Editor’s note: This is part one of a two-part series of tips for first-time home buyers. You’ll find the second part of this tutorial on this page.
I recently had lunch with a friend who was planning to buy a house. As a first-time home buyer, he had a lot of questions about the process. So I jotted down some notes to help him understand how it works. Halfway through the conversation, he stopped me to ask a question: “Do you share this kind of information with your website visitors?”
I explained that there was plenty of information for home buyers, spread throughout the website. “But you should compile it all into one document like you’ve done for me,” he said. This tutorial is the result of his recommendation. Below, I’ve compiled 57 tips for first-time home buyers in 2012.
Stage 1 – Preliminary Steps for First-Time Home Buyers
The tips compiled below relate to the initial stages of the home-buying process. Many first-time home buyers think that the process begins when they start shopping for a house. This is not the case. There are some preliminary steps you must take before you look at your first house.
Advance preparation tips for first-time home buyers:
- Start a housing fund. You’re going to need money to cover a variety of things when buying a house. You’ll have to make a down payment of some kind, unless you use the VA loan program or the FHA program. You’ll also encounter closing costs and moving expenses. These days, some mortgage lenders are requiring additional cash reserves beyond the items we just covered. The sooner you start saving money for this process, the better off you will be later on.
- Clean up your credit report. Your credit report is a historical record of how you have borrowed and repaid the money in the past. This information is used to produce your credit score, which is used by mortgage lenders when considering you for a loan. Negative information in your credit report can result in a lower score. This can hurt your chances of getting a home loan. All first-time home buyers should review their credit reports for errors and inaccuracies. Here’s how to do it.
- Check your credit score to see where you stand. This is a particularly important topic for first-time home buyers in 2012. Mortgage lenders are requiring higher credit scores today then they did in the past, during the housing boom. If your score is below 600, you may have trouble qualifying for a home loan. You can learn more here.
- As a first-time home buyer, you must also understand the relationship between credit scores and mortgage approval. Lenders use your credit score as a risk-analysis tool. It will determine whether or not you qualify for financing, and also what kind of interest rate you can get on the loan. So this three-digit number is critical when buying a home.
- You need to establish a monthly housing budget that includes your estimated mortgage payments, while allowing for savings contributions and quality-of-life expenditures. This should be done before you start talking to lenders. Many first-time home buyers skip this step entirely. And that’s a big mistake. Without a budget, you could end up taking on a mortgage loan that’s too big for you. Learn more here.
- When establishing your budget, be sure to include your estimated utility costs, homeowners insurance, HOA fees, and property taxes. First-time home buyers often overlook these expenses, because they are more accustomed to renting than owning a home. Home ownership comes with some extra expenses, and you need to incorporate them into your budgeting process.
- Start studying your mortgage options. As a first-time home buyer in 2012, you will have fewer options to choose from. That’s because a lot of mortgage products disappeared in the wake of the housing crisis. In one sense, this is a good thing. It means you have less homework to do, as far as researching the different types of mortgage loans. You should study the differences between adjustable and fixed-rate mortgages, and conventional versus FHA loans. Get started here.
- Think about your long-term plans. How long do you think you will live in the house, realistically? This will help you choose the right type of mortgage loan for your particular situation. For example, an adjustable-rate mortgage (ARM) loan is generally not a good idea for a long-term stay.
- Make a list of your housing needs. This is a critical item for the first-time home buyer. Add this list to your housing file, which should include the other paperwork we’ve discussed in this article. You can also give a copy of this list to your real estate agent when the time comes. Your housing needs should include your desired location, the size of the house, the types of features you need, etc.
- Consider making an appointment with a HUD-approved housing counselor. First-time home buyers in 2012 can use these services for little or no cost. You can find an approved counselor in your area by using the HUD website. You should tailor your search to find counselors that offer “pre-purchase home buyer education workshops.” Just by spending about three minutes on the HUD website, I was able to find six counselors that offer these workshops within driving distance.
- Download a free copy of our 2012 Home Buyer’s Guide. This e-book contains more than 180 pages of useful information. You can save it to your computer and refer to it as needed during the process. It’s an essential tool for first-time home buyers and mortgage shoppers.
