The Complete First-Time Homebuyer Guide for 2021
Planning on buying your first ever home? Congratulations! Buying a home for the first time can be an exciting adventure—but it also comes with a bit of stress. Don’t worry, we’re here to help. Use this first-time buyer guide to help you get through all the challenges of being a first-time homebuyer.
Step 1. Set Your Budget
There’s a lot to learn as a first-time homebuyer and one of the most important things to understand is your finances. It might not seem like the most fun first step, but when you set up a healthy budget you can:
- Confirm you are a serious buyer
- Avoid falling for a home you can’t afford
- Never miss out on the opportunity to put in a competitive offer
Don’t spend too much time thinking about this step, though. You’ll get a more definitive answer by going through the next step. But spend a little time thinking about how much you can afford to pay in monthly rent. Remember that your monthly payments will have to account for a few things. Also, think about how much money you have saved up for a down payment.
Your monthly payments include:
- Monthly mortgage payment (principal and interest)
- Mortgage insurance (if you put less than 20 percent down)
- Homeowner’s association fees (HOA, if you buy a condo or within a housing community)
- Property taxes
Pro Tip: If you’re going to be paying an HOA fee, consider setting a budget for this too. HOA fees are monthly fees that never go away, even after you pay off your home. They will also go up over time. Make sure that your HOA fee isn’t larger than others in the area. Check the fees of a couple of homes or condos to decide what the average is.
In some cases, your HOA fees might be higher because there are more amenities included, like an indoor pool or gym. Amenities are tempting, but make sure they’re worth the extra money to you. Could you buy a gym membership for less and have the flexibility to cancel it whenever? You won’t be able to cancel your HOA fee. Some home search sites allow you to set a “Max HOA Fee.” Do this if you don’t want to be tempted by fees that are more than you’re willing to pay.
Step 2. Get Preapproved
The best way to know exactly how much house you can afford is to go through the pre-approval process. But don’t worry—there are a few mortgage companies that will provide a pre-approval letter online within a few minutes, you’ll just need to answer a few quick questions. These companies may also run a soft credit check, but this won’t impact your credit score.
What type of information will I have to share?
Going through the mortgage process can be daunting. Especially because many people will ask for otherwise very personal information. However, don’t let this stop you from shopping around for mortgage rates. We’ll get into this soon.
- Income tax information
- Previous job history
- Previous addresses
- Savings and retirement info
- Credit score (Soft credit checks don’t hurt your score, but hard checks do. Don’t let anyone run a hard check on your credit until you’re sure that you’re ready to work with them.)
Keep in mind that a few modern mortgage companies make it much easier to get an instant pre-approval letter. But that doesn’t mean you have to work with that company in the end. Your pre-approval letter simply confirms what your maximum budget will be so you can shop for houses that are in your range. A real estate agent might also be more willing to work with you if you’re already pre-approved.
Step 3. Start Your Home Search
With a pre-approval letter in hand, you’re ready to start the most exciting step of becoming a first-time homebuyer—the home search (keep in mind though, you should start the next step, too). You may not have a real estate agent when you start, but that’s ok. You will meet agents when you call to look at homes, and when you attend open houses. It’s worth noting that a few mortgage companies will offer a discount if you work with their established real estate agent network. This can be a good way to vet an agent, but at the end of the day buying a home for the first time can create a lot of nerves, so you want to work with someone that makes you feel comfortable.
Real Estate Agent Tips
- It’s ok to ask a real estate agent what their fees are.
- Verify the information your agent tells you. It’s easy to get caught up in the excitement of being a first-time buyer, but don’t spend more than you can afford—even if you feel like you’re getting a great deal, or you’ve just found the perfect house in the perfect neighborhood.
- Take time to find someone you trust. It will be worth it in the long run, and you’ll feel more confident about your decision.
Step 4. Find a Mortgage Lender
One of the most intimidating things about buying a home for the first time is finding the right mortgage lender, although going through the pre-approval process should give you some confidence. But remember, you don’t have to work with the lender that pre-approves you. Here are a few things to keep in mind:
Mortgage Tips for the First-Time Homebuyer
Give Yourself Time
It can take 30-45 days to get approved for a mortgage. If you’re looking to have a quick close, you’ll have to stay on top of your paperwork.
Shop Around
Once you’ve given out your personal information to one lender, you might start feeling a little exposed and overwhelmed. Is it worth it to go through the whole thing again with another lender? Yes. Absolutely.
