How to Buy Your First House in 13 Steps
Owning your own home is a point of pride. So much so that it’s basically a status symbol.
Not to mention that owning a home means you own real estate, an asset that can appreciate and in turn increase your net worth.
Of course, given that homes are such large commitments, home ownership is stressful even before you own your home thanks to what seems like a hopelessly complex buying process.
You’d think that improvements and trends in technology such as online listings and personal finance apps would make this arduous endeavor a little easier. Heck, there are even companies called iBuyers that offer to buy homes in good condition (for a fee) and sell them to someone else for you!
Yet all these improvements in choice and technology haven’t made buying a home much easier.
Because of this, we want to walk you through how to buy your first house in 13 steps. Many of these steps have multiple parts to them, but don’t overwhelm yourself; follow this guide step-by-step for a smooth home buying process that costs you as little as possible.
1.) Look at the Long-Term
Your very first step in buying a house is looking to look at your long-terms goals and needs.
See, needs and goals can change over time. As you know, houses are huge monetary investments, but also huge time investments. Thus, you’ll want to plan for the long-term to avoid regret or buyer’s remorse.
Are you going to start a family? Maybe you’re planning on relocating for better job/business opportunities? Or perhaps you’re just downsizing to save money or simplify your lifestyle.
Also, are you planning on selling the home or do you want to stay in one place for the indefinite future?
Consider these long-term questions when shopping for a home.
2.) Determine What You Desire in a Home
There’s no such thing as a perfect home, even if you spend $10 million (hey, the home might be too large). You’ll simply never get everything; the key is determining what’s most important to you in a home and what trade-offs you’re willing to make.
That being said, there are several criteria you should consider when shopping for a house.
Type of Property
Home buyers shop look primarily at 3 types of properties, each with their own advantages and disadvantages:
- Single-family homes
- Townhomes
- Condominiums (Condos)
Single-family homes have more space and more independence (no homeowner’s association), but repairs and upkeep can be much costlier because it’s on you to pay for them. They usually don’t include any amenities beyond things like laundry, either.
On the other hand, condos require you to pay dues to a homeowner’s association and follow their rules. However, condos have a more friendly, communal feel to them, and much more upkeep/repairs are covered by the homeowner’s association.
Townhouses are in the middle, as they’re more of a physical type of building rather than a housing arrangement. They might have HOA dues, but they tend to be less than for a condo. As for their comparison to single-family homes, townhouses might cover some of your maintenance for you.
Condition
Are you a fixer-upper or do you want to the best and brightest in brand new homes? Define a certain condition level you want in your new home.
Naturally, smaller and older homes will cost less. They may require some remodeling or landscaping, but you could improve your property’s value by doing so (this is how house flippers make money, buy low, improve, then sell). Fixer-upper types will be elated to buy a cheap home that allows them to practice their hobby.
But if you don’t want to spend all the money or time on repairs, you’ll need to look for a home in better condition. These will likely cost more for obvious reasons, but it’s the price you pay for not having to engage in a total home makeover.
Size
Remember those questions you asked yourself in Step 1?. Here’s where they come back in to play.
Are you going to start a family soon? You’ll want more than just your master bedroom.
Already have a child who’s going off to college soon? You won’t need as much space because they’ll soon be living out on their own.
Now, square footage is an important consideration when looking at home size, but it’s not the be-all end-all; the layout of the home can affect how big or small the house actually feels. You may want to look at floor plans of any houses that catch your eye to see exactly how X amount of square footage is spread out among the house.
Neighborhood
Buying a home is such a large investment that you have to consider the neighboring homes, aka the neighborhood. Can you see yourself living there? Do you get along with your neighbors, or do you prefer to be left alone?
Neighborhood isn’t much of a defined metric like size or property type. You might have to spend time in your target neighborhoods to see what life is like.
Commute
Few people enjoy commuting. When you’re buying a home, determine the longest commute you can stomach and try to work within that distance. Think about which roads you’ll be taking (and how busy they are) and if there’s any alternative forms of transportation (walking, biking, public transit, etc.).