- Start gathering your financial documents. You will need these documents during the second stage of the home-buying process, which is explained below. When you submit a mortgage application, you will be asked to provide a variety of financial documents as well. Here is a list of paperwork you should be rounding up.
Stage 2 – Mortgage Applications and Pre-Approval
Since 2006, we have published hundreds of pages of advice for first-time home buyers. But we always seem to come back to certain key concepts. Pre-approval is one of those concepts. It’s a crucial step in the home-buying process, and you will soon understand why.
Mortgage-application tips for first-time home buyers:
- Get pre-approved for a mortgage loan. If you start shopping for a home before you’ve been prea-pproved by a lender, you are putting the cart ahead of the horse. You need to start by finding out how much money you can borrow. And you can do this by getting pre-approved. Every first-time home buyer in 2012 can benefit from the pre-approval process. It will help you identify any qualification problems you have (such as a low credit score), and it also helps you establish parameters for your housing search. You can learn more about it here.
- Real estate agents won’t take you seriously until you get pre-approved by lender. Put yourself in their shoes and you’ll understand why. They don’t want to spend a lot of their time working with a buyer who might not even be qualified for financing. Would you?
- The same goes for sellers. They will take you more seriously if you’ve been pre-approved for a mortgage loan. A pre-approval letter tells the seller that you have been screened by a mortgage lender and will likely receive financing. Obviously, this is something the seller wants to know.
- You should understand the differences between pre-qualification and pre-approval. I recommend that first-time home buyers skip the first option and go straight to pre-approval. Pre-qualification is when the lender takes a quick look at your finances to determine if you’re qualified for a loan. It is not nearly as useful as the pre-approval process. Pre-qualification is basically a lead-generation tool for mortgage lenders. They use it to attract potential borrowers. It doesn’t serve much purpose beyond that.
- Don’t apply for a home loan until you have a budget on paper. We talked about the importance of a housing budget in the previous section of first-time home buyer tips. You need to have a maximum monthly budget in mind before you apply for a home loan. Here’s why…
- Believe it or not, it’s possible to be over-approved for a mortgage loan. This is when the lender approves you for an amount that stretches your budget to the limit. You’ve probably heard the term “house poor” before. This is when your monthly mortgage payment uses up so much of your income that you have little to no money left over. Nobody wants to be in this position.
- Get offers from several lenders. First-time home buyers often go with the first lender they speak to. This limits your ability to spot the best deal. How do you know if you’re getting the best terms if you only have one offer? If you get offers from two or three lenders, you’ll have an easier time spotting the best deal.
- First-time home buyers need to understand that pre-approval does not guarantee financing. It is a conditional form of approval that can be taken away just as easily as it was given. Pre-approval is helpful, and I highly recommend that you go through the process. But you must realize that it’s not a commitment to lend. We will talk about some of the things that can go wrong between pre-approval and final approval later in this tutorial.
- When shopping for the best mortgage deal, consider small banks, local lenders and credit unions. Don’t limit yourself to the “big 3” mortgage lenders (Bank of America, Wells Fargo, JPMorgan). We have heard numerous stories from first-time home buyers who were turned down by a major lender, but later approved by a smaller bank — and vice versa. So don’t limit yourself to the larger lenders. Get quotes from a range of different banks and mortgage companies.
Stage 3 – Tips for Choosing an Agent
The first-time home buyer tips below will help you find the right real estate agent. First-time buyers in 2012 should have professional help. The real estate world has changed dramatically over the last few years. Home prices have declined in most parts of the country, and many of the mortgage rules have changed as well. An experienced agent can help you navigate the process from start to finish.
Tips for choosing an agent:
- Make sure you get pre-approved for a mortgage loan before you try to find an agent. We mentioned this in the last section of home buyer tips. Real estate agents are hesitant to work with first-time buyers who have not been pre-approved by a lender yet. That doesn’t mean they won’t talk to you — it just means they probably won’t spend a lot of time helping you. These tips are presented in a certain order for a good reason.
