The First-Time Home Buyer Guide: 10 Key Steps to Closing

How do you prepare to buy your first home? While the path for every first-time home buyer looks different, there’s a basic framework for getting into the right property at the right time. Take a look at ten essential steps to buying a house.

first time home buyer

The truth about buying a home is that lenders are about to scrutinize all financial decisions you’ve made up until now. But that doesn’t mean you should settle for whatever banks or sellers are willing to give you. Most buyers have more options and power than they realize.

1. Confirm That Now Is the Right Time to Become a Homeowner

Buying a home is an emotional, practical, and financial decision wrapped into one. 

Purchasing a home because you feel pressure or are motivated by high rental prices isn’t a good enough reason to buy. While buying can help you avoid rising rental costs, it only works if you plan to stay in the area for 5-10 years. Moving soon after purchasing a home can cause you to lose money through closing costs, realtor fees, and lack of equity.

Remember that the job of a lender is to determine your ability to pay back your mortgage. They aren’t interested in helping you maintain a specific lifestyle. That’s why it’s important that you’re confident you can take on all the extra costs and duties of owning a home vs. renting.

Factor costs like a new roof, driveway, and appliances into your budget. Are you prepared to cover a significant home-related cost? While you may glide by without any major repairs for years, remember that all of the maintenance calls you make to the landlord as a renter will soon land at your own feet. You’ll also be responsible for mowing the lawn, raking leaves, handling snow removal, cleaning the pool, and any other tasks relevant to your local climate and property.

Buying a home because you feel it’s what you’re “supposed to do” by a certain age or life stage isn’t the best approach. Instead, be honest about whether or not the extra financial and personal responsibilities are compatible with your lifestyle.

2. Look at Your Finances Through a Lender’s Lens

You may assume you’re ready to take on a mortgage because you have no trouble paying your rent. Lenders don’t view things the same way. To feel confident in your ability to pay back your mortgage, lenders look for the following:

  • A debt-to-income ratio below 36%.
  • Credit score of 620 or higher.
  • Steady employment for at least two years.
  • A down payment. 

There’s wiggle room when it comes to meeting lender requirements. For example, some types of home loans allow you to get a mortgage with no down payment or a down payment as low as 3%. 

While DTI (debt-to-income) and credit scores sometimes have leeway, borrowers with less-than-perfect credit histories pay higher interest rates. Aiming for a credit score of 720 can help you close with the best loan terms. 

Lenders want to see stability, sound financial decisions, and proof that you’re likely to pay your mortgage on time every month. Positive credit history is one of the best indicators of your likelihood of paying back your mortgage. 

In addition to looking for positive indicators related to your income and debt, lenders also look for red flags. Bankruptcy and credit disputes are the two big ones. However, many things that seem innocuous can still hurt your chances. For example, lenders will check to see if you’ve recently applied for other forms of credit. If it looks like you’re on a borrowing spree, they may see this as a sign of trouble.

Lenders are also interested in your credit utilization, which is different from your credit score. Your credit utilization ratio refers to the amount of available credit you’re using at the time of your application. If you’re overleveraged, this makes you appear risky. A reasonable utilization rate is below 30% – which means never carrying a balance of more than $6,000 on a credit card with a $20,000 limit.

3. Fix Any Credit or Financial Issues

If your financial history isn’t pristine, it’s time for a “financial fitness” boot camp. Start by reviewing any “dings” on your credit report that seem suspicious. If late or unpaid bills have been reported in error, send the credit-reporting company a dispute letter alerting them. In the case you don’t receive a clear response, file a formal complaint with the Consumer Financial Protection Bureau.

If your DTI is above the 36% threshold, you need to lower it. Strategies to help reduce your debt-to-income ratio include canceling subscriptions, rethinking your budget, or planning to pay off significant expenses early. While some lenders will allow DTIs as high as 45%, a low DTI is preferred.

Finally, make sure your down payment is ready to go. Putting down 20% helps first-time home buyers avoid paying for private mortgage insurance (PMI). But remember to save for closing costs separate from your down payment. Most closing costs amount to 3% to 6% of a home’s value. While lenders can sometimes roll them into your mortgage, they will charge you interest if you choose this option.

If your credit score has taken a severe hit, take a deep breath before assuming homeownership has slipped away. Here’s a quick rundown of repairing your less-than-stellar credit history:

  • Payment history: Your payment history accounts for 35% of your credit score. As shared above, address any errors that could be “dinging” your payment history in error. If you have a history of missed payments, turn things around by never missing a payment again. First, get caught up on any late or missing payments owed. Next, create a system that uses reminders and autopayments to ensure you’re paying all bills on time.
  • Current debt: The amount of money you owe on loans and credit cards reflects 30% of your credit score. It’s important to bring your debt down in relation to your income. If you have high balances on your credit cards right now, start eating away by making larger payments.
  • Length of credit history: Having “no credit” makes buying a home almost impossible. The length of your credit history determines roughly 15% of your credit score. While you can’t go back in time to change your start date on your first credit card or loan, you can make sure your “time in” counts by never closing your oldest credit card.