Usually, homes further out will cost a little less as more people demand to live closer to work. Yet despite the lower sticker price, higher-priced homes in more desirable locations could be more cost-effective.
See, a closer home means a shorter commute. A shorter commute means burning less gas and putting less miles on your car.
You also save time, something that can be used to increase your income.
Schools
Where you live affects where your children go to school, so research the school districts (and private school options if you plan on sending your child there) beforehand on a site like niche.com.
Don’t have any children and/or don’t plan on having any soon? You should still consider the school district anyways. Many studies show that homes in highly-ranked school districts tend to have higher resale values, most likely due to increased demand from homebuyers looking for a great school district for their children.
Shopping/Entertainment
Proximity to shopping and entertainment opportunities is important to think about. For example, some people like being close to the grocery store, whereas others don’t mind driving 15 minutes to reach it.
Same with entertainment. If you live out in the middle of nowhere, you’ll have more space and freedom, but going out to eat or seeing a movie requires a little more planning and travel.
3.) Prepare Your Finances
Many are eager to jump right into home searching once they’ve decided on what they find important in a home. It’s ok to do so, but the true cost of home goes well beyond the sticker price you see online.
Preparing your finances is of the utmost importance. That means understanding and maximizing your credit score, reducing debt levels, creating a budget for your home, and saving up for your down payment.
Credit Score
Credit Report
Unless you’ve got a few hundred grand without any other use, you’re going to be taking out a mortgage for your house. Lenders are risking a lot money when they offer a mortgage, so they want the most creditworthy applicants possible.
Acquire your free annual credit report from each bureau at AnnualCreditReport.com or sign up for a site like Credit Karma to see your credit score for free.
Dispute any errors you see to give your score a boost and make your credit look better. It won’t improve much, but you need every possible advantage in the mortgage world.
Lenders don’t like to see the word “collections” on your report, nor do they like adverse accounts, so resolve those as soon as possible.
Improving Your Score
The better your credit score, the more numerous and advantageous mortgage offers you’ll receive. If your score isn’t great, time to work on improving it.
Your FICO credit score is calculated using 5 factors:
- Payment History (35% of score) – How many payments you’ve made on time.
- Credit Utilization (30% of score) – Not carrying high balances. There’s no defined rule for what a “high balance” is, but basically keep your debt balances as low as possible. All will be explained in the next step of preparing your finances.
- Credit History Length (15% of score) – How long each account has been open and the average age of all your accounts.
- Credit Mix (10% of score) – Having a wider variety of debt (having loans and credit cards instead of only loans).
- New Credit – (10% of score) – Opening a new account slightly dings your score.
While each of these factors matter, the most important ones in terms of getting a mortgage are payment history and credit utilization. Make all payments on time and keep balances low.
However, avoid taking on new debt, as we’ll explain next.
If your score is great already, do your best to maintain or boost it slightly, but don’t spend too much time doing so. Your time is better spent looking for ways to cut costs or increase your income.
Debt and Income
Credit score tells most, but not all, of the story to lenders. Your debt and income play a large part as well.
A quick example: a college student may have an excellent credit score and make $2,400 a month after taxes. But after student loans, a car loan, and credit card debt, (not to mention living expenses), paying a mortgage would be tough.
Debt-to-Income
Thanks to situations like above, lenders use what’s called your Debt-to-Income, or DTI ratio to assist in their lending decisions. It’s simply your total debt (and usually regular payments like rent) divided by your total income.
The higher your DTI, the rougher of a time you’ll have talking to mortgage lenders.
In other words, taking on new debt will do double the damage by hurting your score and increasing your DTI. Even if you take on new debt to increase your credit mix (or decrease your utilization rate in the case of a credit card), you won’t be doing yourself any favors.
Instead, you want to pay down as much debt as possible.
