The Ultimate First-Time Homebuyer Checklist
In your spare time, you browse real estate listings and home design blogs. You’ve even driven through neighborhoods, scoping out “for sale” signs. You may find yourself asking, “Am I ready for home ownership?”
This first-time homebuyer checklist can help you find out. It outlines what you need to do to purchase your first home. Take a look. The keys to your first home may be just around the corner.
1. Evaluate your finances.
First, evaluate your current financial situation. Do you have enough money in the bank to own a home? In addition to paying a mortgage, the average American household spends $13,153 annually. 1 This amount covers taxes, insurance, utilities, repairs and more.
It’s safe to say home ownership is costly. But if you have the income and savings, it can also be a worthwhile investment. According to one analysis, the financial return of owning a home was higher (not including the tax benefit) than the after-tax return on a bond index and on the S&P 500.2 Plus, owning a home offers stability, privacy and the freedom to personalize your property that renting just doesn’t offer.
If you’re eager to buy a place to call your own, here are a few ways to organize your finances first.
- Save for a down payment and closing fees.
According to Money.com, your lender may require a down payment anywhere between 3% and 20% of the loan. But if you put down less than 20%, you may also be required to pay private mortgage insurance (PMI). In addition, you should expect to pay closing costs and fees for the home inspection, appraisal, title search and attorney. This usually adds up to about 5% of the loan.3
- Reduce debt.
Having large amounts of credit card or other debt can hold you back from securing a loan. You’ll want your debt-to-income ratio (DTI), which compares how much you owe each month to how much you earn, to be 36% or less—and definitely no more than 43%.3 Take a look at what you owe and then start working toward paying it off.
- Understand your credit score.
When you apply for a home loan, lenders look at scores from three credit reporting companies: Experian, Equifax and TransUnion. Then they take the score that’s in the middle and apply it to your loan application. If you don’t know your credit score, find out by looking at a credit card statement, talking to a credit counselor, using a free credit score service or buying your score directly from a credit company.4
Finally, if you’re about to purchase a home, avoid big financial transactions. For example, don’t open a new credit card or make a large purchase. Lenders will take note, and it may hurt your ability to secure a loan.5
2. Find a reputable real estate agent.
Real estate agents can help make the home buying process easier and more enjoyable. To find an agent, first ask family members, friends or lenders for referrals. Chances are, someone you know can recommend a reputable realtor.
Then, narrow down top real estate agents by researching their background and experience. In addition, you may want to interview a few agents on the phone or in person to make sure they’re a good fit.
3. Get preapproved for a home loan.
Do you know how much you can afford? Before moving ahead, it’s wise to find out. A lender can help you get preapproved for a loan by looking at your income, debts and assets. If you’re preapproved, a lender will supply a letter stating that you’re a qualified candidate for a loan. Most sellers want to see this letter when you make an offer.6
A word of caution: The amount you’re preapproved for may be different than what you can actually afford. According to one certified financial planner, you should never take out a mortgage that’s any more than three times your annual salary. In addition, your monthly mortgage should never be more than 28% of your gross monthly income.7 Remember, you still need to pay utilities, taxes, insurance and other expenses in addition to your mortgage. Only look at homes you can realistically afford.
4. Search for homes.
As you browse popular real estate websites, ask yourself a few questions to narrow down listings.
First, consider the location:
- If you have children, what is the school system like?
- Is the neighborhood conveniently located near your work?
- Is it a safe area?
- Is it near recreational activities you enjoy (e.g., hiking, parks, museums)?
- Is it on a cul-de-sac, a side street or a busy road?
- Is it in a suburban neighborhood, the city or a rural area?
- How much land does the home have? And how much land can you realistically maintain?
Then, write down your ideal home features such as:
- Do you need a garage?
- How much outdoor space would you like?
- Is there a deck or patio?
- How many bedrooms do you need? Bathrooms?
- Do you like the layout of the kitchen and living areas?
