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Buying a home is one of the biggest decisions you’ll ever make. From finding the perfect place that has what you want – and need – to ensuring it qualifies for financing, our first-time homebuyer guide outlines the steps you’ll need to take throughout the process.
Deciding on the perfect first home is something you’ll never forget! But how do you ensure you’re prepared to take on the wide array of responsibilities and demands that come with homeownership? From financial planning to locking in your rate to taking advantage of first-time homebuyer programs – we’ve got you (and your home sweet home) in mind.
When it comes to buying your first home, there are a lot of moving parts – conditions to meet, tasks to complete, documents to show and people to know. It’s a big commitment that you shouldn’t take lightly, one that requires you to invest a considerable amount of your time, money and effort. So before you scroll through the listings, you should make sure you’re absolutely ready to start the homebuying process.
For starters, ask yourself why you’re interested in buying a home in the first place. Are you looking to put down roots in a community you love? Maybe you’re hoping to better accommodate your growing family? Perhaps you’re at a point where you can finally keep up with the routine work that comes with owning a home? Being able to answer questions like these will help you make an informed decision.
If you decide to move forward with the homebuying process, the next step is to know how much home you can afford before you start making appointments to see homes. Real estate prices depend on multiple factors, such as location, economic conditions and market availability. Things like popular neighborhoods, high inflation and low inventory will spark higher prices. Discover how much you can dole out with this helpful calculator:
Your ability to obtain a loan for a new home purchase is based on a number of factors. Lenders typically make lending decisions based on three key ratios: (1) Loan-to-value ratio (LTV), which represents the ratio of the loan amount to the value of the home. Lenders ideally want to see an 80% LTV, meaning a 20% down payment is preferred; (2) Housing Ratio, which represents the percentage of your total income that goes towards housing expenses; and (3) Debt-to-Income Ratio, which represents your total debt payments, plus housing expenses as a percentage of your total income. Lenders will typically look at any of these ratios as constraints, meaning once any of these ratio limits is reached, the amount of the loan will be capped.
While getting your finances in order, it also helps to set a household budget and calculate your debt-to-income (DTI) ratio. Be mindful of moving expenses and gauge what you can reasonably spend on a monthly mortgage (which could be escrowed to include your principal, property taxes and insurance costs). Monthly costs could also include private mortgage insurance (PMI) and association fees.
You’ll also want to check your credit score. This is especially important for determining what financing options are available. The better your credit score, the better chance you’ll have of securing a loan with favorable terms and a competitive interest rate. You can quickly and easily track down your credit score for free from one of the three major credit reporting agencies: Equifax, Experian and TransUnion.
Next, you’ll want to connect with a lender who is trusted by real estate agents and sellers, someone eager to get to work on finding the loan that’s right for you. This person should be experienced, motivated, great with communication and willing to answer questions. Your ideal lender will also:
A good lender will also provide you with customized solutions, neatly laying out all the details and terms associated with your loan. They’ll highlight any innovative first-time homebuyer programs that are available, and depending on the type of home you’re looking for, they’ll potentially provide interest-rate lock and flexibility options on certain mortgages.
Look for a lender who offers a first-time homebuyer credit on closing costs. You could easily save hundreds of dollars!
Through an underwriting process, the goal is to have your lender provide you with a pre-approval letter that mentions the loan amount you’re approved for based on your credit, assets and income. This letter is crucial because it shows buyers and real estate agents you’re serious about the purchase.
Your lender will also want to discuss the down payment for your mortgage loan. If you can swing 20% for the down payment, they’ll likely recommend that. For one, you won’t have to pay the PMI you would if you paid a lower percentage. Also, you’ll enjoy lower monthly payments and a better interest rate.
For buyers who can’t do 20% down, there are other options, such as a conventional loan for as little as 3% down. A Federal Housing Administration (FHA) loan is another potential route, featuring a more manageable down payment. Some Department of Veterans Affairs (VA) loans and U.S. Department of Agriculture (USDA) loans allow eligible borrowers to put 0% down. Learn more in this video:
Depending on the type of loan you go with, you’ll have either a fixed-rate mortgage (FRM) or an adjustable-rate mortgage (ARM). You'll also have the option to choose the mortgage term. Thirty-year mortgages are the most common – but there are also terms available for 10, 15 and 20 years.
Once you have your pre-approval letter in hand, it’s time for the fun part – to start making appointments to view homes! Start by narrowing down which neighborhoods you’re interested in, then come up with a list of must-haves and nice-to-haves for the home features you’re looking for. Live in a cooler climate? You might want a reliable, newer furnace. Need space to roam? Try to find a home with a big backyard! You get the idea.