Paying Down Debt
Try to start with the highest-interest debt, usually consumer debt like credit cards. Eliminating these balances will perform a triple whammy in your favor: more money saved on interest, better score (less utilization), and a lower DTI.
Stack your interest savings to pay down more debt faster.
Alternatively, you can start with the smallest debt first and tackle progessively larger debts. Paying off a small debt first lights a motivational fire under most people to pay off the rest of their debt. This is known as the “snowball” method.
Now if you’re wondering where you’ll get the extra money to do this on top of saving up for your house, you have two options: cut your expenses and save money, or increase your income.
Make a budget, ruthlessly slash areas you don’t need or can temporarily go without (like subscription services), direct the money towards debt.
While doing so, try to secure a raise at work or even start a side hustle (like taking pictures because almost everyone has a phone!) if it doesn’t involve a large monetary investment. Not only will you have more money to pay down your debt, but your larger income will drive down your DTI further.
Budgeting for Your Home
Banks often approve your for a larger loan than you can afford to pay back. You don’t need to take out your full approved amount; take out only what you need to.
But how do you figure out how much loan you need? There are a few rules of thumb to guide you in taking out the right amount of debt for your home.
28% Rule: Mortgage Payments
This rule of thumb is simple: no more than 28% of your gross monthly income should go towards your mortgage. That means pre-tax and before any other expenses.
Let’s say you’re earning $5,000 a month. You’d want to shoot for under $1,400 a month in mortgage payments, including both principal and interest. $1,400 a month can get you over $200,000 in mortgage, so you’d have a bit of financial room.
Now, the exact percentage might change depending on where you live. If you live somewhere with a high cost of living, such as New York or Los Angeles, you may want to aim for a lower percentage like 25%. You’ll need the rest of the money for your higher living expenses.
32% Rule: All Housing Costs
The 28% rule mentioned above applies to your mortgage payment only, yet home buying and home ownership involves several more expenses. Some of these include
- Homeowner’s Association (HOA) dues – For condos and some houses
- Homeowner’s insurance
- Property taxes
- Private mortgage insurance (PMI) – Lender makes you pay PMI if you put down less than 20% on your home. You can get rid of PMI once you reach 20% equity in your home through mortgage payments
- Utilities
- Upkeep
- Repairs
In addition, you have to think about closing costs when you complete the buying process.
Some common closing costs include
- Attorney fees
- Title insurance
- Title searches
- Lender fees
- Deed-recording fees
These (and other closing costs not mentioned) can add up to several thousand dollars, so budget some extra cash for them.
36% Rule: DTI
All in all, your debt (including your mortgage payment) should not exceed 36% of your gross income. Not just for your budget’s sake (although that’s important), but because many banks consider a 36% DTI to be at the upper limit of acceptable debt levels.
Banks may give you a little leeway if you have an amazing credit score or plenty of cash reserves. In that case, you could loosen up your total debt and housing costs to 40%.
So optimally, you’d be paying 36% of your gross income towards debt. Most of that should be covering your mortgage payment, a small portion should cover other regular housing costs, and a slightly larger amount should encompass the rest of your debt.
None of these percentages are completely set in stone. If you don’t care for an opulent home, you could get a smaller mortgage and still afford to have higher debt levels because, well, you’d have less mortgage to pay each month.
Likewise, you could make your mortgage a little larger than 28% of your living expenses if you’re debt-free and have a healthy amount of spare cash.
Save Up Your Down Payment
After you get your other ducks in a row, you’ll want to begin saving for a down payment as soon as possible. Ideally, you’ll put down 20% of your house’s purchase price up front. If you put down less than 20%, you’ll start out with less equity in your home.
Your monthly mortgage payments will be higher as a result.
But even worse, you’ll pay private mortgage insurance, as we mentioned earlier. This offsets the risk your lender is taking by allowing you to put down an insufficient amount down on your house.
Savings Accounts
Open a separate savings account for your down payment and contribute a consistent amount every month. Direct any windfalls like birthday money or work bonuses toward your down payment fund.
