Takeaways
- Securing the best mortgage involves analyzing terms, structure, interest rates, and more.
- Getting your finances in order before you start exploring homes will save you headaches.
- Finding a real estate agent you get along with can make the homebuying process fun.
- Budgeting for your mortgage means including principal, interest, and tax payments.
- It is important to budget for regular house maintenance and furnishing your home.
Walking into the homebuying process can be intimidating. When you first start the process, there seem like a million items to keep track of, which can feel overwhelming to many buyers. Luckily, we have created a checklist for new home buyers and seasoned veterans. This list will guide you through the different decision points you will have along the way and prepare you to buy your home.
What is a Mortgage?
One of the first items of business in the homebuying process is to understand the concept of a mortgage. A mortgage is an agreement between you and a lender (this can be a bank, mortgage provider, or other financial institution) where the lender gives you cash to purchase a home or property in exchange for the right to take your home or property if you don’t repay the capital you borrowed and make regular interest payments [1].
You need to understand how a mortgage works because most people purchase their home with available financing. Unless you plan on paying cash for your house (good for you), you will probably have to endure the home financing process, which involves vetting different kinds of mortgages (more on this below). While noodling on the concept of a mortgage, you can kick off the steps to get you started finding your dream home.
21 Steps to Buying Your First Home
The homebuying process can be both simultaneously invigorating and a little nerve-wracking. Purchasing a home is usually one of the largest transactions you will ever make, and most Americans have much of their net worth tied up in the value of their home. It pays to get this process right. Below is the Smart Money checklist with over twenty steps to take you through the entirety of the homebuying process:
1. Start Exploring
One of the most fun parts of buying a home is exploring the neighborhoods where you might want to live and daydreaming about the types of houses you think you might like to purchase. This exploratory phase of the homebuying process is one of the most important steps because it gets you familiar with what you want during this process.
Smart Money -> 7 Financial Goals That Will Change Your Life
Ultimately, the type of home you purchase should align with your financial and life goals. Depending on how close you are to nearing life milestones you might be inclined to buy a different type of home. For example, if you just got married and want to purchase your first home as a couple, you might consider a house with several extra bedrooms for an office or children. Alternatively, you could be mentally exhausted with renting your apartment and want to own a condominium to build up home equity.
2. Get Your Finances in Order
One of the best decisions you can make is to get your finances in order before you start the homebuying process. Many people make the mistake of buying a home too soon. But because buying a home is one of the most expensive purchases you will ever make, you want to ensure your financial ducks are in a row before diving into homeownership.
There is no better tool to help you get your finances in order than a budget. There are many kinds of budgets to help you sort through your income and expenses and provide a financial snapshot of your overall financial health.
Smart Money -> Check Out the 50/30/30 Budget and Calculator
Part of the budgeting process will help you understand how much house you can afford. You can utilize home affordability calculators that help you get a sense of what type of mortgage you can afford based on your monthly income, expenses, debts, size of down payment, and mortgage rates. These tools can give you a quick and easy view of the size of the house you will ultimately be able to afford.
One of the most vital pieces of information affecting your ability to get favorable financing terms is your credit score. Take the time to know and understand your credit score. It might make perfect financial sense to implement steps to boost your credit score before applying for a mortgage because a high credit score can reduce the amount of interest a mortgage provider will change, which will decrease your monthly mortgage payments and increase home affordability.
Smart Money -> Credit Score: Is 800 High Enough?
3. Coordinate Your Rent
Depending on your timeline for wanting to buy a house, you should consider your short or long-term lease structure. A month-to-month apartment lease might behoove those looking to purchase a home in the next 30 to 90 days.
When you are simply noodling on the idea of homeownership, having a yearlong lease might be workable. However, there are clever lease terms to consider, such as limiting how much time you need to inform your landlord that you want to break the lease or negotiating a lower breakup fee. The last thing you want is to find your perfect home and still be on the hook for rent payments. Planning can alleviate this financial strain and reduce your need to dip into your savings.
4. Building Up Savings
Most financial planners will tell you that the homebuying process is best for clients who are the most financially prepared for the transaction. A critical piece of the puzzle is having enough cash savings to hedge against the unforeseen costs of owning a home or planning for any emergency that might arise during the process.
One critical part of the savings process is establishing an emergency fund. What is an emergency fund? An emergency fund is a cash savings account to protect you from unforeseen expenses. With the recent unprecedented rise in inflation, the recommended amount for an emergency fund has increased over the last decade, and most financial advisors now evangelize having at least $3,000 in your emergency fund.
This might seem like a high bar because a recent survey found that most Americans can barely come up with $1,000 in case of an emergency. However, the homebuying process can be expensive, so protecting yourself is a smart move.