The area you decide to pursue will depend on your life situation. If you have kids, you’ll likely be on the lookout for good schools. If you have furry friends, perhaps you’ll want to live close to a park that allows pets. If you and your significant other like to stay in and cook for date nights, having a grocery store nearby might be a plus. Get called to work on weekends? You may want to be close to the office.
Ultimately, deciding where to live depends on what amenities you’re looking for. It’s also important to keep in mind that first homes sometimes need a little extra care, so make sure you’re comfortable with the amount of work that would come with your purchase. A leaky faucet may not be the end of the world, but a broken air conditioner in the dog days of summer might be a deal-breaker.
An experienced real estate agent can be helpful in finding the right place for you. It pays to work with someone who knows the community well and understands the state of the local market. In terms of what you’re looking for in a home, give them as many details as possible. Remind them that you’re motivated to buy, and set expectations on how often they should touch base with you on their progress.
As a buyer, there’s a good chance you can work with the real estate agent for free, with the seller paying their commission, usually 6% of the sale price. However, make sure you read the fine print on this. In addition to showing properties, the agent should help with negotiations and writing offer letters. You can buy a home without a realtor, but if you’re a first-time homebuyer, you will likely want to consider one.
It’s only a matter of time before you find the right home for you! It’s an exciting moment, and it’s at this point you’ll be in a position to make an offer. Lean on your real estate agent to help you make one that’s sensible yet competitive. This is also when your pre-approval letter will come into play.
Offers usually involve you making an earnest money deposit – usually 1-3% of the purchase price – to further show that you’re serious about buying the home. In the event you agree to the home sale and later back out, you would lose your deposit, so make sure the right one is actually the right one! If an agreement is made, the earnest check goes toward your home purchase.
The seller can accept, reject or counter an offer. Don’t worry if negotiations carry on for a while. This is common and part of the normal process, and you’ll hopefully end up in a place where both parties are happy. If you can’t reach an agreement, keep your chin up! The right one will come along. When you eventually do reach an agreement, it will then be time for the inspection and appraisal.
Lenders don’t always require a home inspection to get a loan, but you should still consider paying to have one done. An inspector’s job is to walk through the home and look for any issues that may be present. They usually test electrical systems, make sure appliances are working and generally get a sense of if the property is structurally sound. When done, they’ll compile a list of any issues they find and share the results with you.
If the inspection reveals any serious red flags, like lead paint, water damage, radon, a cracked foundation or mold, consider asking the seller to address the problems before closing on the home. Otherwise, you’ll be the one who has to foot the bill for repairs after the sale. It would be wise to include a home inspection contingency in your formal offer. This gives you an out in case of doubt.
Your lender will schedule a home appraisal, which estimates the current value of the home you wish to purchase. Home appraisals are mandatory in order to secure a mortgage loan. If the appraisal ends up being lower than your offer, the loan might not go through. That’s why you should also include an appraisal contingency in your offer. This lets you back out or negotiate without losing earnest money.
Pending the results of the inspection and appraisal, your lender will approve your mortgage loan. Heads up: There’s a LOT of paperwork that goes into finalizing loan documents, and the process can take a while, so try to be patient. In the meantime, start looking for homeowner’s insurance.
Also during this time, avoid opening new lines of credit or making major purchases until the final home-closing paperwork is signed.
While things like bank statements, tax returns, W-2s and Social Security numbers are usually provided early on in the application process, be prepared to present them again, if requested. Once your loan is approved, you’ll be able to do a final walkthrough of the home, allowing you to make sure everything is up to par regarding your terms and agreements with the seller. If all looks good, it’s time to close!
Closing day is an exciting day! It’s also a day filled with even more paperwork – a pile of it. You’ll most likely meet with your lender and real estate agent at a title company to sign all the documents. There will be closing costs you’ll have to pay, which include things like inspection fees, appraisal fees and title insurance. You’ll likely spend 3-6% of the home’s value, which will be outlined in the closing disclosure.
Note: In the days leading up to closing, you’ll want to make sure you review the closing disclosure carefully to make sure it aligns closely with your initial loan estimate. On closing day, it’s a good idea to bring your ID, a copy of the closing disclosure and proof of funds for your closing costs. You’ll review all the closing costs, sign the paperwork and present payment for your down payment and closing costs.
As the #1 mortgage lender in North Dakota, we know what home sweet home means to you. It’s the place you go to seek shelter, find rest, create memories, care for loved ones and hang your hat at the end of the day. Indeed, it’s where a better way of life is found – and it may be within reach. By following the first-time homebuying steps we’ve outlined above, you’ll be one step closer to your new front door.
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