Buying your first home is a major, expensive decision, and you shouldn’t start the process without doing any research. Knowing what to expect during the home buying process can save you from possible mistakes, and give you the confidence you need to dive head first into the home buyer pool. One of the biggest challenges of buying your first home is knowing where to start. Luckily, Homes for Heroes has the complete first time home buying process laid out for you to review. Let’s go through what you’ll need to know and do to buy your first home.
Step 1: Financing
Once you’ve made the decision to stop renting and start buying, you most likely want to start looking at houses right away. In today’s fast housing market, this will only lead to heartbreak. Because of how quickly homes are going, and for well over asking price, having your finances in order before you start your search will set you up for better results. This also includes going over some of the out of pocket costs that first time home buyers might not know about.
Before you start your search, you should know that there are going to be costs associated with buying a house that you can’t put in your mortgage. For example, down payment, paying for movers or moving expenses, earnest money, possible storage if your unable to find a home before your lease is up, and lodging for the same reason. These are just some of the up front and out of pocket costs that you will encounter when buying your first home.
Then there are the costs that sometimes can be rolled into your mortgage. While this can help your overall financial contribution up front, remember that anything you roll into your mortgage will add to your monthly mortgage payment amount. These costs can often, but not always, be financed into your mortgage or escrow account: closing costs, homeowners insurance, and property taxes.
These costs can factor into the thousands, and most are priced based on the specific home you buy. Keep these costs in the back of your mind until you start to look at homes. Then, factor these items in when determining what you can afford.
One of the main factors a mortgage lender or loan originator will look when determining how much money they will loan you is your credit history and credit score. They will use your credit report to see how you have paid your current and past debts. Lenders will look at your payment history with car loans, student loans, and credit card bills. If you have paid all your bills on time and in full, you should have an excellent credit rating. But, if you have been paying late or not the full amount, that could hurt your credit score. Generally, one missed payment shouldn’t hurt your score too much, but consistently missing payments, large outstanding debts, or maxing out your credit cards each month can have a negative effect.
It can be a good idea to check your credit score before you meet with your lender to avoid surprises, but it’s not required. You can check each of the three credit bureaus once a year for free without it hurting your credit. Knowing what your credit score is as a first time home buyer will help you understand your overall finances. Your credit score also has an impact on what your interest rate will be. The better your credit, the lower your interest rate.
What is a Good Credit Score?
One big myth about buying a home, especially for the first time, is that you need to have excellent credit. This simply isn’t true. There are a wide variety of mortgage loans for all kinds of financial and credit situations. If your credit score has been holding you back on your dream to own a home, set up a meeting with a lender. They can let you know what options you have as a first time home buyer. If you need to work on your credit, they can give you suggestions on how to improve it.
Your lender will also need to see your full financial makeup to determine your creditworthiness. They’ll request things like your bank statements for the last two months, your last two years of W2’s and tax returns, credit card and loan statements, paychecks from the last few months, and may even verify your employment with your employer. This is all to make sure that you can actually afford to make the payments once you receive your loan. Most lenders also look at something called DTI, which is debt-to-income ratio, to determine if you can afford your loan. Mortgage lenders look for a lower DTI when approving loan applications, typically under 36%. You can calculate your DTI with this calculator.
Finally, you can take your whole financial picture and piece it together to calculate how much home you can afford. While you may be approved from a bank or lender for more than this, knowing what you can comfortably pay each month in mortgage, fees, property taxes, homeowners insurance, etc. will help you not feel overwhelmed in your payments.
Step 2: Secure a Lender
While you may think you need to start this process with a real estate agent, that’s only partly true. You will need a real estate agent to help you with the entire home buying process. But, you should also secure your lender and the beginning of the process. With the toughest housing market in recent history, you need to be ready to put in an offer the moment you find a house you love. If you find the house, then need to find a lender, gather your documents, and get approved, chances are you are going to miss out on the home.
A loan officer looks at the financial make up of a loan applicant, and determines their ability and willingness to pay back a mortgage. Lenders take a look at your finances and the loan amount you’re asking for, and determine how likely you are to be able to pay that amount back. Since lenders provide most of the types of loans to you, it is usually up to them to determine if you’re going to pay the loan back or not. Each lender has criteria that they look at to see a comprehensive picture of all your finances. They use this to then determine if you’re approved for a loan, and what the terms are.