For those who want to save even more, a slush fund of at least three to six months of living expenses is also encouraged. A slush fund adds another layer of protection if you lose your job or experience a major bill. Saving an emergency and slush fund before diving into the homebuying process will increase your confidence in your financial health. The next step is to focus on your down payment.
5. Save For a Down Payment
With an idea of where you want to live, the size of the house you need, and the amenities you deserve, you can start narrowing down how much home you can afford. One of the highest barriers to entry into the housing market, especially for first-time homebuyers, is saving for the down payment.
Most conventional loans require a down payment. While a down payment of at least 20% of the purchase price of your home has been the rule of thumb, some mortgages allow you to pay less. But if you are in a highly competitive real estate market and need a jumbo loan, a 20% down payment might be a prerequisite.
Smart Money > 6 Types of Conventional Loans
If you don’t make a high down payment, your lender might require you to pay private mortgage insurance (PMI). A smaller down payment alleviates the need to save a large amount of cash, but the tradeoff is having higher mortgage payments and private mortgage insurance.
Smart Tip:
You don’t always have to put 20% down on a home. Check out programs for mortgages like VA loans, USDA loans, and FHA loans, which don’t require such high down payments.
6. Create Your “Must Haves” List
Once you are armed with all the ins and outs of the homebuying process, create a list of “must haves” for your home. The list will help you narrow your search. Many homebuyers are constrained during their homebuying process by financial factors that narrow their search parameters. But there are other variables besides the cost of the home to contemplate.
For younger families thinking about sending their children to school, the quality of the local schools might be a massive factor. Alternatively, you could work from home or run your own online business, making the home office a must-have for your search. Depending upon your situation, there could be many “must have” amenities to help you narrow your search for the perfect home.
7. Find the Best Mortgage
The best type of mortgage for you depends on what house you want to purchase, the size of your down payment, and other factors. The type of mortgage you select determines the information required to qualify for your mortgage.
Your bank, mortgage lender, or real estate agent can help walk you through the steps for your mortgage qualification. Before you choose a mortgage though, it is critical to understand the different types of mortgages as well as the advantages and disadvantages of each one. Here are several popular types of mortgages:
Conventional Loans: These loans are not insured or guaranteed by the government. These mortgages come from private lenders like banks, credit unions, or mortgage companies. The loans usually have lower down payment requirements.
Jumbo Loans: Fannie Mae and Freddie Mac do not back these non-conforming loans. These loans are used for more expensive properties and require high down payments, high credit scores, and low debt-to-income ratios.
FHA Loans: The Federal Housing Administration (FHA) insures these loans and provides homeowners with opportunities that may not meet traditional lending standards. These loans require lower down payments and are flexible on credit score retirements.
VA Loans: The Department of Veteran Affairs backs these loans, and they are available to U.S. veterans, active-duty service members, and certain members of the National Guard and Reserves. Most of these loans don’t require a down payment or private mortgage insurance.
USDA Loans: The U.S. Department of Agriculture sponsors these loans to make homeownership more accessible in rural and suburban areas. They can offer loans for no down payments, reduced PMI, and lower mortgage rates.
Smart Money -> Fannie Mae and Freddie Mac: Here's What They Do
8. Pick The Best Mortgage Structure
Once you have selected the best type of mortgage for you, the next step is to choose the right mortgage structure. Within each mortgage category, there is usually a choice to be made on the type of interest rate and term (or length of the mortgage).
Interest rates have a profound impact on your mortgage payment. Homeownership is much more attractive during low-interest rates environments and less appealing and expensive during times of rising interest rates. How you structure your mortgage from an interest rate perspective is a critical decision. Here are two common interest rate structures to consider:
- Fixed-rate mortgages have static interest rates. Once you lock in your interest rate with your mortgage lender or bank, it stays that way for the life of your mortgage. You can probably refinance your mortgage after meeting certain criteria. The benefit of fixed-rate mortgages is the transparency and consistency of mortgage payments.
- Adjustable-rate mortgages have interest rates pegged to a static interest rate plus a variable rate, which may oscillate. For example, an adjustable-rate mortgage might have a variable component tethered to the Secured Overnight Financing Rate plus a 3% fixed markup. The benefit of adjustable-rate mortgages is that your mortgage payment will be lower during low-interest rate environments.
Your mortgage’s term is the length of time that you are allowed to pay back your bank or mortgage provider. Here are several term lengths to consider:
- 30-year mortgages are the most common mortgage terms because they offer the most flexibility and affordability. Most first-time home buyers opt for this route.
- 20-year mortgages exist but are not a very common mortgage term because homeowners usually opt for a 30-year or 15-year mortgage.
