A Step-By-Step Guide to Buying Your First Home
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You’ve been flirting with the idea of home ownership. Maybe Zillow has become one of your most frequently visited sites, or you’ve casually dropped into some open houses IRL, ran financial scenarios on a mortgage calculator, and find joy in browsing tile samples. But now you’re wondering how to get from “I’d like to own my house one day” to actually taking out a mortgage, buying a home, and getting that zellige tile installed.
No doubt, purchasing a home is a huge financial decision—likely the biggest one of your life. From knowing the important difference between being prequalified and preapproved to understanding things like appraisal contingencies and escrow, the process can feel daunting. Add to that the emotional rollercoaster that is finding your dream home and waiting to hear back on your offer, then going through a property inspection with fingers crossed nothing major pops up, and it can all start to feel pretty overwhelming.
Then of course we can’t talk about buying a home in 2024 without mentioning interest rates. Many buyers are holding off in hopes of lower interest rates to come. However, the market itself is stable, points out Nicole Grandelli, an agent at CORE and the head of sales at Eastlight Condominiums, a new project in Manhattan. And although interest rates are not as attractive as the historically low 3 percent we saw a few years ago, they aren’t excessively high either, Grandelli adds. In fact, the rates we’re seeing now, in the high 6 percent range, are closer to historical averages.
“Purchasing a home now, even with higher interest rates, could be advantageous if it means avoiding the intensified competition and limited choices that come with a more heated market,” Grandelli says. Plus, if rates do drop, you can always refinance and lock in a lower rate. Some lenders are even offering incentives like a free refinance.
We know: It’s a lot to take in. But breaking home buying down into tasks to check off makes it much more manageable. Keep scrolling for our step-by-step, expert-backed guide to buying a home.
1. Get Your Finances in Order
At this early stage, position yourself to be a strong, qualified buyer by saving for a down payment and getting your credit score in tip-top shape.
Every buyer’s financial picture will be unique. Yes, a credit score of 740 or above rewards you with the best interest rates, and putting a down payment of 20 percent or more into the home will save you from paying private mortgage insurance, or PMI. (PMI typically costs 0.5 percent to 1 percent of the entire loan amount on a yearly basis, though it’s usually paid as a monthly premium. PMI is provided by private insurance companies but arranged by your lender.) But breathe easy: You can still purchase a home with a much lower credit score and smaller down payment. To give just one example—because there are loads of loan options out there—your credit score can be as low as 500 and you can still qualify for an FHA loan (a government-backed mortgage insured by the Federal Housing Administration) so long as you put down 10 percent, or it can be 580 if you put down 3.5 percent, Ignacio Rodriguez with Westside Estate Agency in Malibu, California, explains. With conventional loans, you’ll be aiming for a credit score of at least 620, but a higher credit score will unlock better interest rates.
The idea here? Don’t let perfect be the enemy of good! Market growth could outpace you if you wait years to amass enough for a 20 percent down payment in your savings account or for your credit score to soar into the exceptional category.
Save for a Down Payment
Whether your target for a down payment is 3.5 percent or 20 percent, you’ll want to start saving money as soon as possible. “Ideally, it’s in an account that’s earning interest,” New York City broker Lindsay Barton Barrett of Douglas Elliman says.
Consider talking with a financial adviser about your strategy for paying off any high-interest loans you may have while simultaneously saving for a home. Depending on the market conditions, it may make absolute sense to buy a home before paying off other debts—ahem, those pesky student loans!—so that you can build equity and have an asset that can appreciate in value over time, Barton Barrett says.
Build Up Your Credit
You’re entitled to check your credit report every week with the three major reporting agencies: Experian, Equifax, and TransUnion. This report won’t actually tell you your scores (which could vary among the three bureaus), but it will help you pinpoint anything that’s pulling your score down. One in five people have mistakes on their credit report, according to the Federal Trade Commission, so you’ll want to address any errors before you begin shopping for a mortgage. You can keep tabs on your actual credit scores with free online score trackers like Credit Karma. Many banks and credit card companies also integrate free credit score trackers integrated into your online account.
