The housing market has been steadily recovering since the financial crisis almost a decade ago. By some measures, U.S. home prices in general are above their pre-recession peak. And some specific markets like Seattle, Wash., significantly above their 2007 highs after recent gains.
A big part of this continued uptrend in prices is demand for housing from first-time home buyers. Last year, roughly 1 in 3 of residential home sales came from first-time purchasers. And why shouldn’t more people be taking the plunge, considering that broad economic metrics such as unemployment and consumer confidence continue to look strong?
Of course, buying your first house isn’t a task to be taken lightly. The purchase will easily be the most expensive purchase a first-time homebuyer has ever undertaken, and the sheer size of the transaction can keep people awake at night. Furthermore, the specific nature of real estate pricing and mortgage options can be very intimidating even for an intelligent and financially savvy homebuyer.
But there’s no reason to panic. Millions of Americans become new homeowners each year, and most of them have followed a pretty similar path.
If you break down the complicated process of buying a house into simple steps and if you know what’s coming, you’ll find that it’s not that difficult – and that if you’re prepared, you can save a lot of time, money and heartache along the way.
If you’re looking to purchase a new home, here is a 15-point checklist to help you on your way:
#1. Make a budget: According to a recent study by U.S. Bank, only 41% of Americans manage their monthly finances with a budget. That’s unwise regardless of your spending plans, but particularly crazy if you expect to purchase a home. Any big purchase starts with knowing how much you earn and monitoring how much you spend. So start by taking inventory of your finances, seeing how much you can spend monthly on housing and how much you can save each paycheck to build a down payment.
#2. Educate yourself about the market: All those home decorating shows on TV are the bane of the first-time homebuyer, because they often create unreal expectations. The median home price in America is about $315,000 at present, but what you get for that amount can vary widely depending on your local market. Spend some time researching homes on sites like Realtor.com, Zillow or your favorite real estate portal – particularly in regards to recent transactions – to get a handle on how much houses actually cost.
#3. Set a Savings Goal: Now that you have a budget and understand the market, it’s time to get realistic about a savings goal. The bare minimum you need as a down payment is 3.5% via an FHA loan. On top that, you’ll need money for “closing costs,” or fees associated with the transaction that can run anywhere from 2% to 5% more. That means you could need as much as $27,000 – 0r 8.5% — to afford that $315,000 home. If you have nothing saved, it may take some time to build up this cash or else you may have to be less choosy about the kind of house or neighborhood you want.
#4. Fix Up Your Credit: Of course, that down payment is dependent on you getting approved for a loan in the first place. To ensure you find a lender, it’s important to check your credit score and clean up any outstanding issues. Every American consumer gets one free credit report each year at AnnualCreditReport.com, and you should check this document carefully for possible red flags. That may include old accounts you haven’t closed out, errors or fraudulent activity that makes you look like you don’t pay your bills, or other factors that can adversely affect your credit score. And of course, going forward make sure you pay all your bills on time to prevent getting any new black marks.
#5. Find an Agent: There are ways to purchase a home without a Realtor, but as a first-time homebuyer you will benefit greatly from the peace of mind that a seasoned professional can bring. Don’t just dial the first person you hear of, however – pay attention to which agents serve the area you’re looking for. Most real estate databases can tell you who is the most active agent in a given zip code, and that will show you who is knowledgeable about the area. And of course meet face to face, to ensure you have a good rapport. Homebuying is a stressful process, and you’ll want an ally who understands you and your needs.
#6. Find a Lender: Once you’ve done all this, now it’s time to find a lender and get pre-approved for a mortgage. Your agent will be able to help with this step, but keep in mind that the internet has put a wide variety of banks just a mouse click away. Many electronic mortgage companies offer very competitive rates thanks to low overhead and a specialty in housing loans that can’t be matched by a local brick-and-mortar bank.
#7. Find the Right Loan: A good lender will offer a variety of products – including interest-only mortgages, adjustable rate mortgages or other vehicles that may offer a more attractive payment structure than a traditional 30-year fixed loan. Shop around for the best loan even if you think you have a good low-cost lender, and educate yourself about how the different options can alter your monthly payment. After all, it’s important to think seriously about how you will pay for this new home before you start checking out houses and fall in love with a property that you can’t get financing for!
