Ultimate Guide to Buying Your First Home

When I was younger, I played a lot of board games with my friends, Monopoly included.

Did you know that there’s an auction rule? If a player lands on a property, they can buy it for the listed price or it can go to auction where all players can bid on it, with the proceeds going to the bank. 

I’d been playing for years with friends, albeit as a kid, and we never knew or played with this rule.

Not knowing that rule in Monopoly isn’t a big deal, but not knowing it in real life can be.

In 2005, I purchased my first home.

And I messed up a lot.

I didn’t negotiate any closing costs. I didn’t ask for repairs I knew I wanted and that the home inspector pointed out. It was a hot housing market and I let it drive some of my decisions. 

And I rushed it.

In 2013, I purchased my second. I learned from my mistakes and I did it much better the second time. 🙂 Now I’m going to share what I’ve learned so you can be better prepared when you buy your first home.

Table of Contents
  1. What To Know Before You Buy Your First Home
  2. Before the Buy
    1. Calculate How Much House You Can Afford
    2. Start “Playing House”
    3. Begin Paying Down Your Debts
    4. Get Your Financial Documents in Order
    5. Give Your Credit Report and Credit Score a Tune-up
    6. Get a Pre-Approved Letter for a Loan
    7. Finding an Agent
    8. Be Sure You Have Earnest Money Ready
  3. The Purchase
    1. Don’t Panic
    2. Negotiate Everything
    3. Get Every Inspection
    4. Maintain Lines of Communication and Stay Updated
    5. Review Your Loan Documents, Closing Disclosure, etc
    6. Get Homeowners Insurance
  4. Get Ready To Close
    1. Is the House in Move-in Condition?
    2. Bring a Certified Or Cashier’s Check To The Closing
    3. Be Aware Of Wire Transfer Fraud Potential 
    4. Don’t Forget Your Documents 
    5. Prepare for the Move
    6. Schedule Any Post-Move Work You Want to Get Done
    7. Sign on the Dotted Line
  5. After You Close
    1. Change the Locks
    2. Clean Your New Home (or Hire a Cleaning Service)
    3. Update your Address
    4. Get Major Home Systems Serviced
    5. Ensure Utilities Are Turned on and in Your Name
    6. Take a Home Inventory Once You Finish Moving
    7. Re-Evaluate Your Emergency Fund
  6. Summary

What To Know Before You Buy Your First Home

Here’s a step-by-step guide detailin everything you will need to do to buy your first home the right way. This guide is long and it’s just a starting point, but it will cover a lot of the things you’ll need to do.

There are three phases to the homebuying process:

  • Before The Buy: This phase is all about getting your finances in order from increasing your credit score to getting pre-approved for a loan.
  • The Purchase: The “Purchase” phase includes the time from when you put in an offer to when you get ready to close. The decisions you make or don’t make, here can have a lasting impact on your finances for years.
  • Get Ready To Close: This includes getting your documents in order, getting insurance in place, and fixing all the little things so you can fully enjoy your home.
  • After You Close: Once you’re in your house there are a few more things you’ll need to do.

This guide is about getting your finances in order before, during, and after the purchase of your first home. This guide won’t help you find your perfect home or what to look for in a home, that’s on you.

This guide covers a lot of items common to first-time homebuyers but you’ll want to work with a local real estate agent. They will be familiar with the applicable local laws and process and fill in the blanks.

Let’s get started.

Before the Buy

There are some “getting ready” steps that you should take before you start house hunting. Here’s an outline of the steps you should take before you purchase a home include:

  • Calculate how much house you can afford
  • Start “Playing House”
  • Begin paying down your debts
  • Get your financial documents in order
  • Give your credit report and credit score a tune-up
  • Get pre-approved for a loan
  • Finding an agent

Now let’s go into more detail. 

Calculate How Much House You Can Afford

Before you start house shopping, it’s important to figure out how much house you can afford. To do this, it’s important to take several steps. 

List Your Current Debts

You can start by comprising a list of all of the debts you currently have. Be sure to include all credit cards, student loans, car notes, etc. Write down the monthly payments, the current balances, and the interest rates you’re paying on each debt. 

List Your Income

Next, you’ll need to collect all of your income. It’s easiest if you make a list of your net income, even though the mortgage company will approve you based on your gross income. More on that later. 

Know What Front And Back-End Debt-To-Income Ratios Are

There are two calculations banks will make before approving you for a loan: Front-End Ratio and Back End Ratio. The Front-End Ratio is your Monthly Housing Payment / Monthly Income. 

A conventional mortgage backed by Fannie Mae/Freddie Mac will require this to be .28 or less. In other words, your mortgage payment (including taxes and insurance) must be 28% of your income or less.

So the home you are looking for needs to have a monthly payment of less than 28% of your income.

The Back-End Ratio is All Debt Payments / Monthly Income. This number varies based on your credit and other factors, but typically you’ll see that lenders like this number to be a maximum of 45% of your income. 

Gross Vs. Net Income

It’s very important to point out that mortgage lenders use your gross income (before taxes and deductions) when determining approved front and back-end ratios. 

In my opinion, this is dangerous because you don’t actually have your full gross income to live off of. Therefore, when a mortgage company says they’ll approve you for up to 45 percent of your gross income for all debts, that’s really more like 60 to 75 percent of your net income. 