Now is also a good time to give your credit a little TLC. Consistently making on-time payments is the best thing you can do for your credit score. You can give it a quick boost by paying down credit card balances so your utilization on each card isn’t more than 30 percent—that means if you’ve got a $1,000 limit, keep your balance below $330 to prove to creditors you’re not overextending yourself.
Another trick: Ask your credit card company what date they report to the bureaus, because it’s likely different than your due date, and adjust when you make your monthly payment. This way, you can make sure your balances are under that 30 percent threshold when they’re reported.
2. Snag a Prequalification Letter
Before you start looking at homes, you’ll want to get a pre-qualification letter, which states that the lender is tentatively willing to lend to you up to a certain amount of money. This signals to real estate agents that you’re serious about buying, not just looking at homes for fun. A prequalification letter will also help you set your budget and narrow down your price range, says New York City real estate agent Rebecca Blacker with Warburg Realty.
Something to keep in mind: Prequalified is a baby step towards a loan. You self-report information about your credit score and your income, and, in turn, the lender gives you an idea of how much you can afford. Becoming preapproved, though, is a much more thorough process that gets you closer to the closing table: It’s when that information about your income and your credit scores is verified. More on that below.
3. Hire a Real Estate Agent
Think of your real estate agent as the captain of your home-buying team. You’ll want to work with someone who can give you strong referrals for mortgage brokers, real estate attorneys, and home inspection professionals, says New York City agent Kemdi Anosike of Warburg Realty. “Most important, you need a real estate agent who will listen to you and understand your needs,” Anosike says.
It’s okay to interview a few until you find a great fit. Consider asking candidates:
How many other clients are you currently working with?
How long have you been working in this area, and how well do you know the neighborhoods?
What’s your niche? (Some agents may pride themselves on working with first-time homebuyers, for example.)
Can you share some references?
Oh, and another thing? Clarify with your agent who will pay their commission. Sellers have historically covered commission costs for both the buyer’s and seller’s agents. However, a National Association of Realtors lawsuit settlement could shake up how commissions are paid, and a lot of speculation remains.
The changes resulting from the NAR settlement are scheduled to take effect starting on August 17, 2024. As of that date, listing agents can no longer advertise in the MLS (multiple listing service, a database that is basically agents’ private version of Zillow) how much the seller is willing to pay the buyer’s realtor, and it will likely become part of the negotiations. Since the settlement was announced, buyer’s agent commissions have declined from 2.62 percent at the beginning of the year to 2.55 percent as of July 14, 2024, according to a Redfin analysis.
“There’s still some uncertainty about the landscape beyond that date when everyone has no choice but to implement the changes,” explains Claudia Cobreiro, a Miami-based attorney who practices real estate law. “Still, many of the Realtors in my network have taken this time to revisit their value propositions for buyers and sellers, and educate themselves on how the new climate could affect their day-to-day.”
Cobreiro says it does not appear that seller-paid commission will be a thing of the past (at least in some markets, including Southern Florida) come August 17, and she still highly recommends that buyers and sellers continue using a real estate agent’s expertise for their transactions.
4. Get Preapproved for a Mortgage
You’ll position yourself as a strong buyer if you’re preapproved for a mortgage before you start house hunting and putting in offers. “Oftentimes the ‘perfect homes’ are on the market for less than a few days,” Stevie Rangel, an agent with Compass in Los Angeles, says. You don’t want to be scrambling to get preapproved while other buyers are submitting offers. Many sellers won’t entertain offers from prospective buyers who don’t have their financing lined up.
During this step, which is more formal and thorough than prequalification, you’ll be handing over lots of documents, like W2s, paystubs, bank statements, and tax returns to your lender. Have your paperwork organized and ready to go.
