Buying a home is arguably one of the most significant milestones that tops almost everyone’s lifetime to-do list. However, the financial fears of purchasing a home can easily tempt you into going with the first place you locate or simply continue to rent till the end of time. However, it need not be all that stressful and confusing, provided you take the time and research to educate yourself on the fine aspects of the home buying process and understand what to expect from various stages of the same.

Here we have a created a handy first time home buyer guide, which will help you to understand the factors that you need to consider before you buy a home, and know how to protect your finances in the process.

Documents you need for a mortgage preapproval

Ultimate First Time Home Buyer Guide FAQ:

Who Qualifies As An Official “First Time Home Buyer”?

According to the U.S Department of Housing & Urban Development (HUD), a newbie homebuyer is one who fulfills any of the following criteria:

  • A single parent who has owned a home only with a former spouse during the marriage period.
  • A displaced homemaker who has owned a home only with a spouse.
  • An individual who hasn’t owned a residence for three years. Even a spouse is considered as a first-time homebuyer if he/she meets the aforementioned criteria. In case you have owned the home but your spouse hasn’t, then you can buy a home together as newbie homebuyers.
  • A person who has owned a principal residence that wasn’t permanently affiliated to a permanent foundation in alliance with applicable regulations.
  • A person who has owned a place that was not in adherence to the state or local building codes and which can’t be brought in alliance for less than the price of building a permanent structure.

Even this criteria is a little shaky.  For example, in some states “First Time Home Buyer” simply refers to people who don’t own a home.   With how confusing this all is it’s no wonder why you need a First Time Home Buyer Guide.


First Time Home Buyer Spoiler Alert

Most first time home buyer programs are simply “mis-nomers.”  The programs are targeted at first time home buyers but actually the criteria is only that you don’t own a current home (or have a current mortgage).   While this is mis-leading in many instances, there’s never any complaints because often the criteria is much wider than originally imagined.

Important Considerations Before You Buy A Home?

  1. What type of home fits your needs?
  2. What specific features should your ideal home have?
  3. How much mortgage are you eligible for?
  4. How much can you actually afford?
  5. Do you have any major savings?
  6. Who will guide you through the process of selecting homes and making the purchase?

One of the first few things you will need to work out is your long-term goals and understand how home ownership can be accommodated in those plans. Some people are merely looking to convert all those futile rent payments into solid mortgage payments that really give them something that is more usable and substantial. Others view home ownership as a sign of independence and relish the idea of being free from the stress of paying rent every month. Streamlining you long-term home ownership goals will take you in the right direction. Here are five pertinent questions to ask yourself:

1. What type of home fits your needs?

When it comes to purchasing a residential property, there are plenty of options available for you, such as a duplex, a condo, a townhouse, a traditional single-family house, a cooperative housing complex, or a multi-family structure with two to four units. All these options come with their own share of pros and cons that depend on your individual home ownership goals. That is why you need to decide what type of property can help you attain those goals. You can even save on the cost price in any category of homes by selecting a fixer-upper, though the sweat equity, amount of time, as well as finances involved to convert a fixer-upper to your dream home may be a lot more than what you bargained for in the first place.

In addition, there’s different styles of homes from architecturally different homes, such as colonial, victorian and contemporty, but there’s different “types” that real estate agents often use to define houses that are sort of a subcategory.  For example, there is equesterian property, ranches, ramblers (a type of ranch), brownstones (a type of townhome), mansions, even luxury real estate can differ from one locale to the next.

What Type Of Home Fits Your Needs

2. What specific features should your ideal home have?

A home purchase is probably the biggest investment of your life, hence it’s important to make a list of features that befits your needs and budget. The list should be a wee bit flexible as well, else you may end up taking way too much time to make a decision. Your list should, at the very least, include basic amenities like size, neighborhood, as well as more intricate details like bathroom layout, partially furnished living room and a kitchen that comes with essential and still functional appliances. Don’t forget that you will be providing space for your entire family, which could include pets that may be taking up space both inside and outside your home. If you don’t have a large yard, your poop scooping chores could become more of an issue for example. It could also impact your choice of doors to include doggie/cat doors.