- 15-year mortgages are the second most popular option. 15-year mortgages are attractive to people who want to pay off their mortgage quickly.
- 10-year mortgages are less common but can make sense if you don’t have a large mortgage to pay off and can secure a great interest rate.
9. Meet with a Real Estate Agent
Before you get preapproved for a loan, it is a smart money move to meet with a real estate agent. Many real estate agents will tell you that clients tend to contact them well ahead of trying to purchase a home. Sometimes people assume they are prepared, only to realize they need to get their finances in order, save for a down payment, and understand all that is involved in the homebuying process.
You want to find a real estate agent who knows your local real estate market like the back of their hand. The best real estate agents are usually seasoned veterans who know the homebuying process backward and forward. But just like hiring a financial advisor, you want to ensure they are a good personality fit for you and your family. You might have some heavy and intense conversations with your real estate agent when negotiating the purchase price of a home.
Interviewing several real estate agents is a smart money move. A great starting point is to talk with your friends and family members. They might have friends or recommendations to help you find the perfect real estate agent.
10. Get Pre-approved
A pre-approval letter is a form from a lender that lets you know how much a lender will lend to you for your house purchase based on your financial situation. Coming to the table with a pre-approval letter is a smart move because it lets sellers know that you are serious about buying a house and you can make the purchase.
Smart Money -> What is a FICO Credit Score?
Here’s how the process works. First, you should determine what type of mortgage (discussed above) you want. Then, shop around different lenders and secure a pre-approval letter from the best mortgage provider. A pre-approval letter is issued once a lender has sufficient information about your finances. During the vetting process, you will provide financial documents, such as your W-2 and last pay stubs, saving account information, and they will also run a credit check to see your credit score and credit report.
Smart Money -> How to Improve Your Credit Score by 100 Points
A pre-approval letter will give you a crisper idea of exactly how much a mortgage would cost, provide real-time access to mortgage rates, show estimated closing costs, and estimate mortgage origination fees. With a pre-approval letter, you can seriously start house shopping.
11. Start Your Search (For Real)
You are now ready to start the home shopping phase. This is the most exciting part of the homebuying process because you will be able to start visualizing yourself in the houses you visit. Check out websites like Zillow or Realtor to get a sense of what the housing inventory is like in your neighborhood of choice.
Once you find a house you want to visit, you can team up with your real estate agent to attend open houses and walkthroughs. If you are in a highly competitive real estate market, you might need to make an offer right after you visit a house. Being the first offer can sometimes sway a homeowner to let you buy the home.
12. Find Your Home
After you have attended enough open houses and in-person walkthroughs, you will have an excellent idea of what your true “must haves” end up being. For example, a two-car garage might morph into a critical factor for you and your family. Alternatively, you could realize that you like open floor plan designs rather than a more cavernous bungalow.
Smart Money -> What is Private Mortgage Insurance?
You might fall in love with a house or two at the end of this process. Once you have found the one house you want to purchase, it is time to make an offer. During price negotiations, emotions can run high. It is vital to remain grounded in your financial assessment of what you can afford and what is truly out of your pricing range. But once you have found the perfect house, it is time to make an offer!
13. Hire a Home Inspector
Part of buying a house is getting the home inspector to analyze all the nooks and crannies of the house or property you are considering purchasing. The home inspection is a pivotal assessment because it can reveal issues with the home that may not be visible to the untrained eye.
Smart Money -> 10 Types of Insurance
For example, the home inspector may find structural damage that could cause issues in the future (and affect resale value). There could be a roof leak that causes mold to grow over time and might need remediation. A home inspection is not a mandatory part of the homebuying process, but it protects you (the buyer) from issues you might not have seen. Most of the time, you pay the home inspection costs. A home inspection will let you sleep at night and should be thought of as insurance against making a poor purchase decision.
14. Get A Home Appraisal
A housing appraisal is where a home appraiser determines the fair market value of the home you are about to purchase. The home appraiser inspects the property and analyzes recently sold comparable properties. The home appraisal is another part of the homebuying process that you must pay for, but it is mainly for your mortgage lender.
Smart Money -> How to Take out a Home Equity Loan (HELO)
The appraisal tells the lender how much the house is worth, which usually sets the cap on how much the mortgage provider will lend. If the seller's asking price exceeds the appraised value, you may have to cover the difference with cash. Alternatively, you can use the appraisal as a negotiating tool with the seller to bring the selling price down to the appraisal value.
15. Make an Offer
At this point in the homebuying process, you are saturated with information. You know the good and bad from the home inspection, the fair market value from the real estate appraiser, and your notes from the walkthrough. With this information, you can weigh what aspects of the property you like and whether you think the house fits your needs. If it is, you can make an offer.