5. Let the House Hunting Begin
At this stage, you’ve got a budget in mind and communicated to your real estate agent what’s important to you in the home search—whether that’s a big backyard for your dog, a short commute to work, or a walk-in closet.
As you’re touring homes or going to open houses, bring a notebook to keep track of the pros and cons of each property. It’s tough, but don’t get distracted by flaws that can easily be fixed, like a Cookie Monster–blue bedroom or boring builder-grade boob lights. Do pay attention to things that will be harder to address, like water pressure and the amount of natural light.
It could be love at first home tour, or you could need to see a few dozen homes before you find the right one. The average buyer typically looks at 10 homes over a 10-week span, according to a report from the National Association of Realtors.
6. Make an Offer
You’re preapproved for a mortgage, and your real estate agent found a property you love. It’s time to put in an offer!
Your real estate agent will have “comps” that show what other homes in the area have sold for and will help inform your offer. Oftentimes, first-time homebuyers will be unnecessarily worried about paying too much for a home, Angela Carrasco, a real estate agent based in Los Feliz, California, says. And a common mistake they make is coming in too low, Daniele Kurzweil, a licensed real estate salesperson with the Friedman Team at Compass in New York City, cautions. Even if you’ve heard that your market favors buyers, you probably still don’t want to come in way below the listing price. “The problem with this tactic is that a seller will not see you as serious,” Kurzweil says.
But there are some safeguards in place to ensure you’re not overpaying, Carrasco explains, so long as you don’t waive your contingencies. “The reality is that a deal will not close, meaning the lender will not approve a loan, if the home doesn’t appraise,” Carrasco says. (More on contingencies and appraisals shortly!)
When you make an offer, the seller will typically require “earnest money” in order to enter a contract. “An earnest money deposit is a signal of good faith on behalf of the buyer that she is serious about the home and willing to place some skin in the game,” Salt Lake City, Utah agent Jen Horner with RE/Max Masters says. The amount of earnest money required can vary by contract and the seller’s preference as well as by city or state, Horner explains. Typically, the deposit will fall between 1 percent and 5 percent of the home’s purchase price, she says. A buyer can get her earnest money back if the sale doesn’t go through because of a reason listed in the contract’s contingencies. Some common contract contingencies that protect buyers, allowing them to back out of the purchase, relate to home inspections, financing that falls through, and home appraisals that come in too low.
Once you’ve made an offer, the seller will accept, make a counteroffer, or outright reject it.
7. Get an Inspection
Once the seller accepts your offer, it’s time to get a home inspection. Almost all offers include a “home inspection contingency” that allows the buyer to back out of the deal if there are significant problems in the inspection findings.
The inspector will look for all kinds of problems the home could potentially have, from the foundation all the way up to the roof, including things like faulty wiring or signs of mold.
A standard home inspection, according to the American Society of Home Inspectors, includes a comprehensive look at the following:
Heating system
Central air conditioning system
Interior plumbing
Electrical systems
Roof and attic
Walls, ceilings, and floors
Windows and doors
Foundation
Basement
Home inspectors are looking for problems that could pose safety concerns, but they aren’t concerned with cosmetic issues. They’ll report something like a crack in the settlement but won’t make note of a sloppy paint job.
Buyers pay for home inspections most of the time, Kelly Malloy, an agent with Windermere Real Estate in Seattle, explains. She recommends adding on a sewer scope to examine exterior plumbing, including the main water line. Altogether, a home inspection costs between $800 and $1,000, but that amount will vary depending on your market and the size of the house.
Depending on the contract’s terms, you—the buyer—can request that the seller make repairs based on the inspection or provide you with a credit so you can have the repairs done yourself. (One thing to note: If the seller has some competitive backup offers, they might not agree to any fixes or credits.) Say they agree to do the repairs. Before you make it to the closing table, hand over your money, and sign the papers, you’ll have a chance to do a final walk-through to make sure everything has been repaired to your satisfaction. If possible, schedule this after the sellers move out—just in case their movers cause any additional damage.