Keep in mind that you can have a huge wish list of desired features but the real estate market will often dictate to you what you can have.  Homes for sale in Florida often have an indoor pool for example while real estate in Georgia almost have none.  On top of this the market conditions can influence whether you can have everything you want.  Places where housing inventory is lower means less homes to choose from and less features.

Understanding this is where your realtor comes in and is outside the scope of this first time home buyer guide.

3.  How much mortgage are you eligible for?

Before you begin shopping for homes, it’s essential to have a better idea of how much is the lender willing to give you on your first purchase. You may feel you can afford to shell out $300,000 for a home but your lenders may feel that you are only good enough for $200,000 depending upon factors such as your monthly income, your financial obligations (debt), as well as the total length of time you have spend at your present job. Additionally, many real estate agents will choose not to work with clients who haven’t specified the exact amount of money they are willing to spend.

Our suggestion is to set up your monthly housing budget first – basically, how much you can spend on a house per month.   When you do this, you’ll be better prepared for the conversation with the lender.  In fact, many problems can arise if you simply call the lender and take the highest offer.  Their highest offer could be as much as 51% of your total income!

For example, let’s say you make $4,000 a month.  They may offer you a mortgage that would result in a mortgage payment of slightly over $2,000 a month.   As a side note, this is an awful way to buy pretty much anything else.

How Much Mortgage Are You Eligible For

It’s imperative to get your finances in order before even thinking of making a home purchase. And if you wish to qualify for a home loan, you’ll need to make sure you have good credit, a regular income, a 43% of debt-to-income ratio, as well as a great record of paying bills on time. Lenders nowadays tend to limit housing costs (principle, taxes, interest and homeowners insurance) to around 30% of the monthly gross income of the borrowers, though this amount can vary widely, depending upon the local real estate market status at the moment.

Before placing an offer for a home, ensure to get pre-approval for a home loan. In many cases, sellers will not even listen to an offer that comes devoid of an accompanying mortgage pre-approval. You can do this by applying for mortgage and then completing the requisite paperwork. It’s advantageous to shop around for a suitable lender and compare interest rates, as well as fees by using a tool like Google or mortgage calculator.

As soon as you have chosen a lender and applied, the onus is on the lender to then verify the provided financial information (such as checking credit scores, calculating ratio of debt-to-income, verifying employment data and so on). The lender can choose to pre-approve the borrower with regards to a specific amount. Be warned that even you receive pre-approval for mortgage, your loan can be denied at the last moment if you end up doing something impact your credit score, such as finance a car purchase or so.

Big No-Nos While Purchasing A Home

  • Applying for any new credit cards – yes even the mall credit cards
  • Buying furniture – with credit (read the first one), without credit, this could drain your resources.
  • Buying A car – I can tell you that buyers across America will all agree.  Do not buy a car until AFTER you buy a home. 
  • Cosign for anything
  • Basically, don’t spend any money or touch your credit.
Start your mortgage pre approval

4. How much can you actually afford?

How much can you afford

Then in some cases, a bank will provide you the loan for more than what you really want to pay for. And just because a bank states it will lend you a certain amount that doesn’t mean you actually have to borrow that much. A lot of newbie homebuyers make this mistake and become house-poor, which means that after paying out the monthly mortgage payments, they fall short of funds to pay for other expenses, such as clothing, vacations, utilities, or even food.

As with the purchase of a brand new car, you will want to take a good look at the total cost of the house, and not just the monthly mortgage payment. Sure, monthly payment is important, in addition to how much down payment is affordable for you, how high property taxes are, how much does homeowners insurance cost, how much is your closing costs, and how much you expect to spend to maintain or refurbish the house. If you are interested in buying a condo, keep in mind that you will have to shell out monthly maintenance costs as you will be a part of homeowner’s association, which basically collects a few hundred dollars as condominium fees every month from each and every unit’s owners in the building. Similarly, co-operative housing owners also have to pay monthy maintenance fees, however, these are partly tax-deductible.

