Buying a house, it’s a rite of passage and a HUGE deal for any first time home buyer. In fact knowing how to buy your first home is probably one of the bigger more elaborate things you can ask, and we are going to break down the home buying process for you step by step so you know exactly what to do.
Starting Out: The Steps Before You Can Start Buying a House
The steps to buying your first home are pretty standard. But before you rush out to start putting down offers on your first home you need to have a few things in order. The first step in buying a home probably is one you have never considered. We know you have been having buying house dreams but these are the first steps to making those dreams a reality.
Check Your Credit Score
Your credit score can have a huge impact on your first-time home buyer process. A bad credit score can mean a higher interest rate, which means a higher payment and translates into a lower amount of money being loaned to you in the form of a mortgage.
It can take time to improve your credit score but it’s worth doing. Pull your credit score from Credit Karma and see if there are any items that need to be address and start tracking it using Credit Karmas free app.
Once you start tracking your credit score you will know your debts on your credit cards and other loans you have outstanding. Plus you can start to pay these debts off and build your credit score. Increase your monthly payments to get these all paid off and your credit score can climb. Doing this will get you a lower interest rate on your mortgage.
The next step after you look into your credit score, is to start saving up for your down payment. This can take some time but it’s worth it. Knowing how to save for your first house is important because buying your first home means your finances change (things are more expensive as a home owner).
If you need help saving up for your down payment you should check out our down payment accelerator it’s designed to help you save up your down payment fast!
Create a New House Budget
While you are saving up your down payment the next part will be getting your finances in order. This is the most critical step and many avoid it because it can seem overwhelming. Luckily for you, we’ve created a guide to help you get started. It’s called Affording Your First Home it’s a guide to help you get a handle on your homeowner finances. I can’t tell you how many people I’ve talked to who are trapped by a bad mortgage and it’s because they didn’t take the time to do this. Before you go buying your first home take the time to do this step.
These first 3 steps are the first steps in buying a home. They will help you form a solid foundation. Once you know how much of a home you can afford safely, the process of buying a first home is so much more fun!
How To Buy Your First Home Part 1: Assemble Your Home Buying Team
Buying a house means you’re going to need the help of experts. There’ s no way around this. But it’s a lot easier than it sounds. Here are some of the people you will need.
- Real estate agent
- Bank (or mortgage broker depending on which country you are buying a house in)
- Home Inspector
- Step 1: Start screening the professional (You can use the sheets in our guide:
- Step 2: Come up with a short list of potential real estate agents/mortgage brokers/lawyers.
- Step 3: Email your potential candidates – using our templates (in this guide).
- Step 4: Interview them on the phone with our questions.
- Step 5: Select the best one for your needs.
Do I Need a Real Estate Agent?
Finding a real estate agent is your first step towards buying your very first dream home. Often, first time home buyers ask: “Do I need a real estate agent?”
In short: Yes.
Hiring a real estate agent ensures you have a professional in your corner guiding you through the maze of first time home buying. You can attempt to do it on your own, but that often opens you up to many potential pitfalls that a real estate agent can help you avoid.
There are some easy ways to find a good real estate agent for your first time home buying team. A good one will make the buying first home experience great (you can find out what happens when you don’t hire a bad real estate agent here).
We’ve made a guide and worksheets for this too. It’s called How to Build Your Home Buying Team and gives you all the questions you can ask to help build your team and what to look for in the answers. . Simply enter in your notes any information about them and note down anything you will need for later.
How to Find a Lawyer?
The truth is, a home purchase is a pretty straight forward transaction for a lawyer to work through, but it can still feel challenging and complex.
That’s because it’s new to us.
For most first time home buyers this might also be one of your first dealings with a lawyer. Given that this is likely one of the largest purchases you will make, you want to make sure you’re represented properly. Read this post on how to find a lawyer when buying your first home, it’s got great questions to ask and where you can find one.
Should I Use My Bank Or A Mortgage Broker?
For some reason, many people have a sense of security from dealing with a bank that makes them question using a mortgage broker. Many people tell me they want to use the bank they’ve been using since they were a kid, the bank that their parents have been using for 30 years.
