How to Buy a House: Comprehensive Guide to Buying Your First Home

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If you're buying your home for the first time, it can be a bit of an overwhelming experience. Before you can cross the threshold into home ownership, you'll need to figure out how much you can pay, find the assistance that you need and get preapproved for a loan.

Even when your financing is lined up, the roller coaster doesn't stop there: You’ll need to pick an agent and a house. Then you'll need to wrap up the closing process before you can get your keys.

This process can be tedious, we break homebuying down into a few steps to simplify this process.

First Steps to Buying a House

While you might be tempted to jump straight into house hunting, it's a good idea to get your financial affairs in order before you go looking for your dream home. Once you have an idea of what you can afford, you'll have a better idea of what to look for when home shopping.

How Much Home Can You Afford?

The first step is make sure you understand how much house you can realistically afford. Skip this step, and you might find your dreams shattered when you fall in love with a house you can’t pay for.

Calculating the maximum purchase price you could afford involves more than picking a number that "feels" good. You also need to assess your current financial situation, examine how far your home savings can comfortably stretch and see how your monthly budget will be affected by your future mortgage payment.

Consider these elements when determining how much house you can buy:

  • Your monthly mortgage payment. This payment includes a number of different costs: First, the principal and interest, which is the actual "paying off the mortgage" part. Higher interest rates increase this cost. You might also pay private mortgage insurance if you put down less than 20% upfront. Most lenders will expect you to pay a portion of taxes and insurance each month, too. This is called escrow, and can vary dramatically depending on your location. If you live in a high-tax area or in a flood plain, your escrow payments might be very high.
  • Your income. When applying for a loan, your lender will look at how your potential future mortgage payment compares to your income. Most loan programs require your total debt payments to be no more than 43% of your total pre-tax income.
  • The down payment. How much cash you put down can be both a personal and market-based decision. Larger down payments often result in better interest rates. But be sure that your down payment allows you to keep enough cash in savings for unexpected expenses after closing.
  • Closing costs. Your down payment isn’t the only cash you’ll need upfront. Closing costs include a wide variety of small- to medium-sized expenses — like the appraisal fee, application fee and escrow payment. These costs add up: In most locations, you'll pay between 2% and 5% of the total purchase price.

Buying more home than you can afford doesn't just mean ponying up a bigger down payment — it can also impact your monthly expenses for years to come. Pick affordability over your fantasy home, otherwise you may be in financial trouble.

Research First-Time Homebuyer Programs

If this is your first time at the homebuying rodeo, look into first-time homebuyer programs. In addition to federal programs, many state and local governments and nonprofits offer assistance for newbie homebuyers, often in the form of down payment or closing cost assistance. Others offer reduced interest rates or discounts on the listing price — although some require buyers to work in a specific profession, like as a firefighter or a teacher, to participate.

By working with these programs, your money goes further. You can offer a larger down payment or reduce your monthly mortgage payments, helping you afford a home you couldn't otherwise. No matter where you live or what home you're buying, there's probably a program for you. Here are some popular programs:

  • Good Neighbor Next Door, which can give law enforcement officers, teachers, firefighters and EMTs up to 50% off a HUD home — a huge discount. These single-family houses are often located in "revitalization areas," where foreclosure, low income and low homeownership rates are higher.
  • Fannie Mae's HomePath ReadyBuyer provides a rebate up to 3% in closing cost assistance for low- and middle-income first-time homebuyers. In order to enroll in this program, you'll need to take a homebuying education class and provide at least a 3% down payment.
  • State & Local First-Time Homebuyer Assistance Programs are often offered by municipalities and state governments to foster local homeownership. Benefits can come in the form of down payment credits, 0% interest loans and tax deductions for qualifying homebuyers. It's a good idea to check whether your state offers these benefits through a local lender.

Get Pre-Approved With a Mortgage Lender

If you want to look like a serious buyer when you submit an offer on a home, you need pre-approval. To do this, you'll work with a mortgage lender, who will look at your assets, income, credit and employment. By examining the broad spectrum of your finances, they can "preapprove" you for a maximum home purchase amount — letting sellers and realtors know you're serious about your offer.