Since it takes a long time to save for your down payment, consider using Certificates of Deposit (CDs) as your savings vehicle. They pay you higher interest than a normal savings account; the trade-off is you don’t get to touch the money for a set period of time that you choose.
A longer term length equals a higher interest rate. If you’re several years away from buying your home, take advantage of the longest-possible CDs.
Alternatively, some high-yield savings accounts like Radius have rates pretty close to many CDs. Consider these as well.
Side Hustles
Quick note: side hustles can speed up your progress towards your down payment. No need to start a full-blown business, either; drive for Uber, shop with Shipt, sell your creative skills as a freelancer, walk dogs, pick up a 2nd job, etc.
You can find our full list of side hustles here.
Funnel all that money into your down payment fund.
4.) Get Preapproved for Mortgages
Everything’s in order: your credit is in peak condition, your debt levels are a fraction of what they used to be, you’ve reached (or are very close to) your down payment goal, and your income may have improved too.
Now, time to get preapproved for a mortgage.
A mortgage preapproval is a conditional commitment by the bank to provide you a certain amount of loan. It’s essentially “we’ll most likely give you a mortgage of amount X when you formally apply”.
Preapproval Documentation
Seeing as preapproval is basically an informal loan offer, you need to provide several pieces of documentation to prove your financial worth:
- Proof of income (pay stubs, tax returns, bank statements, form W2, etc.)
- Proof of assets (documentation proving ownership of your assets, bank account information, etc.)
- Employment verification (by contacting your employer directly and asking for verbal, fax, or email verification if employed; IRS Form 4506-T if self-employed)
- Proof of Identity (driver’s license)
- Social Security number (to run credit inquiries, also to see current debt levels)
Your lender then uses this information to calculate a preapproval amount. Before they arrive at their quote, you might have to answer a few questions depending on your financial and life situation.
For example, if you have some sort of derogatory mark on your credit report, the lender might want you to explain that.
Or maybe you work for yourself. Self-employed people might have to provide two years of profit and loss statements from your business. Don’t have that? You might have to wait on home ownership.
Use that time to boost your income, save, and pay down your debt.
Why is Preapproval Important?
After your lender evaluates your information and makes a preapproval amount decision, they’ll send you an official preapproval letter.
This preapproval letter is a powerful weapon in your home buying arsenal. Having this letter shows sellers that you’re not only serious about buying a house, but you have the financial means to do so.
Some listings actually require a preapproval just to be considered!
Maintain, Maintain, Maintain
Maintain your great credit, low debt levels, and income by any means necessary. Lenders are not afraid to lower your preapproval amount or even rescind it if your finances change drastically during the process.
They are looking out for themselves, after all, and they won’t let you cheat the system that way.
Other Financing Options
Traditional mortgages aren’t your only financing options.
FHA Loans
The Federal Housing Administration helps out homebuyers by offering loan assistance and other services.
For first time homebuyers struggling to save for a down payment, the FHA offers loans that allow you to put as little as 3.5% down on your home.
One caveat here: you’ll incur a higher interest rate to offset your low down payment. Avoiding private mortgage insurance might be nice, but make sure the higher interest rate doesn’t offset your savings.
VA Loans
Military veterans and active service alike might be eligible for loans from the Veteran’s Administration.
The federal government backs these loans loans allowing eligible active duty and veterans to put nothing down without incurring any private mortgage interest.
However, VA loans can be accompanied by fees and higher interest rates. Weigh the pros and cons of all your financing options before pulling the trigger on one.
5.) Hire a Real Estate Agent
Sure, you can do all the house shopping yourself, but first-time homebuyers place themselves at huge risk of being ripped off or taken advantage of.
Not to mention most people don’t have time to run the entire home buying process on their own.
Hiring a qualified, experienced real estate agent will save you time and money while shopping for homes. They can easily identify homes that fit your desires and budget, and they’ll help you negotiate with the seller.
Don’t be hasty in picking an agent. You want someone with experience that’s willing to put your interests first.