5. Do you have any major savings?

Even if you do qualify for a significant mortgage, there will still be sizeable upfront costs (such as down payment on home, which is mistakenly thought to be 20%), as well as closing costs. So, you may want to put aside that sum of money for later use. When it comes to investing specifically for purchasing a house, one of the biggest challenges lies in keeping savings in a secure and accessible vehicle that offers a full return. If you’ve a year or more to realize you goal, then a deposit certificate may be an appropriate option. While it’s not going to make you a millionaire, you are at least not going to lose your hard-earned money either. The same principle can be applied to availing a short-term bond, or a fixed income portfolio that will help you make growth, while protecting you from the harsh effects of stock markets in the process. (Each one of these questions could be a first time home buyer guide in its own right. )

Costs to Purchase A Home

  • Down Payment:  3.5% of the purchase price and  Up.  While there are entertainers that promote putting 20% down.  A regular first time home buyer loan (typically FHA) is only 3.5% down.  There are other loan types that can offer you other options and improvements overall to your interest rates for putting more money down.
  • Earnest Money:  This is the security deposit when you purchase the home.  In most cases, the earnest money will go toward a “credit” for your down payment.
  • Inspections:  If you plan to inspect the home (and we recommend that you do), you will want to put aside money for this.  Depending on the area it could cost you from $300 to over $1,000.
  • Appraisals & Incidentals:  There’s likely to be things that come up during the process.  It should be less than $1,000 but if you need additional inspections.  Currently, appraisers are controlling a lot of areas of real estate, you can expect to pay not only the fee for the appraiser to appraise the home, but likely an additional trip charge because he conveniently needed to verify something.

In case the home purchase is slated to occur in a year or less, then your best bet is to maintain the money in a liquid form. In this regard, a high-yield savings account is the most apt option out there. It’s essential to ensure that it’s FDIC insured; This makes sure that even the bank goes in loss, you will still have access to an amount of money up to $250,000.

6. Who will guide you through the process of selecting homes and making the purchase?

No first time home buyer guide would be complete without mentioning real estate agents. A realtor will assist you in the process of locating and scouring homes that befit your needs and are available in a price bracket that interests you. They will also meet with you and accompany you in the process of viewing those shortlisted homes. As soon as you have zeroed in on a home to buy, these professionals will then help in negotiating the purchase offer, including getting a loan, completing paperwork and working out unexpected costs. A competent real estate agent has the requisite expertise to safeguard you from any unforeseen pitfalls that you may come across during the process. These agents receive a commission once the purchase is made, from the seller’s proceeds.  In other words, a home buying agent is of no cost to you! 

A Walk-Through Of The Home Buying Process

Now that you have finally made the decision to purchase a home, let us walk you through all the little things that you can expect from the experience of home buying itself. This is basically a stressful period with offers and counter-offers moving back and forth, but if you are ready to deal with tons of paperwork and last-minute hassle, it’s possible to get through the procedure with your mental peace intact. Here is a complete breakdown of what to expect:
Seek the help of your real estate agent to make the most of all the existing options on the market, and find a home that best suits your needs and budget. You can search for online listings and drive around the neighborhoods that appeal to you, in order to search for any ‘for-sale’ signs. Additionally, give a heads up to your friends, family and colleagues that you’re looking for a suitable home. You never know who comes up with a good references that might ultimately lead you to the house of your dreams.

Once you have begun the long, arduous journey of house hunting, ensure doing your research and a little background check first, instead of just sauntering into an open house lacking an agent. Sometimes, dealing with the seller’s agent without hiring one of your own may not work in your best interest and reduce the leverage in your purchase agreement.

If you are on a pre-defined budget, consider looking for homes whose true potential is yet to be understood. Even if can’t afford to change the bathroom tiles, or replace that worn-out wallpaper in the bedroom, it might actually be worth it to cope up with the ugliness for sometime in exchange for purchasing a house that is affordable and more or less suits your requirements.

Also, if your house measures up in terms of aspects that are difficult to change, like location, size of individual rooms, or angle of placement, do not let physical imperfections deter you. Newbie homebuyers must look for a home that can help them in value addition, as this guarantees a leverage in equity to help them climb up the property ladder.