Somehow people believe that being a long-time customer is going to get them a better rate, or better terms. I hate to be the bearer of bad news, but it’s not likely.
There are several reasons you can go with either one, read bank versus a mortgage broker to see which one is best for you.
IN the US most people use online mortgage sites to help them find the best rate and the best deal. There are plenty of online mortgage brokers to choose from. In Canada, using a mortgage broker is still pretty common and they can help you find a better deal than what your bank may offer you. So make sure you do your due diligence when it comes to finding the right person.
How To Buy Your First Home Part 2: Mortgages for the First Time Home Buyer
Getting Your Mortgage Ready
You will need to know your mortgage basics before you find out how much house you can afford. There are several options for the first time home buyer when it comes to mortgages. There isn’t necessarily one that is better than the other, perhaps one that might be a better fit for you.
Things like fixed rate mortgages versus FHA ( federal housing administration ) mortgages and all of this is for another article. for now you need to know the basics.
2 Parts to a Mortgage
We talked earlier about saving up for your down payment but let’s recap.
Everyone knows you can simply save up the money you need for the down payment (use this down payment calculator to help you out!), but that can be easier said than done and many people don’t realize there are other options. Saving for a down payment is pretty straightforward when you know how much you need.
If you are wanting to boost your down payment savings check out our down payment accelerator.
This is the part that the bank will lend you. Be sure to know how the closing costs are being factored in and if your bank will need mortgage insurance or if you can get private mortgage insurance. The mortgage will be based on an income ration and can be a fixed or variable rate mortgage.
Example of a House Purchase
Because everything is easier with examples. Let’s say you have a $15,000 down payment on a $100,000 house. You will get a mortgage for $85,000 (purchase price of the home less the down payment). From that you will still need to pay closing costs, and get mortgage insurance over and above the mortgage amount.
One last thing about Mortgages
When you start to look around you can get pre-qualified for a mortgage or pre-approved. They are not the same thing.
First of all, what’s the difference between mortgage pre-qualification and pre-approval? To save you the details you need to be pre-approved, getting pre-qualified has no weight to it and because there is no verification it has as much weight as a simple online mortgage calculator.
How To Buy Your First Home Part 3: How To Find Your First House
What To Include On Your Real Estate Agent’s Initial Home Search
Searching for a house would take forever without knowing a little bit of what you want. That’s why your realtor will discuss with you wants and needs. The following are the items you should be considering when giving your real estate agent a search criteria. They will use this to create a custom search for you and you will be notified when new houses come up for sale.
1) Square Footage
This doesn’t need to be an exact number, but you should have a range of where you’d like to be.
A few things to consider with square footage:
• Basement square footage may not be included in the total
• Outside storage like sheds and garages does not count in the total
• Consider the house buying timeline for your first house – is it a 5-year house or a 30-year house? Depending on your timeline you may be able to do with less house.
2) Number of Bedrooms
Consider not simply what you need now, but any future plans for children. Are you thinking of renting out a room or taking on roommates to help pay the bills?
Like square footage, if you’re buying your house for the long-term, you may want to think about how many rooms you will need.
As mentioned above, consider if you need an office in your home, one of the bedrooms might end up being used for that.
One last note, for a basement bedroom to be considered a “true bedroom,” the windows must pass egress. This means, that there could be useable rooms that aren’t considered actual bedrooms in the house listing.
3) Number of Washrooms
Make note of the type of plumbing fixtures in each washroom. A home could have 4 washrooms with only 1 shower and no bath tubs.
4) Age of Home
This is a decision that should be made based on the number and extent of the upgrades and repairs you intend to do. There’s nothing wrong with older homes, as long as you know that the upgrading costs will be more than with a newer home. However, this should be reflected in the price.
Take the following into account
- Crime rate
*Bonus points: When you’re picking an area, it’s a really good idea to spend some time in the neighborhood. Visit it at different times of the day on different days. This will give you a better idea of the people and amenities that are available to you.
6) Price Range
At this point you will have been pre-approved for a mortgage and should know what the bank will afford you. Remember that this is not what you should necessarily spend, but what the bank is willing to lend you.
Make sure to maintain some wiggle room here. Many people set up a search right up to their maximum budget, and are forced to pass on houses that they fall in love with because there’s an extra few thousand dollars of extras needed once the house is purchased and there is no room left in their budget.