Real Estate Agent vs. Realtor
All Realtors are real estate agents, but not all real estate agents are Realtors. A Realtor is a real estate agent that belongs to the National Association of Realtors, an organization that require its members to follow strict rules and codes of conduct.
Real estate agents without the designation aren’t bad by any means, and they may be less expensive, but Realtors might have your interests more in mind simply because of their code of ethics.
Listing Agents vs. Buyer’s Agents
Real estate agents can assist both buyers and sellers, but most tend to specialize in one or the other.
Listing agents help sellers list their home and get potential buyers in the door. Buyer’s agents help the buyer through the whole buying process.
Thus, you want to look for a real estate agent who leans towards the buyer’s side.
Finding a Real Estate Agent
You can find good real estate agents one of two ways:
- Word of mouth
- Online
Word of mouth recommendations will come from your family and friends, so ask them if they know any good agents. In addition, you could peak at those real estate agent signs in the yards of homes for sale.
Searching online will net you a wider array of potential agents. You could run a general internet search for agents in your area, or you could check out a real estate sites like Zillow or Redfin.
In fact, you could go online and look up the real estate agents you see on the signs in the yards of homes for sale.
6.) Find Your Favorite Home
After a lot of hard work, you have a preapproval letter (or several) and a quality real estate agent. It’s time to start looking for your future home!
Browse Online Listings
Hop on a site like Zillow or Redfin to start looking for sites. You could also check out the Multiple Listing Service website and look for listings in your area.
Your real estate agent might have their own private real estate portal as well. (This is always a great choice as these get updated earlier than Zillow).
Whichever method you use, set updates and refresh the results often. If you’re in a competitive market, your vigilance will give you the edge over other buyers.
Check Out Multiple Homes in Your Budget
Remember, you’re on the verge of making a huge life and financial decision, so you want to shop around as much as you can before deciding on a house.
Here’s one area a real estate agent comes in handy. Provide them a detailed list of what you want in your new home, and your real estate agent will do their best to find listings that cover as many of your wants as possible.
You are a first-time homebuyer, though, so your wants might change once you start seeing homes for real. As you visit more homes, you’ll have a better idea of what you truly want, rather than what you think you want.
Always communicate any changes in what you want to your agent.
As for the budget…
Don’t visit homes outside of your budget. Reiterate this to your agent, even if they try to persuade you upwards. It’s better to get less than what you want and afford it than to destroy the finances you worked so hard to build by buying a home that’s too expensive.
Sure, you may have to make compromises on what you want vs. what you can afford. However, some of those trade-offs can be added back to your home after buying it (when you have the money) in the form of upgrades.
See Yourself in the Home
When you visit homes, you’ll see each current owners’s furniture, possessions, and decor. You have to force yourself to see beyond that stuff, as it doesn’t come with the house.
Look past the current owners’s stuff to see the actual features of the home, such as windows, ceilings, and room layouts. Then, imagine what your life might look like in the home by envisioning your own decor and furniture.
7.) Make an Offer on Your Desired Home
So you’ve found “the one”. No, not your significant other; your dream first home!
Your real estate agent will help you put together an offer package. This is going to include your preapproval letter, proof of down payment funds (not always necessary, but helpful when in a competitive market), terms/contingencies and of course, your offer price.
Some of your offers will get rejected, which is yet another reason to visit multiple homes during Step 7. Keep working with your agent to identify why offers might be rejected so you can reduce future rejections.
After enough offers, you’ll get a few counteroffers from sellers. You can negotiate further, or reject their counteroffer and look for another home.
Eventually, you’ll arrive at an agreement with a seller.
Escrow
Upon an offer acceptance, the escrow process begins. You’ll sign a purchase agreement, then you’ll pay what’s called an “earnest money deposit” of 1-2% of the home purchase price.
The deposit is accompanied by your down payment and any other loan funds either now or later, depending on the requirements of the escrow company (the 3rd party that holds the funds for you). The earnest money deposit is applied against your down payment, so you won’t have to technically pay the full 20% if it’s done later.