In order to approve your loan application, your lender will need a few things from you to determine your ability to pay back your mortgage. This includes, but is not limited to:
- Recent paychecks
- W2’s or tax returns
- Outstanding debt, like car loans or student loans
- Credit score
- Credit history
- Open lines of credit, like current credit cards
- Bank statements
- Other sources of income besides your job, like stocks and investments
Amount Approved For vs. Amount You Can Afford
One thing to remember is that just because you are approved for a certain loan amount doesn’t mean that you need to take that much for your loan, and that you might not be able to afford that much. For example, if you have a two income household and excellent credit, let’s say you are approved for a $700,000 mortgage. That doesn’t mean you have to buy a $700,000 house, but you can borrow up to that much for the house purchase. And, just because you can get a mortgage for $700,000 doesn’t mean you can necessarily afford the monthly payments. Even if you put down a whopping 10%, or $70,000, at 3.5% interest rate, your mortgage payment each month would be over $3,000. That doesn’t include homeowners insurance or property tax either.
Once you’re approved from a lender, you can always plug the number they’ve given you into a mortgage calculator. This lets you adjust numbers and home prices, using the information that you have, to figure out how a mortgage payment fits into your budget.
Most real estate agents have a relationship with a lender that they suggest you use, but you are also allowed to find your own. This is called shopping around. Shopping for a lender lets you find the best interest rate a lender will give you, and that can make a huge difference in how much you pay for your home.
You can’t talk about mortgages without talking about interest rates. But what is an interest rate? An interest rate is the cost you pay to borrow money. It is calculated as a percentage of the total amount borrowed. The better your credit score, generally the lower the interest rate.
The interest rate fluctuates daily, and are influenced by the Federal Reserve on a national level. Since the start of the pandemic, interest rates have been at or near historically low numbers in hopes to stimulate the economy and get people to spend money. This means, over the life of your loan, you could end up paying thousands of dollars less, which makes now an attractive time to be a first time home buyer. Interest rates can also vary by the type of loan you receive. One of the biggest impacts to what interest rate you receive is your credit score and credit history.
Fixed Rate and Variable Rate
There are also two different types of interest rates on mortgages, fixed rate and variable rate. Fixed rate means that the interest rate stays the same for the life of the loan. A variable rate, or adjustable rate mortgage (ARM), has an interest rate that is fixed in the beginning for a portion of the loan. After that beginning period is over, anywhere from 3-10 years generally, the interest rate can change monthly. It will go up and down based on the market rate.
ARM’s makes it harder to budget for your mortgage payment, since your rate will be whatever the current market rate is. Your mortgage one month could be $900 with the interest rate, and the next it could be $1,300. Your loan specialist will be able to discuss the advantages and disadvantages of both types of rates with you.
One positive thing about adjustable rates is that if you plan to move in the near future, you can potentially get a lower interest rate than with a fixed rate mortgage. And if you sell your home or refinance before the adjustable rate period starts, you do not need to worry about the fluctuation.
Getting pre-approved by a lender does a number of things. For one, it tells you exactly how much money the lender is willing to loan you. This is important to know before you start looking at houses, incase your desired range is higher than the amount you’re approved for. Knowing your max loan amount can also help you calculate how much money you need to put for a down payment once you find a house. It also shows homeowners that a lender has already gone through your finances and the likelihood that your offer would fall through on your end is small. This can give them more confidence picking your offer if there are multiple offers on their home.
Once you provide your lender with all the information they ask for, and they agree to give you a loan, you are officially pre-approved. This means that they will tell you the amount of money they are willing to loan you as a first time home buyer, what interest rate they will loan it to you at, and how much that breaks your monthly mortgage payment into. Pre-approvals typically last for 60-90 days. Then, they have to be recalculated based on the current interest rates.
Step 3: Selecting a Mortgage Loan
During your pre-approval process, your lender will be able to determine which type of loans you qualify for. Chances are you qualify for more than one. They can walk you through the pros and cons of each loan type, and talk about which could be the best option for you. The most common loan types for our first time home buying heroes are:
- FHA Loans – For first time home buyers, FHA loans can be a great option because of their lower credit requirements. They can also be ideal for those who have less money for down payments, which often include first time home buyers. The minimum down payment on a FHA loan is typically 3.5%.
