Buy Your First Home: A Step-By-Step Guide

Step 1

Check Your Credit Score

The three credit bureaus (Equifax, Experian, and TransUnion) are each required to give you a free credit report once a year.  A Federal Trade Commission study found that one in four Americans identified errors on their credit report, and 5% had errors that could lead to higher rates on loans.  Avoid last-minute bombshells by checking your score long before you are ready to make an offer, and work diligently to correct any mistakes.

Determine How Much You Can Afford

Depending on the type of mortgage, lenders look at debt as a percentage of your gross monthly income (debt-to-income ratio).  This figure includes your future mortgage and any other debts, such as a car loan, student loan or revolving credit cards.

Make A Down Payment Plan

The higher your down payment, the lower your loan costs, and you will get a better interest rate.  There are conventional loan products with down payment as low as 3% and FHA offers  down payment as low as 3.5%.  The U.S. Department of Housing and Urban Development (HUD) provides a list of home buying programs.  also, check with credit unions and your employer might even have an assistance program.

Step 2

Prioritize What You Most Want In your New Home

What is most important in your new home?  Proximity to work?  A big backyard?  An open floor plan?  Being on a quiet street?  You will make a much better decision on what home to buy if you focus on your priorities.  If it is a joint decision, now is the time to work out ant differences to avoid frustration and wasted time.  Most important, know what trade-offs you are willing to make.

Research Neighborhoods And Start Visiting Open Houses

Now is when the fun begins.  Use property listing sites, such as realtor.com to find out about neighborhoods, public transportation and cost of living.

Start visiting open houses to get an idea of what kind of homes are in your price range and what neighborhoods appeal the most.  Seeing potential homes will also keep you motivated to continue reducing your debts and saving for your down payment.

Budget For Miscellaneous Home Buying Expenses

Buying a home has some miscellaneous upfront costs.  A home inspection, title search, property survey, and home insurance are examples.  Costs vary by locale, but expect to pay at least a few hundred dollars.  If you do not have the cash, start saving now.

Start A Home Maintenance Account

Start the good habit now of putting a little aside each month to fund maintenance, repairs nd home emergencies.  It is bad enough to have to call a plumber.  It is worse if you are paying credit card interest on that plumbing bill.

Step 3

Collect Your Loan Paperwork

Lenders are very particular when it comes to mortgage loans.  They demand a lot of paperwork.

• W-2 forms or business tax return forms if you are self employed for the last 2 to 3 years
• Personal tax returns for the past 2 to 3 years
• Your most recent pay stubs
• Credit card and other loan statements
• Your bank statements
• Addresses for the past 5 to 7 years
• Brokerage account statements for the most recent 2 to 4 months
• Most recent retirement account statements such as 401(k)

If you start collecting these documents now, it will lessen the stress when it is time to get your loan.

Research Lenders And Realtors

Start interviewing Realtors.  A buyers agent will work in your best interest to find you the right property, negotiate with the seller's agent, and shepherd you through the closing process.

Look for a lender who will shop for a competitive loan rate for you.

Step 4

Get Pre-Approved For Your Loan

If you have been following this timeline, your credit score, paperwork, and down payment should be on track.  You have done your research on lenders and Realtors.  Now it is time to start working with them.  First you will need to get pre-approved for a mortgage.

Your lender will review all of the paperwork that you have collected and run your credit score to tell you how much of a loan you are pre-approved for.  Draft a budget that accounts for mortgage payments, insurance, maintenance, and everything else you have going on in your life.  It may make sense to borrow less than you are pre-approved for in order to live comfortably.

Start Shopping For Your New Home

Once you are pre-approved, your Realtor will be able to target homes that meet your priorities in your price range.  This way you will not be wasting your time looking at homes that you cannot afford.

Step 5

Make An Offer On A Home

It usually takes four to six weeks to close on a home.  If you have a firm move-out date, allow enough time to deal with any hiccups that can delay closing.

Get A Home Inspection

An inspection period is negotiated in the offer you make on a home.  After an offer is accepted, have a licensed home inspector look at the home.  If any issues are found during the inspection, you have the option of negotiating repairs with the seller, agreeing to do the repairs after you take ownership or canceling the offer an continue shopping.

Step 6

Check That All Of Your Financial Records Are In Order And Review All Lending Documents Before Closing

If you have been keeping your documents up to date, and your down payment is in reserve, these final steps are the easiest.  Reviewing the mortgage documents is probably the most difficult.  Your lender and Realtor can help guide you through them.

Get Insurance For Your Home

Do not forget to secure insurance before closing.  You will need to provide proof of insurance to your lender before closing.

Make A Wire Transfer Of Cash Needed To Close

You will be given an exact amount of cash needed to close by the title company who is managing the closing a few days before the close.  Make the wire transfer using the instructions provided by the title company to the title company's escrow account.  It is important that the instructions for wiring come directly to you from the title company, and verify the wiring instructions with the title company prior to making any wire transfer.