Steps to Buying Your First Home - 41 Steps to Success

1. Start saving your cash early on. You’ll need some money to put toward a down payment, and you’ll also need sufficient funds for your closings costs. Not having a down payment is a common obstacle for first-time buyers, so start putting money away early.

2. Get copies of your credit reports from all three reporting bureaus (Experian, TransUnion and Equifax). You are entitled to one free credit report per year, from all three of the bureaus. You can request these online through AnnualCreditReport.com.

3. When you have your credit reports, check them for accuracy. If you find any errors, correct them immediately. Errors on your reports can lower your credit score, and that will hurt your chances of getting a mortgage loan. The FTC website offers some great tips for fixing errors on your reports.

4. Check your credit scores too. These are different from your credit reports. If your scores are in the upper 600s or above, you’ll probably have little trouble getting approved for a mortgage. If it’s 650 or below, you should try to improve it as much as possible before applying for a mortgage. Related article: What credit score do I need to buy a home?

5. If you find that your score is low and you need to improve it, focus on that first before applying for a loan. If you boost your score, it will help you get approved for mortgage. It will also help you get a good interest rate on the loan. Follow the advice offered on this page to improve your score.

6. Lenders will also review your debt-to-income ratio when considering you for a loan. You can help your cause by paying down your debt as much as possible. Just make sure you don’t wipe out the cash reserves we talked about earlier — you’ll need those to cover your closing costs and other expenses.

7. It’s also a good idea to start learning the mortgage terminology or lingo. As a first-time buyer, many of these terms will be new to you. You’ll have a much smoother process if you speak the language. Do a Google search for “mortgage glossary” and you’ll find plenty of reading material.

8. Establish a home buying budget with a maximum amount you can afford to spend each month. Do this before you start talking to mortgage lenders. A mortgage company cannot tell you how much you can afford (that’s a dangerous notion). They can only approve or reject you for a certain amount. Establish your own budget.

9. To create your budget, take a look at how much money you bring home each month (net income), and how much you spend each month on expenses. Account for all of your expenses — bill payments, savings account contributions, entertainment spending, etc. What you have left over is what you can afford to put toward a mortgage payment. Do not exceed this amount when applying for a mortgage loan.

10. Aside from saving money and paying down your debt (both good things), try to keep your finances stable. Avoid opening any new credit accounts or loans. Keep your money where it is, and add to it. The more credit accounts you have, the more things you’ll have working against you when you apply for a mortgage.

11. Learn the difference between fixed-rate and adjustable-rate mortgages. Home loans come in many varieties, but in terms of the interest rate they can all be filed under fixed or adjustable. Some loans are “hybrids,” meaning they start with a fixed interest rate and then start adjusting after a few years. Learn the pros and cons of these mortgage types.

12. If you plan to stay in the home for a relatively long time (more than five years), you’re better off with a fixed-rate mortgage. Unlike the ARM loan, the interest rate on a fixed mortgage stays the same over the entire life of the loan. That’s what “fixed” means. This will protect you from future rate hikes.

13. If you know for certain that you’ll only be in the home for a few years, then the adjustable / ARM loan might be worth considering. You could save money with a lower interest rate on the ARM, and then sell the home before the adjustment or “reset” period. Just remember to do your homework. You need to know exactly how the ARM works in order to use it wisely.

14. Start gathering your financial documents so you can get pre-approved for a loan (more to follow on this). Among other things, the lender will want to see your W-2 statements for the last two years, pay stubs or other income verification, bank statements, and other financial documents related to your income and debt.

15. When you have completed steps 1 - 14 above, you’re ready to contact mortgage lenders. This is where you need to understand the difference between pre-qualification and pre-approval. With pre-qualification, the lender will conduct a quick review of your finances to see if they can work with you. If you clear this hurdle you can move on to the pre-approval, which is a more thorough review of your qualifications.

16. You should get pre-approved for a certain amount of mortgage loan before you start house hunting. It will help you narrow your home search to those you can afford to buy, and it also shows sellers that you are serious about buying (and financially capable of doing so). Additionally, some real estate agents will only work with buyers who have been pre-approved by a lender, to avoid wasting their time.

17. Getting recommendations from friends or family is one of the best ways to choose a real estate agent. This way, you’ll have some insight from a person you trust.

18. Choose an agent who has lived in your desired area for a while. If you work with somebody who has recently relocated into the area, you’ll both be learning your way around town. This is not something you want.

19. There are some really good agents, and there are some really bad ones (and all things in between). In this way, real estate is like any other industry. So do whatever homework is necessary to measure an agent’s skills and credentials. Speaking to a couple of their former clients is a great place to start. If they cannot offer you any names or email addresses, they probably don’t have any satisfied former clients!

20. Reading real estate blogs is another great way to judge an agent’s knowledge, skills and personality. Many agents publish blogs these days, and you can easily find them by doing a Google blog search. For example, I’m in Austin, Texas so I would do a search for “Austin real estate blogs.”