- USDA Loans – You could also qualify for a USDA loan if you are looking to purchase a home in a rural area. There are strict criteria a home has to meet to qualify for a USDA loan, but if you and the home you wish to purchase qualifies, you would have no down payment with this loan.
- VA Loans – VA loans are also an option if you or your spouse is a military veteran. These loans have zero down payment requirements and usually offer lower interest rates.
- Conventional Loans – Most individuals qualify for a conventional loan, which make up the majority of home mortgage loans.
Home Buying Programs and Grants
There are also several down payment assistance programs or other home ownership assistance for first time home buyers. The U.S. Department of Housing and Urban Development, or HUD, has an excellent housing program called Good Neighbor Next Door. This program allows law enforcement, teachers, firefighters, and EMS professionals pay 50% of the list price of a home. There are some restrictions with this housing program, like the home needs to be in a certain area, and you have to live there as your primary residence for 36 months. But, for a home that’s half off, those are pretty good terms!
There is also an organization called Down Payment Resource you can utilize to find down payment assistance and home buying grants. This is the largest online database of available home loan programs, down payment assistance, home buying grants and more for buying a home for the first time. You just put in a few pieces of information like location, income, and home price range. The database then shows you all the home buying programs you’re eligible for.
Step 4: Find a Real Estate Agent
While you are working on your pre-approval with your lender, you should also find a real estate agent. Real estate agents are necessary for buying a home, and will be your best advocate with the sellers. They also understand the homes in your budget as well as your community, and keep their eye on things you might not know to think about or look at.
At Homes for Heroes, we can connect you to both lending specialists and real estate agents in your community. We have the largest nationwide network of both lenders and real estate specialists of any similar program in the country. Sign up with Homes for Heroes and you’ll be matched with these specialists with no extra work or cost to you. As a hero in law enforcement, education, healthcare, firefighting, EMS, or active or retired military, Homes for Heroes and our affiliates want to say thank you. To do that, we offer you Hero Rewards.
When you buy and/or sell a home with one of our local real estate specialists in your area, you will receive a check for 0.7% of the purchase price, or $700 for every $100,000. You’ll receive these Hero Rewards after you close on your new home. Plus, if you work with our mortgage, title and inspection specialists, you can save $500 on lender fees, $150 on title services, and $50 on a home inspection. That adds up to thousands of dollars in savings! On average, our heroes save $2,400 when buying a home. Sign up for Homes for Heroes with no obligation to talk to a real estate agent or mortgage specialist in your local community and get more information.
Step 5: Write it Down
This can be very beneficial when buying your first home, but is often overlooked. There are so many things to think about when deciding what meets your needs in your first home. Sure, there are things to consider like the amount of bedrooms or number of vehicles you can fit in the garage. But there are a lot of things first time home buyers overlook. For example, what kind of amenities or attractions are nearby? Schools, parks, shopping, and restaurants are all things to consider. For some, those are important, for others, not so much. Proximity to work could be a large factor as well, so you can spend less time commuting.
Another thing to consider is the condition of the home. Is it new construction that requires no work once you move in? Or is it a fixer upper that will need immediate or extensive attention? If you do not have the time or resources to fix up a home, you’ll want to put that on your list too.
For most people, things like paint color or landscaping can make a home less appealing, but the same functionally. If a house is in the right neighborhood, in the right school district, next to the amenities you want, but you need to paint the whole inside of the house, don’t write off the home just yet. Cosmetic issues can be easy things to fix yourself, or have someone else do for a small fee. Remember, you can change the paint in the bathroom, or go from carpet to hardwood floors, but if the house is too small or in the wrong school district to begin with, the color of the walls won’t matter.
Types of Homes to Consider
Have you put thought into the type of house you’re looking for? A single-family home isn’t always the right fit for everyone. Your might not have time or patience for yard maintenance. That could make you an ideal candidate for a townhouse or a condominium, where yardwork is usually taken care of. However, that sometimes comes with a fee to do so. Or maybe you have plans to become a landlord down the road, and are looking for a duplex. Make sure to share with your real estate agent the type of dwelling you’re looking to buy as well.
Adding all of the things that are important to you, both tangible and intangible, to a list is a great way to help your real estate agent find exactly what you’re looking for. Knowing what they can skip and what is necessary will help narrow down their search for you. This will also save you time in your busy schedule from looking at homes that just won’t work.