Doing this protects both you and the seller. If you paid the deposit to the seller, they can yank you around however they want because the money’s in their hands.
The seller doesn’t want to risk losing their house without getting paid either, yet you don’t want to risk your money without getting the house.
Thus, the escrow company holds the money so no one has an unfair advantage.
8.) Inspect the Home
While you’re in escrow, you’ll want to inspect your future home. The seller is already legally obligated to disclose any issues they know about regarding the property.
But many issues, such as cracks in the foundation, might be invisible to them.
Again, you’ll want to hire someone for this rather than do it yourself. Your real estate agent can recommend professional home inspectors to you, but always do your research.
Also, get this done asap. Most states and contracts require the home inspection to be completed within 2 weeks of signing the purchase agreement.
Appraisal
Schedule a home appraisal during escrow as well. Banks won’t finance a house for more than it’s actually worth, so if your appraiser finds the home to be worth less than your agreed-upon price, it’s back to the negotiating table.
You can pay more than what the home’s worth, but that’s not recommended because you’ll have a home worth less than the debt you took out on it.
9.) Negotiate Any Repairs
The home inspector will investigate the home and report all major and minor issues they find. Anything major will need to be dealt with before you close on the home.
Your real estate agent again comes in handy here. Enlist their expertise to negotiate the seller into paying for the repairs or at the very least awarding you repair credits upon closing.
Going back to the purchase agreement: most purchase agreements have a contingency that allows buyers to hold sellers responsible for repairs. These contingencies also let you cancel the contract if they refuse, so they’re a good way out if the seller isn’t willing to pay for their damages.
10.) Lock Down Your Financing
Go back to the bank that preapproved you and formally apply for a mortgage. This can take a few weeks to a month; to speed this up, respond to requests for additional documentation right away.
Triple check that all documents, amounts, and other details are correct to prevent issues during the process.
And remember: until your loan is funded, the lender can yank it at any time if your credit score drops or your debt levels increase drastically. Avoid incurring a single penny of debt if possible, and don’t open any new credit cards until you close on the home.
11.) Walk-Through One More Time
Once more, walk through the home with your real estate agent to make sure you didn’t miss anything. Come prepared with questions and concerns, as this is the last opportunity to address them before the house is your responsibility.
Bring all repair invoices and receipts to ensure all agreed-upon work was performed, too.
Take this time to envision yourself living here as well. It’ll get you fired up to move into your new home.
12.) Closing Time
Almost there. Once your lender gives you “clear to close” status on your loan, you and your agent will meet with the seller and their agent, as well as a closing agent (either an employee from the title/escrow company or a real estate lawyer).
During this time, you’ll wire over all closing costs. You’ll also send over the remaining down payment (full down payment less the earnest money deposit).
Make sure to ask for clarification on anything, as this is your last chance. Once everything’s signed, sealed, and delivered, your money leaves the escrow company and goes to the seller.
Then, you finally get your keys.
13.) Move In!
You did it. Welcome to your new home! Now, the hardest part is deciding what kind of aesthetic you want inside your house.
A few things to keep in mind:
- Keep up on upkeep – The sooner you address issues, the less costly they are. It’s a lot of work, but fix stuff the moment you find it broken. After all, your house is your most valuable asset (in terms of money, that is). Lastly, proper upkeep will keep your home’s value as high as possible for you if you ever sell it.
- Emergency fund – Hopefully you had one already with 3-6 months of expenses. However, you may want to bolster it a bit more now because houses are more expensive to maintain on your end than a rental apartment. If you end up starting a family in your new home, you should aim for 6 months because more people means more chance of an emergency.
- Stay frugal for awhile – You’re free of the mortgage lender’s ability to rescind your mortgage, but remain frugal for bit. You just spent thousands and tons of time to get the house, so you’ll want to try and earn that money back.
Thank you for reading this guide! We wish you good luck in finding your dream home.
