How to Purchase a House for the First Time

by Brandon Cornett, Home Buying Institute, © 2009

Summary: Purchasing a house for the first time can be a nerve-wracking experience. But it doesn't have to be. In fact, the more you learn about the process, the more comfortable you will be pursuing it. So in this article, I'll explain how to purchase a house in step-by-step fashion. Let's get started.

This process will vary from one home buyer to the next. But the basic steps are the same. Additionally, some first-time buyers will skip one or more of the steps listed below. For example, a lot of people skip the budgeting process described in step #3. But this is a mistake. If you want to purchase a home the smart way, you should go through all of the recommended steps below, in the order they are presented. You'll be more successful if you do.

Steps to Purchasing a House

Want to know how to purchase a house the right way? Here are the ten steps to success.

1. Start saving money.

This might seem like a no-brainer, but it goes beyond the obvious. There are several reasons you need to save money before purchasing a house for the first time.

The down payment is probably the first thing that comes to mind. If you use an FHA home loan to purchase the house, you can probably get by with as little as 3.5% down. But if you use a traditional mortgage loan that's not insured by the federal government, you'll probably have to put at least 10% down.

You'll also need money to cover your closing costs on the home. These include a wide variety of fees, taxes and other expenses. They can add up to about 3 - 5% of the total loan amount, and they must be paid on closing day. This means you will actually present a cashier's check for the amount due.

There's a reason I put this item first on the list. Before you try to purchase a house for the first time, you need to start saving your money. The sooner the better. Smart home buyers know this, so they start putting money away months or even years before entering the market. This is the best-case scenario for purchasing a house.

2. Check your credit.

When you approach a mortgage lender to apply for a loan, they will review two things above all else: (1) your income relative to your debts, and (2) your credit score. The first item helps them measure the amount you can afford to borrow. The second item (credit history) shows how you've managed your credit in the past. Lenders use this to assess the risk associated with lending you money.

Let me translate this for you. If you try to purchase a house with bad credit, you will face a lot of obstacles. If your score is below a certain point, you probably won't get approved for a loan at all. And if you do get approved, you'll pay a higher interest rate than somebody with good credit. So before you try to purchase a house for the first time, you need to check out your credit situation.

There are actually two things you want to check:

• Your credit report. This is a record of your credit history, dating back to the very first account you opened. You have three of these reports, one for each of the credit reporting companies (TransUnion, Experian and Equifax). You can request all three of them for free by visiting AnnualCreditReport.com.
• Your credit score. This is a numerical score based on the information contained within your credit reports. This is the number lenders will use when considering you for a loan. You can get your scores from this page of our website.

This item is listed in the number-two position, because it's another step you should take sooner rather than later. If you check your score and find out that it's low, you'll need to take certain steps to improve your credit before you purchase a house. It can take time to make such improvements, so you want to start early.

3. Establish your budget.

How much can you afford to pay toward your mortgage each month, given all of your other monthly expenses? You need to answer this question before you try to purchase a house or apply for a mortgage loan.

Let me say that again, because it's a point missed by a lot of first-time buyers. You need to establish a monthly budget for yourself, before you start talking to lenders. A lender cannot tell you how much you can afford to pay each month. They can only say what amount they're willing to lend you. Take a look at the rate of home foreclosure in this country, and you'll realize the difference between mortgage approval and affordability. They are two different things entirely.

To establish your budget, you would start by subtracting your monthly expenses from your net monthly income. And don't forget to account for those quality-of-life expenses you make every month (movies, dining out, etc.).

Here's an article that explains how to establish your budget:
How Much House Can I Afford to Buy?

4. Get pre-approved for a mortgage.

There are two important numbers to keep in mind as move forward in the purchase process. The first number is the monthly spending limit you established in step #3 above. The second number is the pre-approval amount. Getting pre-approved by a mortgage lender is fairly simple. You would call or visit their website and tell them you want to get pre-approved. They will set up an appointment for you. The lender will review your financial situation and give you a maximum amount they're willing to lend you.

The second number might be higher than the first number. That is to say, you might get pre-approved for a mortgage that would exceed your monthly spending limit. If this happens, you need to stay within your own budget.

This process helps you in two ways. It gives you an idea of the mortgage amount you can get (approximately, at least), and it will also make sellers and their agents take you more seriously. If a sellers gets two similar offers from two different buyers -- but only one of them has been pre-approved for a sufficient loan amount -- they are more likely to accept the offer from the pre-approved buyer. The other buyer is a complete unknown, in terms of financing.

Some people will skip this step as well as step 3 above. They will start the house hunting phase (step 7 on the next page) with no idea what they can actually afford to spend. But this is a lesson on how to purchase a house wisely, so I'm covering all of the important steps for you.

Continued >> Steps 5 - 10