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The First-Time Home Buyer Guide

Rachel BurrisFebruary 07, 2020

*As of July 6, 2020, Quicken Loans is no longer accepting USDA loan applications.

If you’re getting ready to buy your first home, you’re more than likely experiencing a range of emotions. It’s an exciting time but also a scary one. Of course, buying a home is an enormous investment, but not knowing what to expect can make the journey all the more nerve-racking.

But the best way to fight your fears is to learn about the ins and outs of home buying ahead of time. This comprehensive first-time home buyer guide will walk you through each step of the process and give you insight into how to avoid common mistakes. By the time you’re done reading, you’ll be prepared to hit the ground running and apply for a mortgage.

Steps To Buying A Home: At-A-Glance

Some first-time home buyers think that buying a home merely requires you to search for listings online, attend showings, make an offer and sign a contract. Unfortunately, it’s not that simple. There are a handful of tasks you must accomplish even before you start scrolling through photos and listing descriptions.

To help you get a better sense of what you’re in for, we’ve broken down the home buying process into 10 steps so you can enter each stage armed with knowledge and confidence.

  • Step 1: Review Your Credit Score
  • Step 2: Ensure Your Savings Will Cover A Down Payment And Closing Costs
  • Step 3: Figure Out How Much House You Can Afford
  • Step 4: Find A Lender
  • Step 5: Get Preapproved For A Mortgage
  • Step 6: Choose The Right Real Estate Agent
  • Step 7: Hunt For Your New Home
  • Step 8: Make An Offer
  • Step 9: Have The Home Inspected And Appraised
  • Step 10: Close On Your New Home

Step 1: Review Your Credit Score

Before you jump feet-first into the process, examine your finances to ensure that you’re actually ready to buy a house. An important indication of your readiness is your credit score.

It’s the first thing that mortgage lenders look at when determining whether you qualify for a loan. Your credit score indicates how large of a risk banks would be taking on by lending to you.

Of course, the higher your credit score, the better your chances of getting a loan. But people with higher credit scores also tend to obtain better mortgage terms and rates.

Even just a few points can lead to a significant difference in interest and fees. So, before you go any further in the process, you should review your FICO® Score to see if it’s high enough to meet lenders’ requirements.

Typically, borrowers need to have a score of 620 or higher to qualify for a conventional loan. However, individuals with low credit scores can apply for FHA loans, which are backed by the government and require a score of at least 580.

If you’re unsure whether you meet these requirements, you can check your credit score for free. Create an account on Rocket Homes to get a free credit score report with weekly updates and access to resources that will help you improve your finances.

Step 2: Ensure Your Savings Will Cover A Down Payment And Closing Costs

Even if you get a loan to pay for your new home, you’ll still have costs that you need to pay, which aren’t covered by your mortgage. The down payment is the amount of money you need to pay upfront in order to buy a home. This large, one-time payment will be a certain percentage of the purchasing price of the home.

You may have heard that you need to put 20% down, but thankfully most lenders don’t require such large down payments anymore. These days, you can usually get away with putting 3% – 5% down for conventional loans and 3.5% for FHA loans. If you qualify for VA or USDA loans, you won’t be required to make any down payment.

Although many home buyers would prefer to put down as little money as possible, there are advantages to putting down more. Borrowers who make larger down payments have lower monthly mortgage payments. They also tend to receive better interest rates because they’re viewed as less of a risk to lenders.

To minimize the risk, lenders will require borrowers who are unable to make a 20% down payment to pay for private mortgage insurance. PMI is rolled into your monthly mortgage payments and used to protect the lender in the event you default on your loan.

So, you should strive to make a 20% down payment on your home. However, you must ensure that you leave yourself with enough savings to cover closing costs (and potential emergencies). Closing costs are the fees that you’re charged for processing and servicing of your loan. These costs are also presented as a percentage of the purchasing price.

They usually amount to about 3% – 6% of the home price; however, they vary depending on your area and loan amount. After you apply for a loan, your lender will send you a Loan Estimate form. This three-page form will itemize all terms and costs associated with your loan, so you know exactly how much money you will need.

Step 3: Figure Out How Much House You Can Afford 

After you’ve checked your savings, it’s useful to calculate how much house you can afford. Of course, your lender will tell you how much they’re willing to lend you, but it’s not always wise to borrow the full amount. Figuring out your budget ahead of time will help you ensure that you don’t overextend yourself and borrow more than you can afford to pay back.

There are a few different methods you can use to figure out how much house you can afford. However, the rule of thumb is that your housing expenses shouldn’t exceed 28% of your gross monthly income (your salary before taxes), and your total monthly debt payments shouldn’t be greater than 36%.