Deals do fall through sometimes. Maybe too many red flags popped up during the home inspection and the seller is unwilling or unable to do the work, Malloy explains. While it might sting a little, trust the process, she advises. Your dream home is out there!
8. Get an Appraisal
Next up is an appraisal, which is required if you’re taking out a mortgage but can be waived in an all-cash deal. During this phase, a licensed appraiser comes to the house and does a thorough walk-through to determine how much it’s worth. Your appraiser is looking at what similar homes in the neighborhood recently sold for as well as any renovations or upgrades that may have added to its value and taking note of the condition of the property. Essentially, the appraiser is trying to make sure the contract price is fair not just for the buyer and seller but also the lender. If the appraisal comes in lower than the contract price, the lender won’t approve the loan.
Even in a multiple-offer situation, the owner needs to keep the appraisal in mind, Brandy Grell, Associate at RE/MAX Professionals in Stillwater, Minnesota, explains. If you offer $230,000 and the home is appraised for $210,000, you’ll need to come up with that extra $20,000. “The bank will only loan the value it believes the home is worth,” Grell says.
Several scenarios could play out at this point. The best-case scenario for buyers? The seller renegotiates so that the sale price is in line with the appraisal. Another option is to put more of your own money into the down payment to make up for the gap between what the home appraised for and what you’re purchasing it for. If you want the reassurance that you could walk away in this scenario, ensure your contract includes a home appraisal contingency. If the appraisal comes in low, you can bow out and get your earnest money back. On the other hand, if you’re looking in a very competitive market and want to make the strongest possible offer, you can include an appraisal gap guarantee to reassure the seller that you’ll cover the difference between the appraisal and the amount you bid.
9. Head to the Closing Table
Put that champagne on ice: You’re in the home stretch! It may have taken a little longer than you expected, though. On average, it takes 45 days to close on a home loan, according to loan software company Ellie Mae, but about one in three closings are delayed. Setbacks that can push out your closing date or require you to reschedule could include issues from the inspection or appraisal, or a credit fluctuation that changes the terms of your loan. You can avoid this by not doing anything that would affect your credit or debt-to-income ratio, like maxing out a credit card or taking out a loan for a big-ticket item like a car.
At least three business days before closing, you’ll receive a closing disclosure, a five-page document that includes the terms of your loan and a list of fees associated with the closing.
Closing costs typically run about 2 percent to 5 percent of the loan, so if you’re buying a home for $250,000, you can expect closing costs in the $5,000 to $12,500 range. You can pay this out of pocket, or you may be able to roll it into your loan, but keep in mind that if you do the latter you’ll be paying interest on it. Some of the common closing costs include fees for the appraisal, loan origination, and title search, plus prepaid expenses such as property taxes, homeowners insurance, and interest until your first payment is due.
At closing, you’ll sign all the required documents for your mortgage, hand over a cashier’s check for your down payment and other fees, and receive the keys to your new place. Some states require an attorney to be involved in real estate transactions or be present at closing. Buyers will often choose to work with an attorney as an added protection if a sale has complications, for instance if the home is located in a flood zone or was subject to foreclosure.
Depending on your loan’s terms, you may also be required to set up an escrow account. Basically, it’s an account at the bank that approved your loan that holds money in escrow until a payment is due to ensure there’s enough to cover it; in the context of a mortgage, the funds could be used to pay for things like property taxes, homeowner’s insurance, and HOA fees, Nora Apsel, cofounder at Morty, explains. The bank collects an upfront escrow payment from you, and then you pay into the account monthly for the life of your loan, says Apsel. This streamlines payments but also helps protect the lender so that your home isn’t foreclosed on because of unpaid property taxes, like this guy who lost his home for not paying $8.41!
Once you’ve closed, it’s time to saber that champagne and roll out the welcome mat. You’re officially a homeowner!
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