7) Does the House Have a Garage or Not?
If you want your new home to have a garage, it’s best to know what type you want. Some features to consider include:
- Number of cars
8) Finished Basement
This is usually a bonus. A finished basement can mean more space, while an unfinished basement can mean developing exactly what you want at a later time.
9) Would Be Nice Items
These are the items that would be great if you got them, but they aren’t on the “must have” list. Things you may want to include are items like:
• Hardwood floors
• Newer appliances
• Deck or patio
Things to Look for When Viewing a Home for the First Time
When it comes to looking at a home for the first time there are a lot of things to consider. Sometimes we need to think about what is missing as much as what is there. There are severals things to look for when viewing a home. Read this post for everything you should be looking for when you first start looking at houses.
Home Walkthrough Worksheet
How Involved Should My Parents Be In My First House Purchase?
This question is such a struggle for so many. Where do you draw the line?
Add in another dimension, if you’re buying with a significant other, and there is the potential for two sets of parents to be involved in the process. This means, you’ve gone from having two people that need to agree (which can be hard enough) to six people giving their two cents.
Is there a ‘right’ way to navigate this? Some parents may be offended if you don’t involve them, and others have a way of involving themselves whether you want them to be or not. The tough part is having them involved when you want them to be, and having them give you some space when you don’t. Read the article: How Involved Should My Parents Be In My First Home Purchase? to get an idea of the pros and cons.
Red Flags You Need To Know When Buying Your First Home
Not everyone can have the eye of a home builder when it comes to house shopping. Because of this, many people are nervous and think they might miss something important that could cause a lot of problems and cost a lot of money down the road.
Here are 5 things you should always look for in a home and definitely get a home evaluation and a contractor to look at if you plan on going ahead with a home.
- Bowed or curved roof lines
- Bowed in foundation walls
- Uneven floors
- Water in the basement
See this article 5 Things to Avoid when Buying a House for all the details. Another thing you can do is grab our free home inspection checklist and use that as a way of filtering whether you should pursue the house further or not.
First Time Homeowner Story
When we were buying our first home, we were awoken by a firetruck in the middle of the night. Turns out we were a block away from the firehall. We were also closer to a few schools and had the buzzer bells going off through the day. It wasn’t a big deal for us, but if I worked an evening shift, those sirens would definitely have kept me up.
Even though I had lived in the area my whole life, I had completely overlooked what types of noises, people and places were around our new home.
Eventually, we got used to the sound and slept right through, but the first six months were rough!
If you want a more detailed guide and worksheets to help you navigate buying your first house check out our guide Buying Your Home with Confidence.
How To Buy Your First Home Part 4: Making an Offer
Once you know you’ve found the right house there are a few things to make sure you are ready to make an offer. Namely the costs of the home.
Understanding the Costs of Being a Homeowner
There are many extra costs of being a homeowner. It’s not as simple as swapping your rent for a mortgage there are other things that come up. To get a better idea of different home owner costs read: The 20 Costs of Being a Homeowner.
The best thing you can do is to take time with a house affordability mortgage calculator to see what you are comfortable with. Make sure you know all the costs of the home before you move and understand the repairs that may come up in the first 5 years
Making An Offer and Closing on a House
This is where things get real for a lot of people.
Up to this point it’s been lots of looking and researching, but no commitment, which can make this part particularly stressful. In an effort to help you navigate some of the stress, we’ve outlined a few important considerations below.
How to Purchase Your First Home: How Much Should You Offer?
There are several factors to take into account when deciding how much to offer:
1. What’s your budget? Many people think that the only thing that matters here is that the offer isn’t higher than the number that the lender pre-approved. Make sure you consider all the variables – what if they counter offer? Are there any improvements to be done? Are there any other costs or expenses that you want your mortgage to cover? Make sure you leave room for these line items in your budget. Some of these details can be outlined before you set your price range, while others will be specific to the property.
2. Items that need immediate remediation. I’m not necessarily talking about renovations here, but items you feel should have already been dealt with for this home to be on the market at the price it’s listed. For example, if you check the faucets and one is leaking, or the drain is slow, these are regular maintenance items that you shouldn’t have to pay to fix. You should have a basic list of this from your walk through inspection. You can subtract the cost of these fix-ups from your offer, if the price of the home does not already reflect this.