- Find an agent that specializes in helping first-time home buyers. Some agents prefer to work with sellers only, because it’s less work for them. The buyer’s agent typically does a lot more legwork. They have to drive their clients around, look at lots of different houses, write up the offer, etc. You want to find an agent who is not only willing to help first-time buyers, but one who specializes in it.
- Find an agent that focuses on your target area. By this, I am referring to the particular neighborhoods or parts of town that you are leaning toward. This will take some of the research burden off of you. The agent will be very familiar with local schools, neighborhoods and other factors that are important to you. The agent will also be better equipped to locate a neighborhood or subdivision that matches your lifestyle. Some agents will list their areas of focus on their websites.
- Consider using an exclusive buyer agent (EBA). This is a real estate agent who works with home buyers exclusively. In some cases, an agent might work with sellers and buyers at the same time. This can create a conflict of interest. When using an EBA, you know that the agent truly has your best interests at heart.
- You can find an exclusive buyer agent in your area by visiting their organization’s website. Just visit www.NAEBA.org and do a search for your city.
- Find an agent that publishes a real estate blog. There are two reasons for this. First, you can get a feel for the agent’s knowledge and expertise. You’ll also be able to research the local housing market. Many agents offer first-time home buyer tips and advice from their blogs, as well. This information will likely be tailored to your local housing market. It also shows you that the agent is tech-savvy and up to speed on current developments.
- Get referrals from family, friends or coworkers. This is arguably the best way to find a real estate agent in your area. The obvious benefit is that the recommendation comes from someone you know and trust. Do you use Facebook? If so, you can post a note about your home-buying plans. You’ll be surprised at how many people want to help you. This is a great way to find a good agent.
This is the first in a two-part series. Be sure to read part two for dozens of additional tips for first-time home buyers. In the second part of this tutorial, you’ll learn some helpful tips for house hunting, making an offer, mortgage underwriting and closing.
Stage 4 – The First-Time Buyer’s Guide to House Hunting
The tips below all relate to the house-hunting process in some way. At this stage, you’ve established a housing budget and been pre-approved by a mortgage lender. You’ve also found a real estate agent to help you through the process. Now you are ready to start looking at houses, which is the most exciting part of the process for most home buyers. Here’s how to do it the right way.
House-hunting tips for first-time home buyers:
- Before you start looking at homes, get a feel for property values in your area. You can do this by looking at recent sales data online. Your real estate agent should help you with this. You need to have some familiarity with home prices in your area so you can spot a good value versus an overpriced home.
- Don’t expect a single home to check all the boxes for you. Be flexible and open-minded. Most first-time home buyers have to make a compromise of some kind. It’s rare to find a house that meets every single item on your wish list.
- Expand your horizons in terms of price, location, and the features of the house. This piggybacks on the item we discussed above. There is a very good chance you will have to compromise on one of these factors. For example, you may find a house that meets all of your needs and falls within your budget–but it’s a few miles outside of your desired area. Or maybe it’s a little above your budget. You’ll have more homes to choose from if you expand your horizons.
- First-time home buyers should use multiple tools when searching for houses. Don’t just rely on your real estate agent to provide you with a list of homes for sale. Be proactive about using the Internet to find suitable homes. I recommend that you use three websites simultaneously–Realtor.com, Zillow.com and Trulia.com. Your agent will also be looking for homes on the Multiple Listing Service, or MLS.
- Don’t make a yes-or-no decision solely by using the Internet, unless the home is completely outside of your parameters. If it meets most of your requirements, it’s worth visiting in person. You may be surprised to find that the home has additional features that were not included on the Internet listing.
- Consider looking at bank-owned homes. These are properties that have been foreclosed upon by a bank and are now back on the market. A lot of first-time home buyers shy away from bank-owned foreclosures. But there is a potential for savings that should not be ignored. These homes are often sold for less than their true market value. You can learn more them in this new story and also in this tutorial.
- First-time home buyers often have a hard time looking past the decor of a house. You should not be concerned about the curtains, the carpet, or the color of paint on the wall. These things can easily be changed, and often for very little cost. You should be more concerned with things that are difficult or impossible to change–the size of the house, the location, the number of bedrooms and bathrooms. Don’t be turned off by the stylistic choices of the current homeowners. Open your mind to the possibilities.
