Buying a house for the first time is a significant milestone—and one that comes with more steps than most people realize. As much as we would love to say the home buying process simply starts with finding a home and ends with moving in after purchase, it’s a little more complicated than that.
If you’re a first-time homebuyer, the following guide will break down each step of the process, so you know just what to expect when it comes time for you to find your new home. Note: Before you do anything, it is highly recommended that you work with an experienced realtor, especially if it’s your first time buying a home.
Before searching for homes, you must get pre-approved by a mortgage lender first. If you’re not sure how much of a home you can afford, this is the step of the home buying process that will help you find out. In other words, a mortgage pre-approval will determine how much of a loan you may qualify for, or can receive, based on your present financial standing.
Finding a Lender
To get pre-approved, you will first need to find a lender to apply with. It is often recommended that you choose a lender who is local to the area you plan on living in.
In general, many people choose to apply through their banking institution if they have been a customer with them for a long time. However, there are plenty of other options to pick from, including credit unions and other third-party lenders that work with mortgage brokers.
Applying for a Loan
Once you’ve found a lender, it’s time to apply. During the application process, be prepared to have a lot of financial information ready; most lenders will ask for details spanning the past two years. Some of the most common things they’ll require from you include copies of the following:
- Bank/credit card statements
- Tax returns (if you’re self-employed, you will need to submit 2 years of business tax returns)
- Pay stubs (from the past 2-3 months in addition to paystubs from the end of the last two years)
Getting the Pre-Approval Letter
If you qualify for any loan programs, the lender will then draft a pre-approval letter that will specify how much home you can afford, as well as the type of loan you’re eligible for. Keep a copy of this letter and provide another copy to your realtor; this is an important document that you’ll need to give to home sellers once you make an offer.
Note: The pre-approval is only valid for 60 to 90 days, depending on the lender and program.
Search for a Home
Now that you have your pre-approval letter, it’s time to start searching for a home! Keep in mind your loan pre-approval amount and your actual out-of-pocket budget when it comes to price (think about closing costs, escrow/option fees, down payment, etc.).
Tip: New data reveals that the average homebuyer spends 6 to 12 weeks before finding their desired home. However, you should start looking for a home at least six months before you want to move in.
If you see a home you like, try to book a tour of it with your realtor as soon as possible. Remember that you’re not the only one searching for a house; other people are looking at the same listings as you are, and could put in an offer before you even had the chance to find out it’s your dream home.
Make an Offer & Negotiate Terms
Once you’ve walked through a home and determined that you see yourself spending the next few years of your life there, it’s then time to put in an offer. Think of this as putting in your own “bid” for the home.
Before sending an offer, your realtor will compare the seller’s price with similar homes in the area that have sold in the past and provide recommendations of what you should put up as your offer price. From there, you will work with them to solidify your initial offer price and down payment.
Your realtor may also help you determine what you should provide as earnest money; think of this as money offered in good-faith to show you’re serious about purchasing the home. The earnest money amount is usually between 1-5% of a home’s purchase price.
Based on the response of the seller to your offer, you may decide to send in a counteroffer or back out of the purchase. However, in the event the seller accepts your offer, you then move into the option period once all parties have signed an agreement.
The Option Period
The option period is essentially a window of time (usually 5-10 days) in which you have the option to terminate the agreement in exchange for a fee. There are a few benefits to this:
- If you decide to cancel the contract for any reason during this period, you can receive your earnest money back.
- The sellers are required to mark the property as “Pending” in the MLS (Multiple Listing Service), meaning it is listed as temporarily “unavailable” to other prospective buyers; this prevents other buyers from viewing or making offers to purchase the home.
Get the Home Inspected
After the seller accepts your offer, your real estate agent will help you arrange for a home inspection within a few days after your offer acceptance (usually within the option period). You will need to hire a professional home inspector to evaluate specific areas of the house for defects. Usually, home inspectors will look at the home HVAC system, plumbing, electrical, roof, floors, windows, doors, and foundation.
Upon the completion of the inspections, your inspector will send you and the seller a copy of the inspection report detailing their findings. You may request that the seller fix the issues uncovered in the home or engage in further price negotiations based on the report.
Apply for a Mortgage
If you decide to move forward with the purchase of the home after the inspection, you will then need to choose a mortgage option to apply for. A mortgage application is extensive and requires that you forward several financial and personal documents to the lender, similarly to the pre-approval process.
You’ll also need to forward the details of the property you intend to purchase, including your agreed price, the down payment amount, and proof of paid escrow and option fees. Your lender will decide on whether to approve or reject your loan request based on the information you supplied.
Have a Home Appraisal Done
Once you have sent in your mortgage application, your lender will need to carry out an appraisal of the proposed property. A home appraisal is organized by a lender to determine the true value of your potential home to decide if it is worth the loan amount you are requesting. The appraiser is usually hired by the lender but paid for by you, the buyer.
The appraiser will look at the building’s exterior and interior condition, price of similar homes in the neighborhood, home improvements, size, and building material quality. Once the appraisal process is done, your lender may approve the loan request if the purchase price is lower than the home value. If the purchase price is higher, your lender may deny your loan request.
Get Homeowner’s Insurance
Most lenders will require that you purchase homeowners’ insurance as a condition of your loan. Homeowners’ insurance is coverage that protects your property in the event of damage or a natural disaster. It helps you fund the repairs and replacement of your property/belongings.
This is the final mortgage approval step. During a loan underwriting process, the lender goes through your submitted documents to make sure they are accurate. Most lenders hire a professional underwriter to verify if your income, employment, asset, debts, and other information meet the loan requirements and qualifications.
Receive Your Mortgage Commitment Letter
After your lender approves your loan application, you’ll receive a mortgage commitment letter detailing the terms of the loan. The letter gives you and the seller assurance that you will be getting the required financing you need to buy the house. Most lenders will send you a commitment letter within 30-40 days from your mortgage application date.
Once your lender has approved your loan request, you and your real estate agent will need to do a walkthrough or inspect the property for the last time before closing on it (usually the day before closing). A final walkthrough helps you discover any new repair issues or if the seller has fixed the defects highlighted in the home inspection report you requested attention to.
This is the final step of your home buying journey. Closing day is the agreed day you meet with various representatives (legal and/or real estate agents) to finalize the purchase. On the closing day, you will sign the mortgage and purchase agreements, and pay closing costs and/or other fees.
More importantly, you’ll receive the mortgage notes, closing disclosure, home title, deed of trust, and certificate of occupancy (if you are purchasing a new-build home). Of course, you also get the keys!
Purchasing your first home is an important achievement for anyone, but the process of getting there can be confusing if you’re unaware of the right steps to take. However, by following the above guide, you should be able to get through the home buying process unscathed. Best of luck, and happy home buying!