Once you find a few homes online, call your real estate agent and schedule showings or virtual tours. Knowledgeable agents often have not only in-depth details about the property, but also information about the home’s history of insurance claims or whether or not there are homeowners association fees.3 These details can be helpful when it comes to making an offer and negotiating a price.
5. Shop for a mortgage.
As you shop for homes, talk with your lender about which types of mortgages and rates are available. Here are a few of the most common loan options you’ll want to understand:
- Loan type
Most home loans are “conventional loans,” which means they’re backed by private lenders, rather than by the government. An example of a government-backed loan is a VA loan, which you may qualify for if you were a member of the U.S. Armed Forces or National Guard—or if your spouse is eligible.
- Loan term
You’ll also want to decide on the term of your loan. Usually this means comparing a 15-year vs. a 30-year loan. With a 15-year loan, you’ll pay more money every month, but your interest will be less over time. A 30-year loan is designed to take longer to pay off, but your monthly payment may be more manageable. It’s a fast and aggressive approach vs. a slow and steady approach. Consider which one is right for you.
- Interest rate type
Finally, you’ll want to ask your lender about adjustable vs. fixed-interest loans. An adjustable mortgage can change throughout the life of the loan. Alternatively, a fixed-rate mortgage doesn’t change over time, so you’re locked into a rate. Ask your lender about the pros and cons of both.
Once you’ve settled on the basics of your loan, talk to your lender about any other financing options you may need. For example, some homeowners also need a construction loan if they’re making substantial updates to their new property. Your mortgage lender should point you in the right direction.
6. Secure home insurance.
Next, it’s time to get a homeowners insurance policy. As you shop around, you may be wondering what factors can impact your insurance premium.8 Here are a few:
- The age of your home and roof
- Your home’s security and safety features (lights and smoke detectors)
- Where you live
- If there have been other claims by homeowners in your area
- If you need to specifically insure personal property, like jewelry and other valuables
- If you have a home business that you need to protect
Once you get a quote, talk to a licensed insurance representative about ways to achieve the lowest rate, and any other questions you may have. For example, if you bundle homeowners and auto insurance policies, you may get a considerable discount. Have another carrier for your auto insurance? Now’s a great time to switch and get a better deal. Additionally, big life moments, like buying a home, are an ideal opportunity for securing or adjusting your life insurance policy.
7. Make an offer.
You’ve found the perfect home, and you’re ready to make an offer. Chances are, other people are lining up offers, too. Your realtor should guide you by comparing the prices of similar homes that sold in the area so you can confidently make an offer.
If your offer is accepted, congratulations! Send the purchase contract to your lender so they can line up the closing details and appraisal. You’ll also want to schedule an inspection. This is when a professional inspects the house, looking for signs of mold, wiring issues, poor ventilation and more.3 If an issue is found, you can either accept the finding and address it yourself, negotiate with the seller to fix it or work with the seller to adjust the price. Note that for significant issues, your lender may require it to be addressed before you close and move in.
8. Close on your new home.
The day you’ve been waiting for has finally arrived. It’s time to close on your first home. Usually this happens 30 to 45 days after a seller accepts your offer and your lender has prepared your purchase contract. Provided all of the details are lined up, this is when you sign the final paperwork.3
Remember to bring a photo ID, proof of home insurance and a cashier’s check to pay for closing costs. Next, give yourself a big pat on the back. You’re officially a homeowner!
- Owning a Home Costs the Average American $13,153 a Year – and That’s Not Including a Mortgage, Fool.com, 2019
- Homeownership is still financially better than renting, Urban Institute, 2018
- A 10-Point Checklist All First-Time Homebuyers Should Follow, Money.com, 2020
- “Where can I get my credit score?” Consumer Financial Protection Bureau, 2016
- 10 Things to Avoid Before Applying for a Mortgage, SmartAsset, 2018
- How to Get Preapproved for a Mortgage, U.S. News and World Report, 2020
- 2 rules to consider when deciding how much mortgage you can afford, according to a financial planner, CNBC, 2020
- How to Lower Your Homeowners Insurance Premium, The Balance, 2021