Before you begin these calculations, it’s crucial that you understand what exactly goes into mortgage payments, as first-time home buyers often underestimate how much they’ll have to pay each month. Monthly mortgage payments, sometimes referred to as PITIA, include: 

  1. Principal: The amount of money you borrowed to purchase the home.
  2. Interest: The fee your lender charges you for the privilege to borrow money.
  3. Taxes: The property taxes you must pay the government based on the appraised value of your home.
  4. Insurance: The homeowners insurance you must buy to protect your home against potential damage.
  5. Association Dues: The dues you must pay if you’re part of a homeowners association. These funds are used to pay for local amenities and maintain the surrounding community.

To find the maximum amount you can comfortably afford to spend, complete the following calculations:

Maximum Monthly Housing Expenses = (Gross Monthly Income x28) / 100

Maximum Total Monthly Debt Payments = (Gross Monthly Income x36) / 100

If you’d prefer to avoid the math, you can also use the Quicken Loans® Home Affordability Calculator. This tool will ask for your annual income, monthly debts, savings, credit score and desired ZIP code to calculate the maximum home price you can afford and estimate the cost of your monthly mortgage payments.

Step 4: Find A Lender

When you’re ready to look into getting a mortgage, you should spend some time researching various lenders. There are not only disparities in lenders’ customer service, but also in the mortgage options, interest rates and closing costs they’re willing to offer borrowers.

First-time home buyers should always shop around before choosing the mortgage lender that’s right for them. To help you compare the differences between lenders’ offerings, make sure to get a Loan Estimate from each one. This form is standardized, making it easy to identify which lender is willing to offer you the best terms and lowest costs.

Regardless of what a lender offers, you still need to make sure you choose a company you trust, one that makes the process as simple as possible. When researching what it will be like to work with a company, consider:

  1. Its speed: Some lenders take longer than others to close loans, which can be problematic when the market is competitive.
  2. Itsclient satisfaction ratings and customer service awards: Other borrowers’ experiences will give you invaluable insight into what you should expect when working with a lender.
  3. Its communication habits: Questions and issues are likely to arise throughout the process, so you want to ensure that your lender responds to all of your inquiries with urgency. Look for companies that respond within 24 hours and have the capability to do business online.

Step 5: Get Preapproved For A Mortgage

Although it may seem counterintuitive, it’s vital that you get preapproved for a mortgage before you start house hunting. Before you can determine your price range, you must know how much money you’re qualified to borrow. Furthermore, the market can be competitive, and having a preapproval letter ready when you make an offer will demonstrate that you’re a serious buyer.

When there are multiple offers on a home, sellers are more likely to choose buyers who already have preapproval. The reason that preapproved buyers typically take priority is that there is less of a risk that their offer will fall through due to issues with financing. Having your financing ready may also give you more power when negotiating the purchasing price – especially if the seller is looking to close quickly.

Be aware that getting prequalified is not the same as being preapproved. Unlike preapproval, being prequalified doesn’t guarantee that you’ll be able to obtain a loan when you need it. It’s merely an estimate of your finances, which is why it’s not nearly as useful.

Rocket Mortgage® offers borrowers different levels of approval:

  1. Prequalified Approval: Provides an estimate of what you can borrow based on your credit report and the information you provide about your income and assets.
  2. Verified Approval1: Provides assurance that you can borrow a certain amount based on the verification of your income and assets.

To get your approval letter, you’ll need to provide proof of your income and assets, verification of your employment, and personal information like your social security number, which will be used to run a credit check. With Rocket Mortgage®, you can start the process immediately by creating an account and getting approved online. 

Step 6: Choose The Right Real Estate Agent

Sometimes, people balk at real estate agents’ commissions and try to handle their transactions without representation. But that’s a huge mistake, especially for first-time home buyers.

Real estate agents don’t simply find available properties and schedule showings for home buyers. They also act as advocates for their customers, ensuring that they ask the right questions, receive the necessary disclosures, come up with competitive offers and appropriately negotiate transactions. And since commissions are taken out of the purchasing price of properties, buyers get to work with real estate agents for free.

The experience and skills that real estate agents provide are invaluable, but not all agents are created equal. It’s crucial that you spend some time looking for the right agent.

Before you settle on one, interview a few. Make sure to ask each agent the same questions, so you can compare their answers. Some questions you may want to ask include:

  • How long have you worked in the industry?
  • How many customers/clients are you currently working with?
  • What experience do you have finding homes in my desired area and price range?
  • What does the process of working with you look like?
  • What services do you offer home buyers?
  • Why should I work with you over another agent?

