Buying a home can be challenging for a first-timer. After all, there are so many steps & requirements, and you may be anxious about making an expensive mistake. But first-time homebuyers enjoy some special advantages created to encourage new entrants into the real estate market.

To demystify the process so you get the most out of your purchase, here is a rundown of what you need to consider before you buy and what you can expect from the buying process itself, plus tips to make life easier after you buy your first home.

6 Questions to Consider Before You Buy

1. Your Financial Health.

Do a serious audit of your finances. You need to be prepared for both the purchase and the ongoing expenses of a home. The outcome of this audit will tell you whether you’re ready to take this big step or if you need to do more to prepare. Follow these steps:

Look at your savings. Don’t even consider buying a home before you have an emergency savings account with three to six months of living expenses. When you buy a home, there will be considerable upfront costs, including the down payment and closing costs. You need money put away not only for those costs but also for your emergency fund. Lenders will require it.

Review your spending. You need to know exactly how much you’re spending every month—and where it’s going. This calculation will tell you how much you can allocate to a mortgage payment. Make sure you account for everything—utilities, food, car maintenance and payments, student debt, clothing, kids’ activities, entertainment, retirement savings, regular savings, and any miscellaneous items.

Check your credit. Generally, to qualify for a home loan, you’ll need good credit, a history of paying your bills on time, and a maximum debt-to-income (DTI) ratio of 43%. Lenders generally prefer to limit housing expenses (principal, interest, taxes, and homeowner's insurance) to about 30% of the borrowers’ monthly gross income. However, this figure can vary widely, depending on the local real estate market.

2. Identify the Type of Home that Will Best Suit Your Needs.

You have several options when purchasing a residential property: a traditional single-family home, a duplex, a townhouse, a condominium, or a multifamily building with two to four units. Each option has its pros and cons, depending on your homeownership goals, so you need to decide which type of property will help you reach those goals. You can save on the purchase price in any category by choosing a fixer-upper, but be forewarned: The amount of time, sweat equity, and money required to turn a fixer-upper into your dream home might be a lot more than you bargained for.

3. Write Down Specific Home Features You Want.

Make a list of features you are looking for. It should include basic desires, like size and neighborhood, all the way down to smaller details like bathroom layout and a kitchen fitted with durable appliances. Remember to be flexible though. Scanning real estate websites can help you get a sense of the pricing and availability of properties offering the features that are most important to you.

4. How Much Mortgage Do You Qualify for?

Before you start shopping, get an idea of how much a lender will give you to purchase your first home. You may think you can afford a $300,000 home, but lenders may think you’re only good for $200,000 based on factors like how much other debt you have, your monthly income, and how long you’ve been at your current job. 

Consider getting pre-approved for a loan before placing an offer on a home. In many instances, sellers will not even entertain an offer that’s not accompanied by a mortgage pre-approval. You do this by applying for a mortgage and completing the necessary paperwork. It is beneficial to shop around for a lender and to compare interest rates and fees by using a tool like our mortgage calculator. Available for free on my website.

5. How Much Home Can You Afford?

Sometimes a bank will give you a loan for more houses than you want to pay for. It doesn’t mean that you should borrow that much. Many first-time homebuyers make this mistake and end up “house poor,” with little left after they make their monthly mortgage payment to cover other costs, such as utilities, clothing, vacations, entertainment, or even food.

When deciding how big a loan to take, you’ll want to look at the house’s total cost, not just the monthly payment. Consider how high the taxes are in your chosen neighborhood, how much homeowner's insurance will cost, how much you anticipate spending to maintain or improve the house, and how much your closing costs will be.

6. Choose a Realtor Who Will Smoothly Guide You Through the Homebuying Process.

A realtor will help you locate homes that meet your needs and are in your price range, then meet with you to view those homes. Once you’ve chosen a home to buy, a real estate professional can assist you in negotiating the entire purchase process, including making an offer, getting a loan, and completing paperwork. A good real estate agent’s expertise can protect you from any pitfalls that you might encounter during the process.

