5 Steps to Prepare for your 1st Home Purchase

In March, I became a homeowner!  Time sure flies because it feels like just yesterday.  Many of my close friends have recently purchased a house or are in the market to buy in the next 2 years or less.  Although it can seem like an overwhelming process, it doesn’t have to be.  I am here to help you out.  Look for regular posts regarding the home buying process.

To start things off, check out these 5 steps to prepare for buying a home!

5 Steps to Prepare for your 1st Home Purchase

Pull your Credit Report

I read last week that “56% of Americans had no idea that their credit score was the most important factor for applying for a mortgage, car loan, and a new credit card.”  Some people assume their salary or even savings is the number one factor.  Of course, those things are important but your credit report is like your report card in grammar school.  It is a listing of how you have handled credit in the past.  Lenders want to know you can afford the home you want to buy through your salary, but they want to ensure that you will faithfully make on time payments as well.

If you’re considering purchasing a house in the next 2 years, it is time to pull your credit report.  Head over to www.annualcreditreport.com to get a free copy of your credit report from the following 3 credit bureaus: Transunion, Experian, and Equifax.  Personally, I raised my credit score 150 points a few years ago; however, it took over a year to see significant changes.  That is why it is so important to pull your credit report before you need a car loan or mortgage.

Time Frame: 2+ years prior to purchasing

Pay Down Debt

Once you have pulled your credit report, you can see what information has landed there.  Medical bills you didn’t realize you had?  Old credit cards?  Now, it is time to get to work on cleaning up your credit.  Per the crash course in your credit report, one of the main components of your credit score is the credit utilization or the percentage of credit available compared to what is borrowed.  The rule of thumb is to keep your credit card utilization below 30%.  For example, if you have a credit card with a credit limit of $1000, you want to keep the amount borrowed at $300 or below.

Part of improving my credit score included paying off a debt in collections of over $11,000!  That is why it is important to pull your credit report early so you can get to work on cleaning it up.

Time Frame: 1-2 years prior to purchasing

Save for a Down Payment

Traditionally, a down payment is 20% of the home purchase price.  A down payment of 20% will afford you the best interest rate and help you avoid paying private mortgage insurance.  I know, 20% sounds like a whole lot of money and it can be.  That is why it is important to start saving well in advance for the down payment.

Recently, banks have been approving loans with much less than 20% – even 5% or less.  However, the more you can save up now the better.  Once again, if you are paying less than 20% you will likely have to pay private mortgage insurance.  This is .5-1% of the entire loan amount that you are responsible for paying on an annual basis.  On a $100,000 loan, you could be paying as much as $1,000 a year or an additional $83.33 per month just for private mortgage insurance.

Personally, in order to save for the down payment I stacked my tax return from multiple years, regular bonuses from my job, in addition to $300+ per month.

Time Frame: 1-2 years prior to purchasing

Review your Budget

A budget is the foundation for your financial success.  Reviewing your budget can show you what you can afford in terms of a monthly payment, how much you are able to save each month and what needs to go towards paying down debt.  If you haven’t reviewed your budget lately, make sure you are budgeting like a pro.  It is also an important time to distinguish needs from wants.  For example, you may have a weekly happy hour with friends.  That weekly occasion may need to turn into monthly in order to save money for your down payment.  Personally, I slashed multiple items from my budget to save more money.

Personally, I had a roommate for 2 years. Let me tell you, this helped with my budget tremendously.  It felt nice to split rent, utilities, cable, etc.. with someone else.  It also paid off financially!

Time Frame: 6-12 months prior to purchasing

Save More

Purchasing a home can be extremely expensive.  Once you save for the down payment, you aren’t off the hook.  There are quite a few required costs before owning the home as well as things you may want to purchase after you close.  Check out some other costs associated:

  • Earnest Money: also known as good faith deposit letting the home buyer know you are serious.  Earnest money is typically 1-3% of the selling price.
  • Home Inspection: a visual examination of the home that you want to buy.  In most cases, a home inspection isn’t required but strongly recommended.  A quality home inspection may be between $300-500.
  • Closing Costs: fees paid at the closing of a real estate transaction.  On average per Zillow, buyers pay an estimated $3700 in closing costs.  Although closing costs do have to be paid, the seller may pay the buyers closing costs.

Then after the home is actually yours there are other things you may need that weren’t necessary when you were renting.  For example, the largest purchases I have made for my house so far are a washer, dryer, and a lawn mower.  Although I am a financially fit shopper and was able to get details on all three items, it was still a large cost.  After the necessities are taken care of, don’t forget the fun stuff like decorating!

On top of that, you will still need an emergency fund in the event that your home needs repaired.  Saving really never stops!

Time Frame: Ongoing! 

5 Steps to Prepare for your 1st Home Purchase

If you have purchased a house before, what tips do you have for others?  If you are interested in purchasing a home, what is holding you back?  If your goal is to purchase a home in the next 2 years or less, what steps have you taken to prepare?

 

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The 5 Steps that every first time home buyer must start with (including time frames).

47 comments

  1. My number 1 piece of advice is don’t get the home warranty that realtors often encourage you to get. We ended up paying $500 per year for 5 years and every time our heat/air went out, we had to pay $75 for someone to come and check it. Supposedly, if something happens to the hvac and it can’t be repaired, they will replace it. Well, for four years we were strung along and told that are system was fine until eventually the thing just decided to give up. I’m pretty sure that the home warranty did everything they could to avoid making that $8,000 replacement. This recently became a very unexpected expense so I encourage saving as much as possible and forgoing home warranties.

    1. I’d have to disagree with a previous commenter. A homeowners warranty is like health insurance, you hate to pay it but you’re glad you have it when you need it.