Step 6: Start Looking
Now that you have a good idea of what you are looking for and have communicated your list with your real estate agent, it’s time to start looking at homes! This can sometimes be a long and tiring process, but exciting as well. Plus, your real estate agent will be there every step of the way to answer questions that you may have and guide your search.
Don’t be discouraged if you look at more than a few homes. The reality of our housing market currently is that most homes get multiple offers and go on and off the market in just a few days. Don’t get discouraged if you find a home you think is perfect and your offer isn’t picked, or it’s just outside of your price range.
Sometimes, seeing a home in person can actually help you see what kind of things you don’t want. Maybe you always dreamed of having a walk-in closet. But, when you see how much space it takes away from your bedroom, you might change your mind. The more you look at homes and give feedback to your agent, the more your agent can narrow their search to find the perfect home.
Once you find a home that you just have to have, it is time to submit an offer!
Step 7: Submit Your Offer
Making an offer on your first home can be an exciting process. But, it can also be scary and stressful. Luckily, you’ll have an experienced agent by your side!
To draft your offer, your real estate agent will discuss with you how much you would like to pay for the home. While your agent is there to offer guidance and their knowledge of the market in your area, the actual amount you offer is entirely up to you. Your agent will also ask if there are any stipulations or requirements you want to add to your offer. For example, if there is a swing set that your kids would love, you can request in your offer that it stays.
They will also ask you for the terms of closing, or how many days you will need to close. Part of this will be determined by your loan terms and lender and the time they need to get the mortgage in order. If you’re renting, it can be a good idea to time the closing with when your lease is over. Then they will submit your offer to the sellers. If they accept your offer, congratulations! You are one step closer to becoming a home owner.
Sometimes, sellers will come back with a counter offer, whether that is a different price, disagreeing to your stipulations or closing time, or some other counter offer. This is where your real estate agent will work to get you the best deal they can. Or, if you are not willing to agree to the seller’s requests, you can walk away from the home. Then you’ll need to start the home search over again.
Step 8: Offer Accepted
Once the seller accepts your offer, it doesn’t mean you own the home – yet. There are several things that need to happen before your closing date to ensure a smooth transition of ownership.
It’s always wise to conduct an inspection on your soon to be home. This common practice brings in an inspector to look at your home and make sure it is in working order. Items they look at are things like the foundation, electric, plumbing, HVAC, and other items. Some home buyers are waiving the inspection, hoping that their offer will be seen as more favorable by the homeowner. While ultimately that decision is up to you, it probably isn’t a good idea. There could be an issue that could cause it to be unsafe, uninhabitable, or cost thousands to fix.
If you do have an inspection and they find something wrong, like a crack in the foundation, electricity not to code, or any other issues, it’s not the end of the world! As the buyer, you have a few options. You and your real estate agent can come back to the sellers with a counter offer. In that counter offer, you can ask for a few different things, for instance: a lower sale price since you’ll need to pay for the repairs, you can ask the homeowner make the repairs, you can extend the closing period so that the repairs can be done before moving in, or, if the fix is going to be too expensive or complicated, you can cancel the sale. You can also use your Hero Rewards to fix anything that shows up on your inspection too!
Another thing that will need to happen before you close is a home appraisal. These are a requirement for some types of home loans and from different banks. A home appraisal tells the bank that a home is worth a certain amount of money. If you are asking for a home loan for more than that amount, typically they will only give you what the home appraises for. On the other hand, if a home appraises for more than the purchase price, you will either need to renegotiate the sale price with the sellers, or come up with the difference in cash in order to close on the home.
Step 9: Close and Move
Once you make it to your closing date, the home is almost yours! Your real estate agent and your lender will be in communication with you before your closing date to let you know what you’ll need to bring to closing, along with what your final closing costs will be. Again, each lender will have their own requirements, but typically closings will need at least proof of homeowners insurance and a cashiers check with your down payment and closing costs, among many other items.
Generally, you’ll also do a final walkthrough a day or less before closing. This ensures that all the previous owner’s possessions are gone, and that there are no other breaches of the contract. Once you sign all the paperwork (there will be a lot!), the house is officially yours. You are now the owner of your very first home and can move in.
Buying your first home is exciting, and Homes for Heroes wants to help. Our mission is to serve every hero, including healthcare workers, police officers, teachers, firefighters, EMS, and military. Even if you’re just starting to think about homeownership, let Homes for Heroes get you into the home you deserve.