There are many details involved in buying a home, and the process can be intimidating to first-time home buyers. However, if you take your time and look at those details as a series of distinct steps you can tackle one-by-one, each task becomes much more manageable. Here is a checklist of steps a first-time home buyer should expect to go through.
Checklist for First-Time Home Buyers
Check your credit
This comes first for two reasons. One is that before you go any further you should see if you have a realistic chance of qualifying for a loan. Second, if there are problems with your credit, it may take some time to address them. To give you an idea of what you are shooting for, as of the fourth quarter of 2015 the average credit score for an approved FHA loan was 682. Less than 20 percent of FHA loans these days are going to people with credit scores below 640. So, if you are in the high 600s (or better), your chances of qualifying are pretty good; in the mid-600s you have a fighting chance but it's not a sure thing; if you are in the low 600s or below, you probably have some work to do to get your credit score up.
Start saving for your down payment
This is another early step because saving money can take a long time. FHA mortgages allow you to qualify for a mortgage with as little as 3.5 percent down, but a down payment of five percent or more can save you some money on mortgage insurance. The process of saving for a down payment can be a good test run for seeing how your future mortgage payments would fit into your budget.
Identify the right mortgage program
FHA mortgages are very welcoming to first-time home buyers, but if you are a United States military veteran you might qualify for a VA mortgage as well. Take the time to research your options – the right choice could save you money for years to come, or even make the difference between being able to buy a home or not.
Do some budgeting with a mortgage calculator
Using a mortgage calculator is not only an easy way to figure out what you can afford, but it also allows you to see how different mortgage structures (e.g., 15-years vs. 30-years, adjustable vs. fixed rates) will affect your payment schedule. Try a few scenarios to get an idea of how you can best afford to buy a home.
Decide on the right mortgage structure
Once you've had a chance to crunch the numbers, decide on the right mortgage structure for your situation. This will tell you what market rates to track, and how much you can afford to borrow.
Get to know local housing markets
Don't make a big decision like buying a house without being familiar with local markets. Research schools, look at how many properties are for sale in the area (some turnover is normal, but too many houses for sale at one time is a red flag), and look at what houses sell for compared to how they were priced. All of this will not just help you narrow your search, but it will give you some insight into what a good price is in the area, and how much negotiating leverage you might have.
Find a lawyer
This is a detail people often leave until the end, but you may be better off asking around and finding an experienced and respected real estate attorney in your area. A seemingly innocuous process like a title search can cause you years of aggravation if it is not properly handled.
Allow a cushion for closing costs
As you get closer to making an offer and applying for a loan, be sure you have saved for closing costs as well as a down payment. These can easily run into the thousands of dollars, so closing costs are much more than just some final details in the process.
You may already have been talking to some lenders to get information about different loan programs, but don't commit to one until you can compare loan quotes based on the specifics of the mortgage you will need at the time you are ready to apply. Be sure to compare both interest rates and closing terms to see how both the upfront and the long-term costs of mortgages from different lenders would compare.
Understandably, first-time home buyers are eager to get through all this as quickly as possible, but when you think about the size and the length of the commitment you are making, it seems appropriate that it should take a little time to get through the process. Working through these steps methodically, with time to think about each one thoroughly, will help you make the right decisions every step of the way on your path to home ownership.