3. What’s market value? It’s really important to have your real estate agent check out comparable houses in the area to make sure you’re not paying above market value. If anything happened after purchased the home and you needed to sell, you’d hate to have to sell at a loss. Ideally, you would buy below market value to try and build equity, although I realize that’s easier said than done.
4. How much do you love the home? While being mathematical to a certain extent is definitely important when coming up with an offer amount, we do need to put some weight on how you feel about the home in general. Are you absolutely in love with it, or does it just fit your needs? I suggest you not give too much weight to this, as it usually ends up with over paying for something, but it’s still important to consider. Generally speaking, the less emotional you are about a purchase, the better deal you’ll get.
5. Is there potential to easily increase value on the property? Give some consideration to how value could be added to the property and how easily it could be done. You may pick up on something that others have missed. Sometimes with a little foresight and thinking outside the box, a mediocre deal can turn into a great one. Keep in mind, most people don’t stay in the same home forever and the easiest way to upgrade to a bigger or nicer home in the future, is to build equity in the home you have.
When you put in your offer, you will be required to give an earnest money deposit. The amount of this deposit will eventually be subtracted from your down payment and is usually1-2 percent of the total property value (although some markets can be up to 5 percent).
If your offer is accepted, the deposit will be held in an escrow account until closing (see the section “What the Heck is Escrow” in this module). Never give the deposit directly to the seller. If the deal doesn’t go through for whatever reason, you could have a hard time getting the deposit back.
Sometimes by putting down a larger deposit, it shows the seller that you’re more committed to making the deal go through and satisfying your conditions of the contract. Therefore increasing the likelihood of your offer being accepted.
What Should Your Offer Be Subject To (conditions, contingencies)?
Conditions or contingencies are responsibilities that need to be met by the buyer, seller or both. The sale of the home will not close until all conditions have been satisfied.
1. Financing. Even if you’re pre-approved for a mortgage, your offer should always be subject to financing. And just because you’ve been pre-approved, it isn’t a guarantee. Pre-approvals are done based on information you’ve provided to the lender, and the lender will not necessarily do the background check to confirm the information is correct until you have a real deal pending. The lender will also want an appraisal done to verify the value of the home. If the appraisal comes in low, the lender will not approve the financing.
2. Appraisal. Even though the lender will not over lend on the property, it’s still important to have an appraisal as a condition on the property to avoid any grey area.
3. Home Inspection. We strongly recommend a proper home inspection is completed by a professional. This inspection will confirm that the property is in good condition, or will point out any repairs needed that were not disclosed by the seller.
Even though you have also already made an offer for a certain price, the results of the inspection can still be used as a bargaining tool to either get the seller to fix the issues or drop the price so you can fix them. Either way, the seller is responsible to deal with any undisclosed issues found in the inspection, whether that be by directly fixing the issues, or decreasing the price to compensate.
4. Sale of an existing home. If you have an existing home that you’re trying to sell, it has become popular in some markets to put the sale of the home you’re buying as contingent on the sale of the home you’re selling. This only works in slow markets however. In a seller’s market, this condition would never be accepted.
5. Third party inspection or approval. This is basically an out for the buyer. If something changes in the mind of the buyer after the offer is accepted, they have an out in the way that this third party could be a friend or relative who could come in and say they don’t approve of the property for whatever reason. Again, in a seller’s market, this condition will rarely be accepted.
6. One last thing: it’s a good idea to include, as part of the contract, some sort of agreed upon access to the home while waiting for the actual possession date. This will allow you to take measurements for furniture, drapes etc. and also give you the chance to bring in any trades people if you’re planning on having any work done when you get possession. By planning for this ahead of time and allowing them to see the property, it will ensure they’re prepared, most likely resulting in an expediting process after possession. They will be able to order any materials needed ahead of time instead of waiting for some product on back order while you’re waiting to move into your new home.
What is Escrow?
We all hear this term thrown around when people are talking about buying or selling a house. It’s used as if it’s common knowledge, and if you’re like me, the first few times you heard someone talk about it, it felt like something you should already know and felt silly asking what it meant. For more on what is escrow click here.
