Your agent will then send you listings that meet your specific criteria.

Here is a general checklist to keep in mind during each house viewing:

• How is the neighborhood? If a particular house appeals to you and seems to align with your vision, it's a good idea to talk to the neighbors to get a sense of the neighborhood. Additionally, observing how well the other houses are maintained can provide useful insights into the community.
• How close is the house to basic amenities? When looking for a new home, it's important to consider the proximity of basic amenities such as schools, healthcare facilities, and grocery stores. These are necessities for most people, and having them nearby can make life much easier. Therefore, ensuring that the house you intend to buy is near these amenities and suits your preferred lifestyle is recommended.
• Are the fixtures and fittings, and plumbing of the house okay? Before making a final decision on a home, it's important to inspect the property for any necessary repairs or issues thoroughly. By doing so, you can make an informed choice between two similar deals and save yourself from unexpected expenses.

Once you have made your choice after careful deliberation and patience, you are one step closer to your home.

By the end of 2023, home prices are anticipated to decrease, but this may result in increased competition among potential buyers. Consequently, some home buyers may opt to waive their contingencies, which would otherwise protect their finances in the event of an unsatisfactory closing deal with the seller. Such a move could provide a competitive advantage to those willing to take the risk.

Learn More: Check out a Property For Sale Near You!

5. Making an Offer

When you find a home you love, it's time to make an offer. Your agent will help you draft a competitive proposal considering the current market conditions and the seller's needs. The seller can accept, reject, or counter your offer. In case the seller counters, remember that they are still interested. You can negotiate until you reach an agreement.

In all these steps, the real estate agent plays a significant role. If everything goes well and your offer is accepted, the house goes into escrow and is off the market. For this, the house will be held for you against some amount of money until the paperwork is completed.

6. Getting the House Inspected

Before finalizing the sale, the home buyer must thoroughly inspect the house. This step will help identify potential issues with the property. Once you have the inspection report from a professional, negotiate with the seller and come to a mutually agreed upon solution, which may include a revision of the sale price based on the findings.

Remember to add the contingency clause. If the inspection report is not up to par, you can withdraw your offer without a penalty.

7. Getting the House Appraised

Most first-time home buyers overlook the significance of getting an appraisal, which is a common mistake. Getting an appraisal can provide you with the actual value or market position of the house. It's a good idea to get a home appraisal done to avoid any unfair pricing from the seller. Knowing that the amount you're paying for your home is close to its actual market value can help establish trust with the seller and facilitate a smooth transaction.

8. Closing the Deal

Congratulations, you're almost there! You are now at the final stage of the home-buying process: closing the deal. This step involves signing the final paperwork and paying the required costs. Although the paperwork and documentation process can be intimidating, it can be a smooth and rewarding experience with proper guidance.

While a real estate agent can help home buyers with the paperwork, staying actively involved and informed throughout the process is advisable.

The Take-Home Message

In summary, here are the four key takeaways:

1. Develop a Clear Vision

The home-buying process sits entirely on a clear vision. You can minimize disappointments and delays if you decide what suits you the best early in the process.

2. Protect and Prioritize Your Finances

You cannot move forward with the home-buying process if the money becomes an issue at any stage. If you are a first-time home buyer, you might encounter several hidden costs. Don't be discouraged if you must save more to afford an ideal house. Opting to wait rather than hurrying into it can prevent you from incurring losses down the line.

3. Inspect Before You Invest

Prior to closing the deal and paying the closing costs, ensure that you have inspected the house to your heart's content.

4. Negotiate and Close the Deal

Negotiations come after inspection and appraisal reports. If everything seems fine, there is no need to wait. Get done with all the paperwork and move in!

For home buyers, the challenges of home ownership do not end with the purchase of a house; in fact, they continue with the task of maintenance. Make sure you manage your resources carefully. As a good rule of thumb, always keep aside some money to cater to unannounced repairs or upgrades the house may occasionally need.

Buying a home may still seem daunting but you can begin by browsing through listings and finding compatible real estate agents at HAR who can help you in your home-buying process.