The First-Time Home Buyers' Ultimate Guide
The First-Time Home Buyers' Ultimate Guide
Congratulations if you're looking at taking the first step toward becoming a homeowner!
Upgrading from renting to owning your own home is a big part of the American dream, and the excitement of being handed the keys to your first-ever home is something you'll never forget. That said, it's not without challenges, especially if you've never been through it before.
With that in mind, this step-by-step guide for first-time home buyers will help you navigate the process and make an informed purchase decision.
There's a lot to get through, so let's save time and dive right in.
#1: Decide Where to Live
Every city is extensive, with various neighborhoods and suburbs. Choosing somewhere specific to live in a larger city would be best. Many first-time buyers rush into this decision and get stuck living in a house and area they don't love. So underestimate this step at your peril.
If you find a well-suited neighborhood, you can dramatically enhance your quality of life. Get it wrong, though, and you might regret your decision. If you're unfamiliar with an area, ask an experienced real estate agent for their recommendation.
To make an informed decision, consider the following factors:
- Employment opportunities: Seek areas experiencing job growth and offer opportunities in your field to ensure financial stability.
- Cost of living: Assess whether you can afford the area's cost of living. For example, Tucson, Arizona, has a relatively affordable cost of living compared to other desirable cities, including Phoenix.
- Proximity to family and friends: Living close to loved ones can provide a support network and enrich your social life.
- Schools and education: Good schools are essential for families planning to have children and can positively impact property values.
- Amenities and recreational activities: The availability of parks (both local and national), outdoor recreation locations, shopping centers, and restaurants can contribute to an enjoyable lifestyle.
- Resale ease and value: If you choose to move in a few years, homebuyers will look for many of the abovementioned items. Finding the right area could improve your chances of selling your home quickly and at a great price.
Research neighborhoods using online resources like Zillow or our advanced property search, visit potential areas in person and talk to residents and real estate agents to get a good feel for the different areas within a city.
#2: Work Out What You Can Afford
There's no point in looking or submitting an offer on a home you cannot afford. So, once you've picked one or a few neighborhoods, it's time to get realistic estimates of what you can afford.
Before diving into the home search, assess your financial situation by considering your income, expenses, and debt. Use this information and an online calculator to identify a comfortable mortgage payment that will stay within your budget.
Remember to account for additional costs such as property taxes, homeowners insurance, maintenance and repairs, and utilities. Knowing your budget will help you narrow down your search and avoid potential financial stress.
You can use rules to find out how much you can afford. The 28/36 rule is the most conservative. In short, the rule states that your total housing costs should not exceed 28% of your gross monthly income; your other monthly debt obligations shouldn't exceed 36%. That said, FHA lenders use a 31/43 ratio to decide if you are eligible for an FHA loan, the most common type for first-time homebuyers.
Examples of each using a gross monthly income of $6,000
6,000 x 0.28 = $1,680 for monthly housing costs
6,000 x 0.36 = $2,160 for 'all other' monthly debt obligations
6,000 x 0.31 = $1,860 for monthly housing costs
6,000 x 0.43 = $2,580 for 'all other' monthly debt obligations
You can use this information for a pre-approval letter from a lender down the road (more on this shortly), but rough "back of a napkin" calculations should suffice for now.
#3: Prepare Your Credit
Your credit report and overall score are vital in securing a mortgage with favorable terms. It's usually the most significant factor in determining your terms and interest rate, so it's worth cleaning up your score.
To prepare your credit, check your credit report for accuracy and dispute any errors. You can improve your credit score by paying bills on time, reducing debt, and avoiding new credit inquiries.
A higher credit score can help you obtain a lower interest rate and better loan terms, ultimately saving you money in the long run. So it's worthwhile putting in the effort to improve your credit score.
Pro tip: Improvements to your financial and credit situations can take four to six weeks to filter through to the leading credit agencies. It pays to work on it early in the home-buying process.
#4: Save for a Down Payment
A down payment is typically required when purchasing a home. Depending on your loan type, credit score, and other factors, it could range from 3% to 20% of the purchase price.
Determine the amount you need to save based on the price range of homes you're looking to purchase. Employ saving strategies such as creating a budget, automating savings, and cutting expenses if you need to increase how much you can save. Once again, the earlier you start, the easier it will be to reach your goal.
Additionally, explore down payment assistance (DPA) programs if you need extra help. Several programs are available to first-time buyers, so it's worth checking your eligibility. Each state has different programs; ask your real estate agent if programs are available for you.
Pro Tip: FHA Loans require a downpayment of 3.5%. If you don't put 20% down on a home, you must pay for private mortgage insurance (PMI).
#5: Get a Pre-Approval Letter from a Lender and Shop for Homes
With all your ducks in a row with your credit and down payment, it's time to secure a pre-approval letter from a lender.
A pre-approval letter is essential because it demonstrates your financial capability to sellers, giving you an advantage over other potential buyers. To obtain a pre-approval letter, gather the required documents, such as proof of income, assets, and debts, and find a reputable lender.
With a pre-approval letter, search for homes through online listings or by working with a real estate agent, and attend open houses and private showings. If you are not working with an agent, remember to keep your budget and desired location in mind as you search for your perfect home to avoid getting carried away and wasting time.
Pro tip: Hiring an experienced real estate agent is a good idea if you're buying a home. They are on your side throughout the process and will help you make the best decisions for your situation. Best of all, the seller pays their commissions; you get expert advice and help for no extra cost.
#6: Secure an Offer on a Home
Once you find a home you love, it's time to make a competitive offer.
Consider market conditions, such as whether it's a buyer's or seller's market, and the seller's motivations, like a quick sale or the highest price. Remember to include contingencies, such as a home inspection, to protect yourself if issues arise.
Once you've covered all your bases, it's time to negotiate the offer with the seller and finalize the contract with earnest money (a payment of around 1% to 2% of the purchase price) to secure the property.
#7: Closing and Getting the Keys
Closing is the final step in the home-buying process. From here, you'll be a few weeks from the finish line.
Before closing, you'll need to review the closing disclosure to ensure that all fees and terms match your expectations. You should then conduct a final walk-through of the property to verify that any agreed-upon repairs are complete and that no new issues have arisen.
At the closing, be prepared to pay closing costs, which typically range from 2-5% of the home's purchase price. You'll sign various closing documents, such as the mortgage note and deed of trust, which finalize the transaction.
Closing is probably the most paperwork-heavy part of the process, so expect to spend a few hours (or even days if you have a demanding job) signing documents.
Once all documents are signed, and everything is approved, you'll receive the keys to your new home!
Congratulations, You're a Homeowner!
Congratulations on successfully navigating the home-buying process, and welcome to home ownership!
By staying informed and proactive throughout each step, you will have made a sound investment in your future. The only thing that you'll have left to do is enjoy your new home and create lasting memories.
If you're a first-time buyer in the Tucson area, don't hesitate to contact me. I can help you through the process of buying a home and be there to answer any questions you may have at every step of the journey.
I will offer you honesty, integrity, and an unrivaled knowledge of the local market to give you the confidence that you're making the right decision for your first-ever home purchase.
Call me any time of the day or week (yes, even evenings and weekends) at 520-248-1239 to discuss your thoughts, and let's start your home-buying journey together!