As you conduct interviews, remember: You’re looking for someone who has the expertise, but you also want to make sure that the agent is someone you like, a person with whom you’ll feel comfortable working closely.

Rocket Homes℠ understands how important it is for home buyers to find a real estate agent who meets their specific needs. The company works with a nationwide network of prescreened, highly-rated partner agents and prides itself on finding the right real estate agent for every client.

If you’re interested in having Rocket Homes℠ match you with an experienced, local agent, sign up today.

Step 7: Hunt For Your New Home

Once you’ve chosen your real estate agent, it’s time to have a serious discussion about the qualities you want in your home. You should think about:

  • Location: What neighborhood do you want to live in? What local amenities are important to you?
  • Size: What’s your ideal square footage? How much space do you actually need?
  • Bedrooms and Bathrooms: How many bedrooms are you looking for? Do you need to have the same number of bedrooms and bathrooms?
  • Age and Condition: Are you looking for new construction? Are you willing to put work into the home to improve its condition?
  • Home Features: Are there any specific features that you must have, such as a garage, finished basement or open floor plan?

Defining your priorities will help you communicate your needs to your real estate agent and ensure you don’t waste time looking at homes that are wrong for you. If you’re unsure of what your preferences are, don’t worry.

That’s what the search process is all about. As you see more homes, you’ll have an easier time pinpointing what exactly you want.

However, just as you make a list of your priorities, you should also start thinking about what you’re willing to sacrifice. Despite the number of homes on the market, it’s highly unlikely that you’ll be able to find your ideal home available and in your price range.

Begin to separate the elements of the home that you need and those that you’d simply like to have. Finding the right home is likely to require quite a few compromises.

Your real estate agent will help you begin the search process by sending you listings based on the preferences you’ve communicated. Although you’ll be receiving these listings on a regular basis, you’re free to also look online to find additional homes on the market. Once you come across one that you like, contact your agent to set up a showing for you.

As you walk around each property with your agent, be sure to take photos and make notes of your impressions. You’d be surprised how quickly homes blur together. Make sure that both the home and neighborhood meet your needs. But also look out for common problems, like water damage, poor insulation and issues with the roof and foundation.

After you leave any showing or open house, be sure to explain everything you liked and disliked to your agent. This information will help your agent refine your search parameters.

Step 8: Make An Offer 

Once you’ve found a home that checks all the boxes, it’s time to make an offer. Just because the seller is asking for a certain price doesn’t mean that the home is worth it. So, to help you determine how much to offer the seller, your real estate agent will do a comparable market analysis.

This analysis will examine similar homes that have sold in the last 6 months to determine the fair market value of the home you’re interested in. Based on the fair market value and the amount of time the property has been on the market, you and your agent will come up with a competitive offer.

Keep in mind that your power to negotiate will also depend on the current strength of the market, the number of days the home has been listed and the number of buyers who are interested in the property.

If there is little interest in the home, you may want to consider adding contingencies to your offer. Contingencies are provisions that are added to the purchase agreement, stating that the sale of the home is dependent on certain conditions being met. If the conditions are not met, the buyer has the ability to walk away from the contract without facing financial repercussions.

Although sellers tend to shy away from offers that include contingencies, there may be some stipulations that protect you from unforeseen problems with the transaction. For example, including a mortgage contingency in your offer will ensure that you are not forced to purchase the home if your financing falls through for any reason. On the other hand, adding an inspection contingency will make sure that you can back out of the offer if there are any major problems with the home that are revealed after you have the home inspected. 

Earnest Money Deposit

If your offer is accepted, you will be required to make an earnest money deposit into an escrow account. You provide these funds up-front to show that your offer is serious. In exchange for your deposit, the seller will take the home off the market.

The amount of earnest money you provide is typically 1% – 3% of the purchase price; however, it can be negotiable. The money is kept in an escrow account until closing when it’s applied to your down payment and closing costs.

If you back out of the purchasing agreement, the seller is entitled to keep this money. However, this may not be the case if you’ve included a contingency in your contract. For instance, if your financing has fallen through, but you’ve included a mortgage contingency, you’ll be able to walk away from the deal and keep your earnest money deposit.

Step 9: Have The Home Inspected And Appraised 

Before you close on your new home, you must have the home inspected and appraised. These precautions will ensure that you know the true condition and value of the home before the sale is final.