#8. Find an Insurance Policy: If you’re borrowing to pay for the house, a bank will not allow you to move in without homeowner’s insurance to protect their loan. So before you’re ready to make an offer, you need to find an insurance company that will extend coverage to you. Like the loan, you’re just outlining broad strokes here and giving the insurer information so they can act quickly when you find the house that’s right for you. The last thing you want is for insurance to hold things up, so get the ball rolling now so you can understand pricing and so you can streamline the policy process when you’re ready.
#9. Look at LOTS of Houses: If you’ve gotten this far, it’s now time to look at houses. But keep in mind that this is a dangerous step for first-time homebuyers who are overly emotional or unrealistic about their local market. A good agent and plenty of time online will help greatly, but there really is no substitute for looking at numerous houses that are actually for sale at this moment to understand what your options are. A good rule of thumb is to look at least 10 houses before you put in your first offer. Otherwise, you may not understand what’s available or what prices are fair.
#10. Make an Offer: It’s finally time to get serious! Now that you have pre-approval for a loan and a good knowledge about what a proper price is, you should have confidence that you can make a competitive offer for a house. Just remember that different buyers are motivated by different things, and an offer that is fair to you may be under what the seller wants or another buyer is prepared to offer. The only thing you can do is bid a price that you can afford and you think is fair, and then stick to it.
#11. Finalize Your Loan and Insurance: If your offer has been accepted, congratulations – you’re now “under contract” and other prospective homebuyers can’t bid on the property. However, that doesn’t mean it’s all a done deal. You still have to move from pre-approval on a general loan to a specific mortgage amount and structure. If you did your homework earlier, this should be straightforward, but will involve some added paperwork and steps like locking in an interest rate for your loan. In some cases you can pay “points” against your mortgage to reduce the rate further. And of course, you’ll have to get back to your insurance company to backstop that loan. This will finalize the structure of your monthly payments that cover both insurance and your mortgage obligations, so make sure you discuss all your options.
#12. Inspect Everything: Its standard operating procedure for an agent to recommend a home inspector who will do everything from check the electrical outlets to estimate the age of appliances. But depending on https://www.reviews.com/life-insurance/your property, you may also want to pay for a specialized inspector to give an extra level of safety. If you’re buying a house that’s not on a public sewer, getting the well water tested and the septic tank inspected is wise. Similarly, if your prospective home has a fireplace you may want that inspected as well. Your home inspector may also find worrisome signs that indicate termites, basement flooding or roof leaks, and recommend a follow up from a dedicated professional. These inspectors will each charge a fee, but are well worth it. If they find problems, you will either be able to negotiate a lower price with the seller or back out of the purchase altogether if there are serious problems.
#13. Tie Up Loose Ends: Before you sign on the dotted line, you get a last chance to negotiate terms. You can suggest repairs to issues you found during inspection – no matter how small – or ask for some money back to offset the cost of you fixing them yourself. You also get to do a final walkthrough of the property before signing on the dotted line. This is important in properties that are shown with furniture until the resident moves out, and may have had issues obscured on walls and floors. Similarly, you may have to schedule an inspection for the insurance company before the policy is finalized. And of course you’ll want to contact the power utility, a local trash company and other service providers to let them know you’re the new owner.
#14. Get a Home Warranty: If you’re a first-time buyer, it can be a nightmare to navigate this whole stressful process and then be saddled with a massive bill a few months later when the washing machine or the furnace quits. That’s why a home warranty is a great option for those new to home ownership. For a modest monthly payment, you can protect the major systems like heating and plumbing as well as costly appliances in your house just in case they break and need to be repaired or replaced. Much like insurance on your car, you don’t use it until you need it – but it will feel well worth it if the unexpected happens. You can structure a home warranty to take effect the minute you close on the house, too, so there is seamless coverage as soon as you become the new owner.
#15. Closing Time: It’s not uncommon for homebuyers to spend years saving up, months shopping for their first house and weeks to fight through the paperwork after getting an offer accepted. But now, at long last, you’re finally ready to buy that home! “Closing” on a house involves an hour or two of paperwork, signing a lot of documents and reconciling the finances of the buyer and the seller. You may get a cramp in your hand, but at the end you’ll actually have a set of keys and a new home to show for all your hard work and preparation. Congratulations!