4. Get Pre Approved

Once you feel confident you’re in shape to get approved for a mortgage, it’s time for a “trial run” by applying for pre-approval. A pre-approval allows you to get an idea of the size of the mortgage a lender will offer you. While a preapproval letter isn’t a formal binding offer, it helps set up budget expectations before you begin shopping for a home. 

The mortgage estimate supplied on a preapproval letter can help you decide if it’s time to start shopping or refocus on improving your financial picture. Most real estate agents will only show you properties if you have pre-approval letters from lenders.

While your pre-approval amount may align with what you suspected your buying power to be, it’s also possible the number is much lower than expected. If you don’t feel ready to purchase based on your pre-approval amount, strategies for increasing your pre-approval include upping your down payment, paying down existing debt before applying again, or getting a co-signer for your mortgage.

While pre-approval isn’t as “invasive” as applying for an actual mortgage, you’ll still need to get your W-2 tax forms, 1099 tax forms, pay stubs, employment details, and proof of down payment ready. With most pre-approval offers expiring within 30 to 90 days, ensuring you’re prepared to dive into your home search is vital. The good news is that you can reapply for pre-approval multiple times without penalty.

5. Get a Real Estate Agent

It’s time to reach out to a real estate agent with your pre-approval letter—book consultations with several agents before committing. Once you commit to an agent, the agent will begin showing you homes that meet your criteria for price, size, style, location, and more. If all goes according to plan, the day will come when you’re ready to make an offer on your first home.

To ensure you’re working with a qualified agent, look for a real estate agent who is a Realtor. While all Realtors are real estate agents, only real estate agents with membership in the National Association of Realtors (NAR) are Realtors. Realtors abide by a specific code of ethics.

Also, look for a buyer’s agent in your area. Ideally, your agent will have completed ABR (Accredited Buyer’s Representative) certification that allows them to advocate for your interests during a sale transaction. Additionally, choosing a real estate agent with CRS (Certified Residential Specialist) credentials is preferred. As you’re interviewing real estate agents, ask to see listings of homes they’ve helped clients purchase within the past year.

6. Apply for a Mortgage

While a preapproval letter is enough to get you to the point of making an offer, it’s necessary to go back for the “real deal” once the offer is accepted. When getting a mortgage, a first-time homebuyer can either go with the same lender they used for the preapproval or select a different lender. Assemble these documents for the application process:

  • Identification and Social Security number.
  • W-2 forms going back two years.
  • Pay stubs from the past 30 to 90 days.
  • Proof of income.
  • Bank statements going back several months.
  • Tax returns from the past two years. 

A first-time buyer is free to shop around with multiple lenders to get the best interest rate. The Consumer Finance Protection Bureau recommends contacting at least three lenders to shop for rates. Just keep in mind that credit inquiries from lenders will hurt your credit score because they count as “hard pulls.” According to the Consumer Finance Protection Bureau, the way around this is applying to all lenders within a 45-day window to get the inquiries reported as a single inquiry.

What happens if a bank offers you an interest rate that looks good? Don’t assume that today’s appealing rate will be available tomorrow. Rate volatility is why many buyers choose to protect themselves against rising interest rates by requesting something called a rate lock on a mortgage application. 

A rate lock is a commitment from a lender to reserve a specific interest rate for you until a predetermined expiration date. A rate lock can also lock in any discount points you’ve used to “buy down” your mortgage rate. Rate locks aren’t required. If you feel that rates may drop before it’s time to get final loan approval, you can wait. The only rule is that you must request your rate lock before your lender prepares closing documents.

Most first-time buyers assume that getting a mortgage means locking into a conventional 30-year mortgage after putting down 20% in cash. While there was a time when this was the only way to do it, buyers today have many choices for making things work. Some home loan options require 0% down. Here’s a glance at the loan products to consider:

  • 30-year fixed-rate mortgage: The most popular choice, this loan allows you to stretch payments over 30 years with a fixed interest rate that offers predictable payments.
  • 15-year fixed-rate mortgage: This shorter alternative to the 30-year loan offers a fixed interest rate that’s typically much lower than rates offered with longer-term loans. While a first-time buyer can obtain a 15-year mortgage, this loan is most popular with refinancers.
  • FHA loan: Insured by the Federal Housing Administration (FHA), these government-backed loans make it possible for buyers with lower incomes and credit scores to put down as little as 3.5%.  But buyers must pay Mortgage insurance premium (PMI) payments for down payments below 20%.
  • VA mortgage: Available to military service members and veterans, VA loans require no down payment. You also won’t be on the hook for PMI the way you would be with an FHA loan. In addition, VA loans generally have lower interest rates.
  • USDA mortgage: Available to buyers in some rural areas, the U.S. Department of Agriculture backs these zero-down loans. 