The Buying Process

1. Find a Home.

Sometimes you find a great home, but you know it'll break your wallet. In such cases, you might need to look for something that needs some revitalization. If the home meets your needs in terms of the big things that are difficult to change, such as location and size, then don’t let physical imperfections turn you away. First-time homebuyers should look for a house that they can add value to, as this ensures a bump in equity to help them up the property ladder.

2. Consider Your Financing Options. 

First-time homebuyers have a wide variety of options to help them get into a home—both those available to any purchaser, including Federal Housing Authority (FHA)- backed mortgages and those geared especially to novices. Many first-time homebuyer programs offer minimum down payments as low as 3% to 5% (vs. the standard 20%), and a few require no down payment at all. Be sure to look into or consider:

• HUD’s resource list. Although the government agency itself does not make grants directly to individuals, it does grant funds earmarked for first-time homebuyers to organizations with Internal Revenue Service (IRS) tax-exempt status. The FHA (and its loan program) is part of HUD.
• Your IRA. Every first-time homebuyer can withdraw up to $10,000 out of their traditional individual retirement account(IRA) or Roth IRA without paying the 10% penalty for early withdrawal (but you’ll still pay taxes if you use a traditional IRA). That means a couple could withdraw a maximum of $20,000 ($10,000 from each account) to use toward a first-home purchase. Just know that if you don’t use the funds to pay for the home within 120 days—and if you’re under age 59½—then it becomes subject to the 10% penalty. Also, you will owe income taxes on the withdrawal(s).
• Your state’s programs. 
• Native American options. Native American homebuyers can apply for a Section 184 loan. This loan requires a 1.5% loan upfront guarantee fee and a 2.25% down payment on loans over $50,000 (for loans below that amount, it’s 1.25%). Section 184 loans can be used only for single-family homes (one to four units) and primary residences.

3. Choose a Lender.

Shop around, even if you only qualify for one type of loan. Fees can be surprisingly varied. An FHA loan, for example, may have different fees depending on whether you’re applying for the loan through a local bank, credit union, mortgage banker, large bank, or mortgage broker. Mortgage interest rates—which, of course, have a major impact on the total price.Provide financial information to your lender: credit scores, employment information, DTIs, etc. The lender can pre-approve the borrower for a certain amount. Be aware that even if you have been pre-approved for a mortgage, your loan can fall through at the last minute if you do something to alter your credit score, such as finance a car purchase.Having a back-up lender is also a great idea.

4. Make an Offer.

Your real estate agent will help you decide how much money you want to offer for the house, along with any conditions you want to ask for. Your agent will then present the offer to the seller’s agent; the seller will either accept your offer or issue a counteroffer. You can then accept, or continue to go back and forth until you either reach a deal or decide to call it quits.

Keep in mind the closing costs (which can total anywhere from 2% to 4% of the purchase price), commuting costs, and any immediate repairs and mandatory appliances that you may need before you can move in.When you review your budget, don’t overlook hidden costs, such as the home inspection, home insurance, property taxes, and homeowner's association fees.

If you reach an agreement with the Seller, you’ll make a good faith deposit, and the process then transitions into Escrow. It is is a short period of time (often about 30 days) during which the seller takes the house off the market with the contractual expectation that you will buy it—provided you don’t find any serious problems with it when you inspect it.

5. Have the Property Inspected.

Even if the home that you plan to purchase appears to be flawless, there’s no substitute for having a trained professional do a home inspection of the property for the quality, safety, and overall condition of your potential new home. You don’t want to get stuck with the headache of performing a lot of unexpected repairs. If the inspection reveals serious defects that the seller did not disclose, then you’ll generally be able to  renegotiate the offer, or have the seller make the repairs, or rescind your offer and get your deposit back. 

6. Close on the Property.

Things that you’ll be dealing with and paying for in the final stages of your purchase may include having the home appraised (mortgage companies require this to protect their interest in the house), doing a title search to make sure that no one other than the seller has a claim to the property, obtaining private mortgage insurance or a piggyback loan if your down payment is less than 20%, and completing mortgage paperwork. Other closing costs can include loan origination fees, title insurance, surveys, taxes, and credit report charges.

Congratulations, New Homeowner!