First-Time Homebuyers’ Guide to Purchasing a Home

First-time homebuyers are often excited yet mystified by real estate transactions. Truthfully, you may need to spend several months (or years) improving your financial health. And that isn’t always fun – but it is achievable. After you receive pre-approval for a mortgage and have saved money for the down payment and closing costs, you will need a team of qualified professionals to help you navigate the details of your purchase successfully.

From preparing for a mortgage to making an offer, here’s a comprehensive look at the home-purchasing process for first-time homebuyers. Deep breath – home buying can be complex and overwhelming, but if you’re well informed, the process will be much smoother.

Laying the foundation for your first home before your search begins

Even if becoming a home owner is part of your three or five year plan, you can start building a successful foundation now. Prepare your financial records and become knowledgeable in the months or years before you’re ready to purchase your first home. Preparation alleviates stress during the mortgage process. All lenders must verify that first-time homebuyers have a steady source of income and the ability to make monthly payments on your mortgage.

Finding a rockstar real estate agent

Your first order of business is to meet real estate agents and determine which is the one you’d like to work with for a successful home purchase. Don’t go it alone: agents are experts in their local markets and understand the nuances of the buying and selling process. They will advise you on the advantages and concerns of the properties that interest you and help make sound decisions, from mortgage selection to negotiating a deal.

Assessing your financial situation and determining your budget

Your debt-to-income ratio (DTI) measures the proportion of your monthly gross income that pays debts and expenses. Mortgage lenders use DTI to determine lending amounts, thus establishing the budget you’ll have to purchase a home. Lenders tend to approve mortgages for applicants with DTI ratios of 36% to 43% or less. 

Let’s say your monthly mortgage is $1,800. Car repayments are $200 a month. Student loans are $400. Your total monthly payments would be $2,400. If your gross monthly income is $6,500, then your debt-to-income ratio is 37% (because $2,400 is 37% of $6,500). It’s reasonable for you to assume that lenders will approve mortgages with your DTI of 37%.

You do not have to be debt-free to qualify for a mortgage or buy a home, but fewer debts increase the amount of money a lender will allow you to borrow, ultimately affecting your buying power. If you have a higher-than-optimal DTI, it may be possible to compensate with a good credit score or a healthy savings account. You should pay off credit cards, auto loans, student loans, and other debt to lower your DTI ratio before applying for a mortgage if your current percentage isn’t optimal.

Keep your new mortgage payments within the recommended DTI guidelines to ensure you can sustain the costs of financing your new home. The interest on your mortgage, the mortgage amount, length, and type will influence monthly payment amounts. You can use free calculators to estimate monthly payments based on your income and the amount of money on an estimated loan.

Applying for a mortgage and verifying income requirements

When you’re ready to apply or get pre-approved for a mortgage, you will need to provide:

• The names and addresses of your employers
• Tax documents from the last two years (including w-2 income statements, 4506-C and SSA-1099 forms, or Schedule K-1/1065 for self-employed individuals)
• Proof of income in the form of pay stubs, direct deposits, and invoices (usually from the past 30 days)
• Proof of social security
• All other income and assets, including pension, maintenance income, rental property income, gifts, stocks, sale of assets, and saving account and brokerage statements
• A report of fixed debts
• A current balance sheet

Comparing mortgage pre-approval offers

You can shop for better interest rates and fees with another mortgage company once you’ve received your first pre-approval letter from a lender. There is no obligation to take out a loan based on the pre-approval letter. Pre-applying for a mortgage with numerous won’t really impact your credit score as long as you do it in a relatively short period.

How much is a down payment for first-time homebuyers?

First-time homebuyers typically need to pay at least 3% to 3.5% on homes with conventional and FHA mortgages. In addition to the down payment costs, you’ll pay closing costs, including lawyer and appraisal fees. These expenses are due at closing and typically amount to 2% to 7% of the purchase price. For example, you will need a down payment of $9,000 if you put 3% on a home that you’d like to purchase for $300,000 and an estimated additional $9,000 for closing costs.

Several home loan programs allow 0% down payments, but there are usually special requirements. If saving for a down payment is challenging, ask lenders about down payment assistance.

Selecting your mortgage

First-time homebuyers often feel intimidated by the thought of selecting a mortgage lender. The lender you choose should be the one that provides you with the lowest closing costs, the lowest interest rate, and the most reasonable terms. An FHA loan may be most feasible if your credit score is under 600. However, if it’s above 620, shop for conventional loans that may offer terms with down payment requirements lower than 3%.

Chat with your lender about which mortgage is the best fit for your needs. They’ll weigh up the options based on the factors of your circumstance. Factors like your credit limit and how long you intend to stay in your new home are examples of the criteria a lender will use to help determine the best option.

Local, state and federal programs for first-time homebuyers

From FHA to USDA loans, there are a variety of local, state, and federal programs that help qualified first-time homebuyers afford and purchase homes. There are fewer requirements and lower down payment and closing costs associated with Federal Housing Administration (or FHA) loans than with other mortgage agreements. Most people qualify for FHA loans, whereas USDA loans are only available to first-time homebuyers who purchase properties in designated “rural areas.” In addition to national programs, check out your state’s program offerings for first-time homebuyers.

When you’re ready to make an offer on a home

After you’ve prequalified for a loan and understand your budget, it’s time to go shopping! View homes that meet your price, location, and space requirements. When you find a home you’d like to call your own, it’s time to make an offer! 

Many first-time homebuyers are surprised to learn that real estate deals are somewhat complex. Closing is a multi-step process that realistically takes several weeks to complete. Work with a trusted real estate agent to submit an offer. Once it is accepted, the “due diligence” process begins.

When you make an offer on a home, be prepared to:

• Tell your lender about your offer. Often, they will be responsible for delivering EMD and holding additional closing funds in escrow in preparation for closing. Escrows are bank accounts that trusted, neutral third parties hold for sellers and buyers that secure transactions. It’s best practice to hire a title company or an attorney to counsel you through the transaction with your agent and loan officer.

• Order an official home inspection(and consider a pest inspection, too). These are required to determine a home’s appraised value and structural integrity and to discover code-related problems. Your title company or attorney will likely order a title search at this time. Note that any type of inspection is pursuant to the contract and in a hot seller’s market, it’s not a given that buyers are going to get to order one before submitting an offer.

• Negotiate the price based on the findings of the inspection and your lender’s appraisal of your home. Appraisal value is determined by the home’s features, age, condition, and market comps for the area. After you review the results, you may ask the seller to fix any serious problems discovered, renegotiate the closing price, or back out of the deal entirely. Ask your attorney, agent, and mortgage officer about negotiating “junk fees” (i.e., the administrative, processing, application, and settlement fees) associated with closing costs.

• Conduct a final walk-through before you can officially buy a property. Inspect your home again to ensure that nothing has been damaged since the last inspection. Verify the seller has fixed any problems identified since the inspection, and lastly, check paperwork with your attorney to ensure that you fully understand your agreements and contracts.

• Finalize your mortgage and payment agreements. Officially accept a lender’s approval and formally agree to down-payment and closing terms.

Just like that, you’re a successful first-time homebuyer!

After you accept the terms, you will sign the closing documents with a real estate attorney or licensed title agent and then take official ownership of the home. 

And when it’s time to sell your first home, work with Curbio for pre-listing home improvements. We help agents and homeowners update properties so they sell quickly at market-worthy prices. We’ve already earned the trust of thousands of homeowners and agents nationwide with our reliable expert services and “pay at closing” price model.