Compare Rates
On the third page of your loan estimate, you’ll find a “Comparisons” tab. Use this number to determine which loan might be a better offer. If you plan on staying in a place less than five years or more than 10, you might have to calculate your own numbers. Do this by multiplying your “Estimated Total Monthly Payment” by the number of years you plan on keeping the property. Then add in loan costs. Three years would be:
3 Years (Estimated Total Monthly Payment x 36 months) + loan costs.
5 Years (Estimated Total Monthly Payment x 120 months) + loan costs.
Remember that you can also apply for 15 or 20-year mortgages. These might offer lower interest rates, and you’ll pay less interest over time, but you’ll have much higher monthly payments.
Mortgage Points
You can buy points to lower your interest rate on a fixed-rate mortgage. This might make sense if you plan on staying for a longer period of time, but it will raise your closing costs upfront. Do the calculation above to decide if this is the right move for you.
Price Match
It might surprise you, but you can take the rate of one lender and ask a different lender if they can match it or do better.
Credit Check
When you apply for a mortgage, they will run a hard credit check. For this reason, it’s best not to apply for a loan until you have an accepted offer. A pre-approval letter is enough to start your offer with. However, once you do have an accepted offer you will have to do a hard credit check. The good news is that you’ll have a 45-day window after the first credit check to have your credit pulled by multiple other lenders without it making another impact. Hard credit checks impact your score, but your score will only be impacted once within those 45 days.
Understanding the Loan Estimate
Your loan estimate can change over time, especially as new information is added. Keep an eye out for that—but for the most part, the estimate is a good ballpark number. Not sure how much you’ll be expected to pay every month? It can be a little confusing at first. You’ll want to add the numbers for these categories:
- Principal & Interest
- Mortgage Insurance
- Estimated Taxes, Insurance & Assessments
= Estimated monthly payment
You can skip over the estimated escrow. Escrow is the amount your lender will take out to cover property taxes. Taxes are typically paid annually or sometimes in installments. But your lender will take the money out each month and put it in escrow to ensure you have the funds available to cover your taxes. Since “Estimated Taxes” is included in the last figure, you can eliminate the escrow amount from your calculation.
Things you can negotiate on a loan estimate
- Rates
- Loan costs
- Mortgage insurance (to lower this, you might have to increase your down payment)
- Homeowner’s insurance
- Cash to close
- Title costs
Things you can’t negotiate
- Property taxes
- HOA dues
Step 5. Make an Offer
You might spend a fair amount of time with your real estate agent finding the right property and negotiating the right price. The process can seem daunting, but eventually, you’ll be ready to make an offer. Your real estate agent will walk you through most of this process, but here are a few reminders:
Tips for Making an Offer as a First-Time Homebuyer
- When the housing market is hot, you might be advised to offer more than the asking price. This is a risky move. If demand slows, your home could quickly lose value. This could make it harder to sell your home without losing money. It might make sense if you’re looking to invest in a place for 10-15 years but remember that plans can change and often do.
- Determine what you’re willing to do to make your offer more attractive. In some cases, that might not mean putting in more money. For example—would the buyer be motivated by a quicker closing? Also, that pre-approval letter might help.
- Try to negotiate. You can trust your agent to give you good advice on whether you’re in a good position to negotiate. But make sure they’re doing their due diligence by checking the sale price of other homes in the area. Don’t overpay for a home.
- Prepare to be patient. Making an offer can take time and there can be a lot of back and forth. As hard as this is for first homebuyers, don’t spend all your energy waiting to hear back.
Step 6. Prepare for Closing
Perhaps the most nerve-wrecking part of buying a home for the first time is preparing for closing. But the actual close is the most exciting part because it’s the moment that you transition from first-time homebuyer into first-time homeowner. Congratulations, you’re almost there. And most of the work has already been done. Here are the last few tips for closing.
Things to Know Before You Close
- What to bring. Your down payment and other loan costs are due at closing. Decide whether you are going to get a cashier’s check from the bank or establish a direct transfer to your title company. If you’re the type of person—also bring your lucky pen.
- How long will it take? Closing can take anywhere from a couple of hours to three or four. It can be hard to predict though, so consider bringing a snack.
- Where do I close? You’ll likely be at the title company, but the location can change. Your lender and agent will let you know ahead of time.
- Who will be there? The seller might not be there. Typically, they aren’t. But your agent will be, a title person who helps get the paperwork together, and your lawyer if you have one that has been involved in the process.
There’s a lot involved when buying a home for the first time; but, hopefully, this first-time homebuyer’s guide gives you some confidence about what to expect. Things will get stressful at times but hang in there. And remember that your agent and your lawyer both have a fiduciary duty towards you, but other parties involved—like your lender—don’t. Keep this in mind, do your research, and don’t make rushed decisions. You’ll be fine. You’ve got this.
Contributed to Your Home blog
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Published 9.1.2021