There are a wide range of options available to help newbie homebuyers get into a home that is ready to move in. Many newbie home buyer programs give out minimum down payments at a rate of 3-5% as opposed to the standard 20%. Then there are few programs that don’t require any down payment at all.
In particular, first-timers should:

Use the resource list of HUD: Both the FHA, as well as its loan program are components of HUD

The FHA and its loan program is part of HUD.

Look to your IRA: In terms of IRA distributions, a newbie home buyer is someone who hasn’t owned an interest in a primary residence, house trailers, houseboats, mobile homes and stocks held by stockholder in a co-op housing complex for the last two years. Since each person has a lifetime amount of $10,000 that can be withdrawn free of penalty from their IRA, a couple can collectively withdraw up to $20,000 to pay for their first home. Only make sure to use the amount within the first 120 days or else it may become subject to 10% penalty.

States like Ohio, Illinois and Washington provide down payment aide for newbie home buyers who qualify. Generally, eligibility in these programs depends on income and may have certain limits on how costly a property can be purchases. People who qualify might be able to receive monetary help with down payments, closing costs and expenses to remodel a property.

Know about Native American choices: First-time Native American home buyers can apply for the Section 184 loan. The latter requires a 1.5% upfront guarantee fee, as well as a 2.25% down payment on loan amounts more than $50,000, and for loans below that amount the down payment is around 1.24%. Unlike a traditional loan, where interest rate is calculated according to the borrower’s credit rating, this loan’s rate depends on the current market rate. Section 184 loans can only be used for a primary residence or single family homes (between 1 to 4 units)

Don’t be strictly adhered by loyalty to your present financial institution while seeking a pre-approval or trying to search for mortgage. It’s advisable to shop around, even if you know you qualify for only one type of loan. Surprisingly, the fees can be quite varied, as can the mortgage interest rates, which obviously have a significant impact on the price you end up paying for your house.

Some authorities recommend you to have a back-up lender. Just qualifying for a loan doesn’t guarantee that your loan will be funded eventually. Investor markets can change, lender risk analysis may alter and underwriting guidelines may shift. There have been cases in the past where clients signed loan and escrow documents only to be notified one or two days before the closing that their lender froze the funding on the loan program. Thus, having a second lender that has deemed you eligible for a mortgage gives you another way to keep the process on schedule.

Your realtor will assist you in deciding the amount of money you want to make an offer for the home, in addition to any other conditions you need to request. The agent will then proceed to present your offer to the seller’s realtor and the seller will then either accept your offer or solicit a counter-offer. Now, the onus is on you to either accept it, or continue to request more offers until you work out a suitable deal or just decide to call it quits and move on altogether.

As a word of caution, consider taking a second look at your budget before submitting your offer to the real estate agent. You need a small window of time to figure out exactly how much you need to spend for estimated closing costs (which may be anywhere from 2-5% of the home’s price), transport costs, as well as any last-minute repairs and indispensable appliances you may require prior to moving in. Also, think ahead. It’s easy to be intimidated with higher or unforeseen utility costs in your new bigger home. So, it’s a good idea to request energy bills from the past year, in order to to a better understanding of the average monthly charge.

If you do reach an agreement, please know that you will make a trustworthy deposit and the process will then me managed by Escrow. Escrow takes a short span of time (around 30 days) and involves the seller to take the house off the market and put up a contractual document stating that you will buy the home only if you do not encounter any severe problems with it upon inspection.

Your potential home may look all polished and perfect at the first few glances, but it never hurts to get an expert opinion on the actual status of the interiors. Having an experienced professional inspect the nitty-gritty aspects of the property for quality, security, and overall condition of your prospective new home saves you the hassle of rushing hither thither to fix unforeseen damage and shell out an whole lot of money on these pricey repairs.

Sometimes the seller will not disclose serious defects and may try to sell you off a home that is teeming with hazardous drawbacks (such as mold). A thorough home inspection carried out by an expert reveals any potential problems and walks you through the pros and cons of moving into a home of that sort. In case, the expert advises you to retract your decision to buy that home, consider rescinding the offer and getting your deposit back from the seller.