Before you make a formal offer, you should chat with your real estate agent about what purchase price makes sense. You might need to factor in variables such as home repairs or credit with the seller.
In a strong housing market, often called a seller’s market, you might have to make an offer above the asking price to get the house. Alternatively, in a poor housing market, known as a buyer’s market, you have more negotiating leverage and can offer below the asking price. Either way, you should formally submit your offer to the seller, which your real estate agent usually handles with the seller’s agent or homeowner.
16. Wire Your Down Payment
Wiring your down payment to your mortgage provider is both a happy and sad moment. Sending your down payment means you have made it very far in the homebuying process, which is terrific, but parting with that much cash can be difficult for some buyers. You will wire your down payment one to two days before closing day. This occurs after final numbers have been locked and agreed to by the buyer and lender.
Smart Money -> Best High-Yield Savings Accounts
Remember that your down payment is immediate home equity in your home. You can use the equity in your home to take out a home equity loan later or leave it because it will help you pay off your mortgage. Reducing your mortgage debt and increasing your home equity will boost your net worth.
17. Finalize Closing Documents
You are almost there! Once your real estate agent informs you that the seller has agreed to your purchase price, you can move on to the closing documents phase of the home-buying experience.
Smart Money-> How Much Money Should You Keep in Your Savings Account?
During the closing process, you will sign several forms that map out the details of the property and the mortgage loan. You will need to have a photo ID to verify your identity. At closing, you need to bring a cashier’s check to pay the cash-to-close amount. The cash-to-close amount includes expenses like your down payment (although these can be wired), prepaid interest, property taxes, and home insurance. With your ID and cash to close in hand, you will also need to read the closing disclosure form, which lays out the terms and costs of your mortgage.
Closing day documents are paramount because all documents need to speak to one another. If you notice a discrepancy, bring it up with your counsel, real estate agent, or lender. Always adopt the rule of thumb that you shouldn’t sign anything you aren’t comfortable with or haven’t read. Once closing documents are finalized, the house is officially yours.
18. Make Updates or Remodel
Purchasing a “move-in ready” house alleviates the need to make any immediate upgrades or begin the remodeling process. However, if you buy a “fixer-upper,” you might need to hire an architect to help you add on another bedroom, build an office over the garage, or accomplish any other number of remodeling projects.
Smart Money -> How to Get a Personal Loan: Step-by-Step Guide
Financing these updates or remodels should be part of the calculation when you are thinking about your offering price for the home. Sometimes there are things in a house that you can live with now but might want to fix in the future. For these projects, you can contemplate securing a personal loan.
19. Hire a Moving Company
Now that you have the keys to your new place, it is time to move in! Depending on where you are moving from and how much furniture you have (probably not enough), you might need to hire a moving company.
Smart Money-> 14 Wacky Ways to Cut Expenses Quickly
If you are moving for work, your employer might gladly cover the cost of a moving company or provide a moving stipend. Research what moving companies are the best and ensure that you read reviews.
Pro tip: always read the negative reviews to look out for recurring issues. Hire the best moving company you can find so your stuff gets into your new house without any damage. You don’t want to spend money repairing damaged furniture now that you must start making mortgage payments.
20. Start Making Mortgage Payments
Now that you are living in your new home, you will start having to make mortgage payments unless you are a cash buyer. You will know what these payments will cost. A mortgage payment consists of the three main components:
- Mortgage Payment
- Interest Payment
- Property Tax
Depending on the type of mortgage you secured, you will be required to make mortgage payments for the life of your loan. Of course, you can make principal payments to reduce your mortgage over time. Additionally, you might be eligible to recast your mortgage or refinance later.
21. Furnish Your House
For first-time homebuyers, the last step of the homebuying process is realizing that you might not have enough furniture to decorate your house. Moving your current furniture into your new home might highlight the fact that you need more furniture, curtains, and art to properly decorate your new space.
Smart Money -> How to Save for a Down Payment While Renting
Upgrading in size can be great, but it often comes at the expense of purchasing items like beds for the guest room, desks for the office, couches for the living room, dining room tables, breakfast tables, or stools. Depending on the size of your house, the list could go on. Furnishing your home might take some time and planning with your budget.
Smart Summary
The homebuying process is a complicated series of exhilarating activities. Gaining a sense of the landscape will get first-time homebuyers geared up for success, and a refresher on the process for experienced buyers is a smart money move. Owning your own home is a dream for most people because it embodies all the hard work necessary to get to that point – saving an emergency fund, slush fund, down payment, and successfully navigating the entire process. In the end, you have a house you can call your own. Enjoy the process.
Sources
(1) Consumer Financial Pretension Bureau. What is a mortgage? Last Accessed February 5, 2024