- If you are going to be driving to and from work every day, you need to consider the commute time. This is especially important when you start to zero in on a particular house. Before you make an offer on a home, you might want to commute to work from the house during rush hour. It’s an easy drive at 1:00 PM. But what about 5:30 PM? This is a serious quality-of-life issue that needs to be considered. It’s common for first-time home buyers to overlook such factors, when they find the “house of their dreams.” But it won’t be your dream house for long if it takes away from your quality of life.
- Consider the quality and desirability of schools in the area. This is important even if you don’t have children. Schools go hand-in-hand with property values. Your home is more likely to appreciate in value if it’s located within a desirable school district. And the opposite is true as well. This factor is even more important for first-time buyers who have school-aged children. Your real estate agent should be able to help in this area. But don’t rely exclusively on your agent. Use the Internet to research schools in your desired location.
Stage 5 – Tips for Making an Offer
What does a first-time home buyer need to know about making an offer? First of all, you should realize that home prices in 2012 are lower than they were a few years ago — at least, in most parts of the country. So you’ll have to give some extra scrutiny to the seller’s asking price. Here are some other tips and strategies to help you through this stage of the process.
Offer / negotiating tips for first-time home buyers:
- Earlier, I stressed the importance of researching home prices in the area where you plan to buy. It’s worth repeating. Before you make an offer, you should have a good feel for what homes are selling for in the area. This information is readily available online. Just visit Realtor.com or Trulia.com and look at homes that have recently sold in the area. If you do enough of this research, you will be able to tell the difference between a reasonably priced home and one that is overpriced.
- First-time home buyers must realize that homeowners frequently overprice their homes. They might do this for a variety of reasons. Some homeowners set their asking price based on the amount they still owe on the mortgage. But these two numbers have nothing to do with one another. Remember, it’s called an “asking price” for a reason. You need to compare it to other homes that have sold recently in the same area. Is it priced comparably–or is it overpriced?
- When you make an offer, you should be prepared for three possible responses. The seller will either accept your offer as is, make a counter offer of some kind, or reject it outright. You should have a plan for each of these scenarios. And your plan will be limited by the next thing we’re going to discuss…
- You should know the maximum amount you are willing to pay for a house, before you submit an offer. That way, if the seller comes back with a counter offer for a higher amount, you’ll be prepared for it. This relates back to the fair market value of the house. If the seller makes a counter offer that is still within reason, you should consider accepting. But if they refuse to budge on a price that is clearly set too high, you should be prepared to walk way.
- Submit a letter of justification with your offer. Show them the data you are using to justify your offer amount. A good real estate agent will handle this for you. It’s rarely a good idea to submit an offer without supporting data. This leaves the seller to believe that you pulled the number out of thin air. You want the seller to know that your offer is based on current market data. They will be more inclined to accept your offer if you back it up with such data.
- Some sellers may be more willing to make concessions, rather than reducing the sale price. Talk to your agent about these types of scenarios before you make an offer. Be open-minded about it. For example, a homeowner may be willing to make a contribution to your closing costs from the proceeds of the sale. Or they might be willing to throw in some furniture, in lieu of a price reduction.
- As a first-time home buyer, it can be tempting to follow your agent’s advice blindly. You should not over-rely on your agent when making important decisions. They are your advisor. They are not your decision maker. These are your finances that are on the line, and it’s your potential home. Research the market. Use the data to validate the asking price. Trust your own instincts.
Stage 6 – Mortgage Underwriting and Final Approval
After you make an offer on a home, you will go back to your lender for final approval. This is when your file gets sent to the underwriter, the person who has the final say as to whether or not you’ll be approved. Here’s what you need to know about final loan approval in 2012.
Mortgage-approval and underwriting tips for first-time buyers:
- Many first-time home buyers fail to understand the difference between pre-approval and final approval. Believe it or not, you can still be turned down for a loan even though you’ve already been pre-approved by the lender. Pre-approval is not a guarantee or a commitment to lend. The deal isn’t done until the mortgage underwriter gives his seal of approval.