21. Remember, you may be working with your agent for a few weeks, or for a few months. So you need to do the proper research in advance to make a smart choice. Don’t just pick the first agent you come across — dig a little deeper to find out who they are and how they work.

22. First and foremost, stay within your budget. Your agent may show you some houses that are above or below your price range, to help you “frame” the right kind of property in your mind. But you need to remember that you’re only pre-approved for a certain amount. And you should never exceed the home buying budget you set for yourself back in step #8.

23. You’ll be more likely to find the best house for you if you combine multiple house-hunting techniques. Your agent will help you find properties that meet your needs, but don’t just rely on them. Use the Internet to research homes in your area. Websites like Realtor.com have plenty of listings with pictures, pricing and other details. Read the weekend edition of your local newspaper. Drive through the neighborhoods you like with an eye out for the “For Sale” signs.

24. Get a general idea of what homes are selling for in your preferred area. This will help you evaluate the asking price of any given property. Your agent will help you with this. But again, you shouldn’t rely too heavily on your agent. Educate yourself about local sales.

25. There is a big difference between the listing or “asking” price and the actual sale price. Many sellers price their homes above their actual market value. If you agree to pay too much for a house, it probably won’t meet the mortgage lender’s appraisal (described below). Measure the asking price against recent sales in the area. Based on that data, is the asking price reasonable, slightly elevated, or just plain ridiculous?

26. Bring a digital camera and a notepad with you on your house hunting trips. Taking notes and pictures of each home will help you recall the details later on. It also forces you to pay attention to the details, which is something that first-time buyers often overlook.

27. When you make an offer on a house, you need to consider the type of market you’re in. Is it a seller’s market? If so, you should offer the full asking price or close to it (if it’s a reasonable asking price). You should also move quickly to avoid losing the home to another buyer. If it’s a buyer’s market, you’ll have more bargaining power and more time.

28. Have your real estate agent show you recent and comparable sales in the area. These are known as “comps,” and they will help you prepare a realistic offer based on hard data — and not based on the seller’s wishful thinking.

29. When you make an offer on a home, you will have one of three outcomes: (1) The seller will accept your offer. (2) The seller will reject your offer. (3) The seller will make a counter-offer to negotiate some aspect of your original offer. You need to be prepared for each of these. Discuss each option with your agent, and what you plan to do next.

30. Make sure your offer is contingent upon a successful home inspection and appraisal. This gives you a way out of the contract if the inspector finds a serious flaw you’re unwilling to accept, or if your lender appraises the home below the asking price. Your real estate agent should do this as a matter of course, but you need to make sure.

31. You should always get a home inspection when buying a house, even if it’s brand new. Inspectors are trained to find structural and systematic flaws that the average person cannot see. The inspector will examine the roof, the foundation, electrical system, heating and cooling, etc.

32. Choose a home inspector that is certified / licensed by one or more professional organization, either the ASHI or the NAHI. In fact, you can use either of these two websites to find an inspector in your area.

33. If you get the chance, follow the inspector through the home during the course of the inspection. You’ll be the “maintenance supervisor” once you buy the place, so you may as well learn about it early.

34. I also recommend getting a termite inspection if you live in a state where termites are active (which is most states). You probably won’t pay more than $150 for this inspection, and it’s well worth the price. Termites can do tremendous damage to a home, so you need to know if the one you’re buying is infested or not.

35. Shortly after you make an offer on the home, the mortgage lender will have it appraised. They will send a professional home appraiser to evaluate the property against comparable sales. The lender does this to protect their interest in the home, and to make sure it’s worth the amount you’ve agreed to pay.

36. If the appraiser determines that the home is worth the amount you plan to pay, then you’re in good shape. But if it comes in “under appraisal” — meaning you have offered more than the current market value — you have another hurdle in your way.

37. When a home comes in under appraisal, the seller will generally lower the asking price to meet the appraised value. This allows the process to move forward. If a seller refuses to lower the price, you should seriously consider walking away from the deal. It’s rarely a good idea to pay more for a home than it’s worth. This creates a negative equity situation, right from the start. This is why your initial offer should be contingent upon a successful appraisal.

38. You can prepare for this process by staying in close touch with your escrow officer and real estate agent, and by continuing to save money. I touched on the money side of things in step #1 above, and there’s a reason I put it first on the list. You’ll have to bring a cashier’s check with you to pay for closing costs, so be sure you’re saving your cash leading up to this point.

39. A day or two before the closing date, you should receive what’s referred to as a “HUD-1″ settlement statement. This document will outline the exact closing costs you’ll have to pay. You can get a cashier’s check in this amount and bring it to the closing with you.

40. During the closing / settlement proceedings, you’ll be asked to sign a lot of paperwork. Don’t sign things blindly. Take the time to read these documents, especially the bottom-line figures you are paying, the interest rate, and other financial items. You can even arrive early to review these documents, if the escrow company allows it. I strongly encourage you to do this.

41. After all the paperwork has been signed, and all monies have been properly distributed, you’ll receive the keys to your new place. Congratulations! You are now a homeowner.