7. Get Homeowner Insurance

Most lenders require you to take out a homeowner’s policy to get a mortgage. However, the policy won’t kick in until your closing date. Coverage should be enough to replace the home.

When deciding “how much home” you can afford, be sure to factor in annual homeowner insurance premiums in your area. An insurance policy covers interior and exterior damage or destruction, loss through theft, and personal liability. You may need more extensive coverage if you’re in a flood zone. If a policy has exclusions, you may bulk up with supplemental coverage for flooding, earthquakes, sewer-related damages, and more for peace of mind.

Get quotes from three to five companies. If you already have car or renter’s insurance, ask your current company about discounts for bundling. If you feel in the wilderness understanding how policies work, consider hiring a home insurance broker capable of matching you with companies.

8. Schedule a Complete Home Inspection

A home inspection gives a buyer the full story on a home’s foundation, roof, systems, and more. Inspections can also uncover radon, mold, and other concerns that could result in high repair costs and health hazards. An inspection that includes findings not included in the seller’s disclosure could allow you to back out of an offer without penalty.

The buyer pays for the home inspection. The cost for a standard inspection often covers plumbing, electrical systems, heating and cooling systems, roof, siding, foundation, and appliances. The inspector will also check the interior and exterior of the home for signs of cosmetic and structural damage. 

While most standard inspections don’t cover radon testing, mold testing, or pest detection, it’s wise to pay extra to have them included. Remember that a home inspector’s job is not to tell you whether or not you should buy a property. Instead, an inspector is a neutral professional focused on giving you an accurate assessment of a property’s condition.

What if the buyer asks you to waive the home inspection? Being asked to waive your home inspection contingency sometimes happens in hot markets where sellers have the advantage. This contingency is in place because it allows the buyer to back out with their deposit intact if an inspection uncovers a “sale-killing” issue. If a seller asks you to waive your inspection, you’re losing an opportunity to verify the property’s condition before closing. That means accepting all the financial risk associated with a property in an “as is” condition.

9. Do a Home Appraisal

Lenders require appraisals to confirm that they aren’t lending you more than a home is worth. Appraisers use a home’s state, comparable recent home sales, and other factors to determine true market value. If a home appraises for lower than the sale price, the buyer can renegotiate the price with the seller, walk away from the sale, or come up with the difference in cash.

Like a home inspector, a home appraiser is a neutral professional with zero stakes in the outcome of the findings. Appraisal fees are typically covered by the buyer. To be able to walk away from home with a low appraisal, you’ll need to have something called an appraisal contingency in your real estate contract. When the appraisal report comes back to you, it should include the following:

  • A street map detailing the appraised property.
  • An outline of the home’s exterior.
  • An explanation of how the appraiser calculated square footage.
  • Photographs of the front, back, and street view of the property.
  • Details related to land records, tax records, and market data the appraiser used to determine the home’s fair market value. 

If you feel that an appraisal is inaccurate, getting a second opinion from a fresh appraiser is allowed. It’s not unheard of for an appraiser to make mistakes. The purpose of an appraisal is to protect the buyer from paying too much for a home worth less than its sale price. However, someone purchasing a home with cash may want to move forward with a sale even though they know they are buying an overpriced home.

10. Negotiate With the Seller

The final step before closing is negotiating with the seller. If you’re happy with a home’s price based on the inspection and appraisal findings, you may skip negotiations. However, buyers can sometimes negotiate seller concessions or paid closing costs.

As a first-time buyer, seller concessions make buying a home more affordable by reducing closing costs that can total 3% to 6% of your loan amount. Your real estate agent is a valuable source of information regarding what’s “up for grabs” with negotiations. 

If you suspect you’re contending with other offers, there may be less room to make demands. On the other hand, if you’re dealing in an ice-cold market, the seller may be more receptive to concessions. 

A buyer’s most significant asset during negotiations is access to information about comparable home sales in the area. If you can provide comparisons that prove that almost identical homes sold for less, sellers may rethink sales terms. Buyers can request concessions that cover costs for:

  • Mortgage points.
  • Appraisal.
  • Inspection
  • Title search.
  • Attorney fees.
  • Certain repairs or replacements.
  • Property taxes through the end of the closing year. 

While it may seem like the buyer is the only one who has something to gain from seller concessions, sellers benefit by getting their homes off the market sooner.