- You may be given a list of conditions to satisfy before the lender will issue a final approval. For instance, they may ask for additional documents relating to your finances. This is the most common type of condition. In some cases, they might even require you to reduce a certain debt obligation. I’ve had a lender tell me that I had to pay down one of my credit cards before I could be approved. Just be prepared for these conditions–it’s a very common scenario.
- Keep tabs on your mortgage package as it goes through the underwriting stage. The underwriting process is the last and largest obstacle to final approval. Keep in touch with your loan officer about the status of your application. Make sure the underwriter has everything he needs to move the process forward.
- Keep your financial situation stable between pre-approval and closing. A lot of first-time buyers think that they are “home free” when they reach this stage in the process. But that’s simply not the case. If you go out and buy a new car while your loan is still being processed, you could throw off your debt-to-income ratio. It might even result in your loan being rejected. Try to spend as little money as possible during this process.
- At this point, the only good change to your financial situation would be an increase of assets. For example, if you made a contribution to your savings account, it would probably support your cause. The worst thing you could do at this stage would be to decrease your assets in some way. So keep your hands off your savings account until the loan is approved.
- If anything changes with your financial situation, let your loan officer know about it. Remember, he or she is on your side at this point. The loan officer wants the deal to go through almost as much as you do. This is how they make a living. So you should keep them informed of your financial situation.
- Have a backup plan in case the deal falls through. It’s common for mortgage loans to fall apart during the underwriting stage, especially in the current economy. Lenders are a lot more strict today than they were before the housing crisis. It’s not a pleasant scenario to think about, but you still need to have a plan in place. What will you do if your mortgage gets denied? How will it affect your current living arrangements?
Stage 7 – The Closing Process for First-Time Home Buyers
The home buyer tips collected below pertain to the closing process. Depending on where you live in the United States, this process might be referred to as “closing” or “settlement.” Either way, it’s the final step in the home-buying process. This is when all of the paperwork is finalized and all of the funds are distributed. The seller receives a check for any proceeds they made from the sale. The buyer presents a cashiers check for whatever closing costs they have incurred. Ownership of the property is transferred from the seller to the buyer. In short, this is when you become a homeowner. Here are some tips to help you navigate this process.
Closing / settlement tips for first-time home buyers:
- Review the closing / settlement procedures for your state. You want to be familiar with the sequence of events that will take place leading up to, and including, your closing date. Ask your agent about it. Do some research online.
- You can expect to receive a HUD-1 settlement statement a couple of days before closing. This document will list the actual amount you have to pay on closing day. Your mortgage lender will give you an estimate of closing costs at the time you apply for a loan. But your actual closing costs may be more or less than the estimated amount. The HUD-1 statement gives you the finalized amount that will be due. Make sure you review this document carefully. Here’s a sample statement (PDF file).
- Be prepared to bring a cashiers check with you to the closing / settlement process. You may also be able to wire the funds to the escrow company, via electronic transfer. This is something you should ask about in advance. The escrow company can tell you what form of payment they will accept.
- At this stage in the process, there are three people you should keep in touch with. These are your agent, your loan officer, and the settlement / escrow agent. Be proactive about contacting these people. You want to make sure that everything is on track leading up to your closing date.
- Don’t be surprised if the closing date gets bumped by a day or more. And don’t panic if it does. Over the last few years, there have been a lot of changes regarding closing documents and procedures. So it’s fairly common to encounter snags and paperwork delays at closing time. As long as it doesn’t wreck the deal entirely, you will still be okay. A closing delay is an inconvenience, but nothing more.
- Take your time reviewing and signing documents at the closing. This is a cliché that you’ve probably heard before. But it’s very important. Many first-time home buyers feel rushed during this process. They feel like they’re holding the entire process up by examining the documents closely. You should never feel this way. Take as long as you need. Do not sign anything unless you fully understand the information it contains. This is your process. A good escrow / settlement agent will go over each document with you to ensure you understand them.
Conclusion, and Where to Learn More
This tutorial offers tips and advice for first-time home buyers in 2012. Despite its length, it really only scratches the surface of the home-buying process. Elsewhere on this website, you will find more than 500 articles relating to this process. We have a variety of in-depth tutorials about mortgage loans, credit scores, house hunting and more. You can use the search tool located at the top of this website to access our library.