Hiring a professional, third-party home inspector will give you peace of mind by ensuring that there aren’t any undisclosed issues with the property. The inspector will provide you with a list of all necessary repairs, as well as more minor issues that can be attended to in the future. If there are major repairs that must be made, you can negotiate with the seller to either complete the work prior to closing or deduct the required funds from the purchase price. If the seller refuses, and you have an inspection contingency in your contract, you’ll be able to withdraw your offer without losing your earnest money deposit.

If you’re getting a mortgage, your lender will require the home to be appraised. An appraiser will examine the property, consult public records and analyze comparable sales and market trends to estimate the true value of the home. The appraisal is a protective measure for you because it ensures that you’re not paying the seller more than the home is actually worth.

However, the appraisal also minimizes risk for your mortgage company. Your new home will be used as collateral for your loan. If you fail to keep up with your monthly mortgage payments and default on your loan, your lender will foreclose on the property and sell it to recoup costs. If the lender has lent you more money than the home is worth, they won’t be able to recover all the money they have lent you, and you’ll be on the hook for the rest. Therefore, the appraisal makes sure that your lender is not providing you with more funds than you’ll ultimately be able to pay back.

If the home is appraised for less than the purchase price, your lender will not cover the difference. You will either have to renegotiate with the seller or come up with the extra funds yourself. If you have a mortgage contingency (or appraisal contingency) in your contract, you can choose to walk away from the agreement without penalty. If you don’t, you’ll be on the hook for the purchase price, regardless of how much the bank is willing to lend you.

In addition to requiring an appraisal, your lender will most likely require you to buy homeowners insurance. Lenders expect a standard policy to cover the costs of rebuilding a structure from the ground up. In most cases, you’ll be asked to provide proof that you’ve prepaid 1 year of coverage.

Like your mortgage, you should also shop around for your homeowners insurance by comparing coverage, prices and customer reviews. Be sure to handle this a few weeks before closing and schedule the policy to take effect on your closing date.

Step 10: Close On Your New Home 

Closing is the day you’ll sign all the paperwork and finalize your purchase to officially become a homeowner. Your lender will send you a Closing Disclosure 3 days prior to the closing. The form will itemize all of the terms and costs associated with your loan. Review it to check that the information is correct and compare the terms and costs to those listed on your Loan Estimate form to ensure that there haven’t been any changes.

Twenty-four hours before you hit the closing table, you should do a final walkthrough of the property. You can bring your inspector back with you – usually for a fraction of the cost of the original inspection – and make sure any repairs you requested the seller to make were done properly.

If you do your walkthrough without an inspector, be sure to bring your real estate agent. Turn everything on and off, test out all the electrical outlets, run the faucets and flush the toilets. Ensure the property hasn’t been damaged and nothing has been removed.

If you do find a few issues, proceed with caution. You may not want to jeopardize getting into the home you really want due to a minor issue that sets you back a few hundred dollars. If you discover that something wasn’t repaired properly or has deteriorated and will cost a few thousand dollars, talk it over with your agent and decide if the seller needs to make amends.

Closings typically take place at a title company, management firm or escrow office, but the location can be flexible based on the needs of the parties involved. The closing usually takes about an hour. Be prepared to have to sign a lot of paperwork, including the Closing Disclosure, promissory note, deed of trust and certificate of occupancy. Unless you’ve negotiated otherwise, you’ll have to pay the closing costs, which will include the fees for your mortgage application, appraisal, survey and title search.

After all the documents have been signed and the funds disbursed, the property title will be transferred into your name, and you’ll be given the keys to your new home!

Now that you’ve learned about each of the 10 steps of buying your first home, you can begin the process with confidence. If you’re ready to get started, we’re happy to talk you through your options. Create a Rocket Mortgage® account online or call us at (855) 480-8624.

1Participation in the Verified Approval program is based on an underwriter’s comprehensive analysis of your credit, income, employment status, debt, property, insurance, appraisal and a satisfactory title report/search. If new information materially changes the underwriting decision resulting in a denial of your credit request, if the loan fails to close for a reason outside of Quicken Loans’ control, or if you no longer want to proceed with the loan, your participation in the program will be discontinued. If your eligibility in the program does not change and your mortgage loan does not close, you will receive $1,000. This offer does not apply to new purchase loans submitted to Quicken Loans through a mortgage broker. Additional conditions or exclusions may apply.

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    Rachel Burris

    Rachel Burris is a writer covering topics of interest to present and future homeowners, as well as industry insiders. Prior to joining Rocket Companies, she worked as an English teacher for the New York City Department of Education and a licensed real estate agent for Brown Harris Stevens. She holds a bachelor's degree in creative writing from Bucknell University, a postbaccalaureate certificate in psychology from Columbia University and a master's degree in English education from Teachers College, Columbia University.