First Time Home Buyer Story
When I sold my first house the women who bought it was a single mom with a special needs child. She needed a fence built in the back yard to keep her son safe, as he liked to take off on her. She decreased her offer by $2,500 dollars to have money left in her budget for the fence.
The offer was still in the range that I was willing to accept, and I was appreciative of her being honest with regards to her explanation of why she was offering what she was, so we made the deal.
In hindsight the reason for a buyer offering what they offer should be irrelevant to the seller, but somehow it made me feel better than someone just “lowballing” me.
Don’t forget about the human element here. An explanation of why your offer is what it is can sometimes make a difference.
What To Do After Your Offer Has Been Accepted
Now that your offer has been accepted (YAY!), it’s time to satisfy your end of the conditions in the offer.
1. Book the inspection.
By now you should already have this contact in your phone. When the inspector shows up, walk through the home in person so they have the opportunity to point things out and explain them. It’s much easier this way, rather than reading a report later that might not make much sense. Don’t be afraid to ask question, this can be a great learning experience for you and it’s your home, you want to know all about it. You may even be able to add some extra notes on to your DIY home inspection checklist as you go. Nothing beats hands on learning from a professional.
Learn more about how to find a home inspector here.
2. Get your financing approved.
Go visit your lender and do the final approval for financing, then provide the information to your real estate agent and lawyer.
Once the offer has been accepted, the lender should also arrange for the appraisal of the property. The appraiser will do their inspection and report back the value. If the value comes in lower than the offer price, use this as a way to drop the offer to the appraised value. If the appraisal came in low, then the contingency of appraisal will not be able to be met, essentially nullifying the contract unless you decide to waive the contingency (which, based on our experience, you shouldn’t).
Many people get totally stressed when an appraisal comes back low, but it can in fact work out to your benefit as you may get the property far cheaper than you thought.
If the seller however, isn’t willing to drop the price to the lower appraised value, you’ll have two choices – (a) either come up with the difference out of pocket (the lender won’t give you any more than the appraised value), (b) or walk away from the deal
4. Contact your lawyer.
Call up your lawyer and provide them with the property details, so they can start putting together their end of the paperwork to complete the deal.
Contact your insurance company and provide them with the property details. They can then put together a policy for you which you’ll provide to the lender and your lawyer
What To Do Before Possession
After the conditions of the contract are satisfied and everyone has filed their paperwork, there will likely be some down time while waiting for the actual possession date to come (the day you get the keys), another exciting moment in the process. There are a few things you should get done in this “down time.”
1. Book the mover.
First of all you will be moving! Take a look at our moving timeline, it has a checklist of everything you need to do up to moving day. You should start gathering free moving boxes as well as putting everything in a moving binder to keep organized. It will be a busy couple of months but with some planning and organization you will be great!
2. Order any furniture and appliances needed.
Some of these things can have a 6 week lead time, so consider this when you’re planning. You already included in your contract to have access to the home, so go take measurements and get this stuff ordered. I’ll say again GO TAKE MEASUREMENTS. All appliances are NOT the same size. There are some common sizes, but you need to check before you order. If you are wondering what you will need for your first house, we have a new house checklist to help you.
3. Arrange any services that need to be transferred and book the appropriate people.
These might include: hydro, alarm, tv, internet, phone, satellite etc. We cover all of this in our Millennial Moving Binder.
4. Book any trades people for work you’d like done right after possession.
This should include someone to change or re-key the locks when you move in, if you’re not doing it yourself. There are a lot of things to do after you move in. If you plan on doing renovations after you move in it’s a good idea to have a renovation budget, this template will help. Of course you can plan everything out with this binder.
Congratulations! You Made it Through First Time Home Buying 101
This is an extremely long article but it’s worth the time. You now know how to buy your first home, and realized that buying a home isn’t hard, once you break out all of the different pieces.
Buying a home is a milestone and a rite of passage. When you reach it you should be very proud of what you have done.
This brings us to the end of our journey together and the start of a whole new journey. To help you get through the home buying process we have created a suite of products and guides that can help you. They can be found in the shop. Enjoy!