      A few years ago, my AC unit went out and yes I had to pay a $75 trade call for a technician to come out but they ended up replacing it and covered about 75% of the cost to buy a new one. Without the home warranty I would have easily been out $5-6k versus $1500. It has also covered an expensive washing machine repair and several major plumbing issues.

      1. Thanks for providing your good experience with the homeowners warranty. I especially love the comparison you made to health insurance.

    2. Thanks for your prospective on the home warranty! I did get a home warranty with my house but the seller paid for it thankfully.

  2. These are great tips not only for purchasing a home, but for life in general. I like Latoya’s advice too. Luckily, our home warranty came with the purchase of our house. The seller paid for it, but I do feel like warranties in general don’t serve a great purpose, and it’s better to save for the unexpected because usually you’ll pay out of pocket anyway.

  3. Great points. Most people don’t realize they need to start doing these things way in advance. When l bought my first house many years ago, l actually bought it with a friend. It was scary and felt less so with another person. We had the house for 8 years before selling and splitting the profit enabling a substantial down payment for my first house by myself. As far as the warranty, they usually suck..but when they fix the same thing twice, you have to be pushy and insist they replace it (they do try to string you along). I had a sub-zero fridge that went on the blink and they did not want to replace it..fast forward a lot of research on my part, and l filed a small claims against the home warranty company. They couldn’t pay me soon enough :-).

    1. You always provide great wisdom and advice! I appreciate it! You are so right that time is important. Just not the time to find your dream house but to prepare your finances to be ready to purchase !

  4. Fantastic advice! We just bought our house in April, we did get a home warranty but it was paid by the seller for the first year. We have not had to use it yet but we like having it just in case we need it, we have no problem being pushy if need be ;). I would also encourage new home buyers not to base their max price on what the bank tells you that you can afford. Just because you are approved for that $300,000 dollar house does not mean you can afford it. Figure out what you can handle monthly and then be sure to include the principle, interest, taxes, home owners insurance, and PMI if applicable into that amount when deciding if you can afford the house you are interested in or not.

    1. Great advice! The bank definitely told me I could afford ALOT more than I was willing to pay. I did exactly what you said though. Focused on my monthly payment and then determined what house I could afford from that.

  5. Here in Minnesota the seller pays the buyers closing costs 9 out of 10 times. The flip side of that is when you go to sell you better be prepared to pay twice as much in closing costs! Thankfully first time home buyers don’t have to worry about that.

  6. This list is right on the money! We kind of suddenly purchased our first home but thankfully we had done most of these things and that made us more prepared.

  7. Congrats on your home purchase and great advice in this post! Pay debt down and KEEP it down is important. When we bought our big house we Loved it (and still do). But several areas were less than perfect but we decided we could fix them all, no problem. Then of course, we had to pay for all those home improvements plus all the ones we weren’t planning on!
    Buying a house is a huge commitment but if you are in it for the long haul, it’s worth it.

    1. Thanks for sharing, Gloria! Great advice to keep debt down. It is easy to rack up debt as a new home owner furnishing your home but it is important to keep your debt under control.

  8. Great advice and congrats on your home purchase! I think that the saving for a down payment is probably the hardest step. We are in the process of building a manufactured home and, besides the tedious paperwork, the most difficult part getting there was the down payment! All I can advise people to do is save, save, save!

  9. Great tips! I’m currently working on paying down debt. My credit score isn’t bad, but I’d like to pay off the majority of my student loan debt before adding a mortgage. Our plan is to pay off debt for 2 years, then save up the 20% downpayment as quickly as possible.

  10. I really wish I’d saved longer (and more) to buy my first house. I paid PMI for years, and it’s just so much money down the drain for a product that makes sure the bank gets its money if you default. Which I did not do.

    In addition to the down payment and closing costs and earnest money, my lender required me to have 3 months worth of mortgage payments in the bank. That did cover all of those things I had to pay for when I moved in like a lawnmower, moving costs, etc, but it cut down on the money I otherwise would have put to the down payment.

  11. Great tips and congrats on being a homeowner! That is a huge accomplishment. I go back and forth on whether I’d like to one day own a home, but for now renting is what is right for me. Though I regularly save and keep my credit score looking good, just in case. First up though is making significant impact on my student loan debt (it doesn’t impact my credit score much, but I don’t want to double down my debt with a mortgage.)

  12. Congrats on your new(ish) home! These are great tips for anyone looking to buy in the future. I’d suggest that while you’re reviewing your budget, you get a good sense of how much you can realistically afford to spend (consider mortgage, taxes, insurance, PMI, HOA fees, and maintenance). Once you start looking, the bank and the realtor will likely tell you that you can afford a bigger mortgage than what’s wise to do. Not only does that affect your down payment percentage (and whether you need to pay PMI), but it may stress your budget to the point where you can no longer save for your goals.

    1. Thanks for sharing Gary! You are so right! The number for your monthly payment is so much more than you might see on a site like Zillow which only shows the mortgage amount and interest.

  13. Congratulations Tia! I completely agree with your 5 steps. I would add ‘Review how much home you can afford.” 🙂 This may be an obvious one, but I think people overlook it! Having several rental properties, that is the first step in making the next purchase! Great post, take care,

    1. Thanks so much for sharing! I hope to turn my first home in to a rental property eventually. I am going to check out your site for tips!

  14. This is great. I’m just starting to turn over the idea of buying a home in the next few years and started saving up for a down payment last year. I’ve been trying to set aside about $3,000 a year for now – but I’m also really interested in tiny homes.

  15. Congrats! I bought mine in March too 😀

    my one tip would just be to go and see tons and tons of houses. In a hot market you will have to make compromises and it may take a bit of time to get clear on what are must haves and what are nice to haves.

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