Another way out is to negotiate with the seller to make the necessary repairs or lower the selling price point.  Making this first time home buyer guide worth it’s time to read!

If you are successful in striking a nice deal with the deal, or if the inspection didn’t quite reveal any significant issues, you should be all geared up to close. Closing essentially means signing loads of paperwork in a short span of time, while praying earnestly that nothing falls out of the place at the last minute.

A few things that you will have to deal with and pay for in the last stages of your purchase might include having the house appraised (as mortgage firms require this measure to safeguard their interest in the home), doing a quick title search to ensure that no one apart from the seller has a right over the property, securing private mortgage insurance or piggyback loan, especially if the down payment is less than 20 percent, as well as finishing up the comprehensive mortgage paperwork.

Additional closing charges may include taxes, surveys, title instance, loan-origination fees, and credit-report fees


Question To Ask About The Listing Agent

How can the listing agent get the MOST money for the seller AND get the home buyer the BEST deal?

Who Is Involved In A Typical Real Estate Deal

Essential People To Home Buying

  • Home Buyer – That’s you.
  • Home Seller – The person or entity you are buying the home from
  • Buyer’s Lender – The entity that is loan the home buyer money to purchase the home
  • Buyer’s Real Estate Agent – Although, not required, it’s very common (over 80% of buyers have agents) and highly recommended.
  • Seller’s Real Estate Agent – AKA “Listing Agent.”  They represent the seller in the transaction.   For those that would think they can get a better deal from the seller’s agent, ask yourself this… “How can the listing agent get the most money for the seller and the best “deal” for the buyer?”
  • Home Inspector – Most home buyers get an inspection and you should too.  Inspections should be done by someone who is licensed, preferentially certified by ASHI (American Society Of Home Inspectors), and takes photos of all the problems.
  • Home Appraiser – Most lenders will require the home to be appraised.  Going into types of appraisals is outside this first time home buyer guide, but rest assured even though the buyer pays for the appraisal, the lender controls it.
  • Home Insurance Agent – if you are going to get a loan, chances are close to 100% you’ll need home owner’s insurance on it.
  • Closing Attorney or Title Company – Depending on your state you will have a “place” to close the transaction.  In Georgia real estate, it’s a closing attorney.  In Florida real estate, it’s a title company.  Still in New York there’s an attorney for everyone.   In most states, this entity represents THE LENDER, not the buyer or the seller.

Other Vendors Involved In The Real Estate Transaction

  • Pest Control –  In many states, a termite inspection is required or desired.  In other instances, an inspector may recommend a pest control person to investigate the infestation.
  • Mold Remediation – If the home has mold it’s likely you’ll be referred to a mold remediation specialist.
  • General Contractor or Construction Specialists – During your inspection you’ll find a ton of problems.  It’s just part of the home buying process.  Depending on the issue you may want to involve a contractor to get a quote or conversely the seller may engage a contractor to repair the items from the inspection.   This list could include HVAC Contractor, Electricians, Roofing Company, Painters, Carpenters and more.
  • Home Warranty Company – If you’re getting a home warranty then they will of course be involved, at least to the extent of collecting a check.

Third Parties That Are Indirectly Involved In Home Purchases

  • Loan Officer | Mortgage Professional – This is the person that likely talks to you in a friendly way and took your application.
  • Loan Processor – This person collects your financial documents and gets it read to submit to the lender’s underwriters.
  • Loan Underwriters – This person reviews your documents to ensure they meet certain guidelines and then submits it to the investors to see if your loan is worthy to be purchased and funded
  • Real Estate Brokers – They hold the real estate licensees license.  In a legal sense, home buyer and sellers work with the brokers and the brokers assign a “designated” agent to represent the client.
  • Appraisal Management Company – This company takes a chunk out of the appraisal fee in order to put a buffer between the lender, the buyer and the appraiser.  The theory is that this will ensure that the appraiser will not collude with the lender.  What happens in reality is that there is no accountability if the appraisal comes in incorrect because the appraiser answers to the appraisal management company and not the person who paid for the appraisal.