Here's what lenders may request:

  • Tax documents from the past two years
  • 30 days of pay stubs
  • Bank account quarterly statements

They will also likely pull your credit report. Expect this process to take two to four weeks — although some lenders can issue a preapproval much more quickly.

Finding the Right House

Once you’re preapproved for a certain amount, you’re ready to start the house hunt. The sale price of the home should fall within the range you budgeted for in your first step.

Assemble Your Real Estate Team

Think carefully before going it alone — and keep in mind some states require you to use licensed real estate agents during closing. Buying real estate is substantially more complicated than, say, buying a used car, as the regulations surrounding real estate purchases are vast.

Working with an agent has a number of benefits. They can access market data directly, helping them find homes more quickly. They may also know about houses expected to hit the market soon, so you can make a fast offer. And when the closing process gets tricky, their experience will speak volumes: They can help you navigate the inspection and appraisal process and any other road bumps that may occur.

If you want to work without an agent, prepare for extensive research. Online and local resources can help you find the details you're looking for — and it can't hurt to retain a real estate lawyer, just in case.

Find Your Dream Home and Make an Offer

Your agent is essential for helping you make a strong offer on a home. They can help you decide exactly how much money to offer and will know what contingencies you should include — like an inspection clause to ensure you don't purchase a home with major problems. Here's how the offer process works.

First, you'll give the sellers your offer. That will include things like your proposed purchase price and down payment, information about your lender and preapproval and any contingencies you expect — like a home inspection.

The seller may counteroffer by asking for more money or requesting a contingency removed. Once both parties agree on a final price, you'll be expected to put down a deposit, also called "earnest money." The exact amount depends on the property and loan type. For instance, USDA loans require a 1% deposit.

Hiring an inspector is important. These home professionals will examine every inch of your potential property, looking for small problems and major deal breakers like a bad roof or a dead HVAC system. If the inspector finds a big problem, you and your agent will negotiate with the sellers to either fix the problem, lower the asking price or provide "seller concessions" — essentially a rebate to cover closing costs in exchange for leaving the problem unfixed.

However, if you and the seller can't come to an agreement, an inspection contingency lets you back out of the sale.

From Underwriting to Closing

When you’ve found the home you want to buy, the process shifts back to your mortgage lender. You’ll need to submit a formal mortgage application and send in a lot more paperwork to confirm your financial details.

Underwriting and Appraisal

"Underwriting" may sound scary, and the process is rarely transparent — but there's no reason to be frightened. Mortgage underwriting assesses your financial situation to make sure you are suited for the mortgage you're applying for — and makes sure the home doesn't have any issues that may affect the loan. Here's what an underwriter looks at:

  • Your credit. All your existing loans, credit cards and other debt will be reviewed to make sure you're not taking on too much debt. They'll also go through your credit report with a fine-toothed comb, looking for any derogatory information.
  • Your capacity. Now that they understand how much debt you have, underwriters will weigh that versus your income and compare that to how much debt you'll have to take on with the mortgage. Most lenders will want your debt-to-income ratio to be less than 43%.
  • Your collateral. Bigger down payments pose less risk to the lender. And if you're not planning on living in the home full-time — or if it's a multiunit property you plan to rent — they may use different measures to determine your eligibility.

You'll also go through an appraisal, where the lender verifies that the home is selling for the correct amount. An appraiser will evaluate similar purchases nearby, called "comps," and look at the interior and exterior of the home to ensure it is accurately represented. Buyers are expected to pay for this process.

Final Walkthrough and Closing

Once the inspection and underwriting process are completed, you can move on to closing. You'll have a final walkthrough to ensure the property is in the shape you expect. This ensures the sellers didn't walk off with the laundry unit listed in the contract or neglect to evict the existing tenants.

Now you can move on to closing, where you'll pay the down payment and closing costs. Stretch your fingers: You'll be signing a lot of documents. (Feel free to ask your lender for a copy of the documents ahead of time so you can read things thoroughly.) Typically, you'll meet with your lender and real estate agent, and may meet with the seller, title agent, and attorney, as well.

Once you've signed and all documents are in order, you can pick up the keys to your new place. At this point you'll have completed the transfer and be the proud new owner of a new home.

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