This truth can be quite a shock to your budget when you haven’t done your research and have to actually make that first mortgage payment. This is why it’s so important to take your budget and your future money goals into consideration before you start house shopping. 

What About Your Budget And Future Money Goals?

Before you start house shopping – and regardless of what loan amount you’re approved for – it’s vital to assess your current budget and your future money goals before you buy a house. 

Your mortgage company will likely approve you for a loan amount and house payment that’s larger than what you expect. But does that mean you should take full advantage of the money they’re offering you?  

Only you can answer that question, but I encourage you to think about your future money goals before you do. Finance expert Dave Ramsey is a big believer that your house payment shouldn’t equal any more than 25% of your take-home pay. In other words, your net income

While that dollar amount is likely quite a bit lower than what a mortgage company will approve you for, it will go a long way in ensuring you have money left over for your future money goals. 

So before you start house shopping, consider making a list of your future money goals. What do you want your future financial life to look like? 

Do you want to retire early? Start working at a job that pays less but is more fulfilling? Have one partner stay at home to be with your kids? Be able to travel often? Give to charitable causes?

Think about what you want your money situation to look like years down the road, and then be sure your house payment fits in with those financial goals. 

Start “Playing House”

One way to put the previous step into action is to “Play House” with your estimated mortgage payment.

Each month, take the difference between your future estimated mortgage and your current housing payment. Put at least that amount into a House savings account. 

Doing this will give you a sense of how your finances will feel like when you buy a house with a larger payment. In addition, it’ll push you to save with purpose. 

Aim to save at least a 20% down payment so you can avoid having to pay Private Mortgage Insurance and have more equity in your home to begin with. 

Begin Paying Down Your Debts

As you’re working on saving money and learning what it will be like to live with a larger housing payment, consider paying off any debts you currently have. 

Make a list of all of your debts and work on getting them paid down or off quickly. If you’re looking for a concrete plan that works, consider using the debt snowball method. 

The less debt you have when you buy your house, the more financially secure you will be. 

Get Your Financial Documents in Order

If you’re going to need a mortgage on the home you purchase, there will be several documents you’ll need to provide to any potential mortgage lender. 

If you get these documents prepared ahead of time it will be easier to get pre-approved. At a minimum, you’ll need to provide the following documents:

  • Two months’ worth of bank statements for all checking and savings accounts
  • Paystubs for your last one to two months of work for all jobs
  • Your last two years’ tax returns
  • Your last two years’ W-2s
  • The most recent statements for any retirement or investment accounts you have
  • Documentation for any other type of income you have, such as disability income, investment income, child support, or alimony
  • Form DD-214 and certificate of Eligibility if you’re applying for a VA home loan

Note that you do not have to include proof of income for any source you don’t want included as you’re getting pre approved. But if you do want to include that income, you’ll need sources. 

For instance, if you have child support or alimony income you want to include, you’ll need to provide a copy of your divorce decree. 

If you have pension income, you’ll need to provide your pension statement. 

And if you don’t have much of a credit history, you’ll need to provide copies of utility bills, cell phone bills, or any other bills you make regular payments on. 

Get everything in order now so you can be ready and speed up the pre approval process.

Give Your Credit Report and Credit Score a Tune-up

The most important number when it comes to buying your house is your credit score. A good credit score means a good rate on your mortgage, a bad score means a bad rate on a mortgage, or perhaps no loan at all. 

And the difference can really add up.

According to FICO, the difference between the top FICO score tier (760-850) and the 2nd tier (700-756) is $13,730 over the life of a $300,000 loan. Fourteen grand over 30 years doesn’t seem like a lot but wouldn’t you rather keep that?

Take a look at our Guide to Increasing Your Credit Score and do everything you can to get that score up.

Get a Pre-Approved Letter for a Loan

Next comes the pre-approval letter from the mortgage company you’ll be using. A pre-approval letter is a letter from a bank that is their conditional commitment that they’ll give you a mortgage for the purchase of a home at or below that amount. 

This is an involved process because you will complete a mortgage application and provide the bank with all the information they need to do the necessary checks. 

In addition, you’ll need to provide them with the documentation we talked about earlier. A pre-approval letter makes any purchase offer you make stronger because the seller knows you can get a loan, thus removing one potential hurdle to the sale.

“Pre-qualified” is one step below a pre-approval and is less valuable than a pre-approval letter. This is because you won’t supply as much information and the bank isn’t issuing you a conditional commitment.

Finding an Agent

Once you have a handle on your money and how much house you want to buy, you’ll want to find a real estate agent to work with. 

You can go with a full-service broker or you can give Redfin a try. Here’s the difference between Redfin and a full-service agent.

When speaking to an agent, find out about state and county-specific items that might help you financially. 

For example, in Maryland, there’s a credit for first time home buyers where you don’t pay the buyer’s portion of the State transfer tax (which is 0.5% of the purchase price). 

When you learn about these types of credits, treat them as found money. Don’t adjust your purchase price because of it.

Keep in mind that realtor fees vary from state to state. However, in most cases the buyer doesn’t pay the buyer’s agent. The buyer agent’s commission usually comes from the seller. 

For that reason, it’s perfectly fine and often recommended to use a full service broker when you’re buying a house. The buyer’s agent represents you as a buyer, and having full-service representation can be very valuable when you’re buying a home. 

The seller likely has full representation, and you should too. A lot can go awry during the home buying process and you want to be sure you’re protected from any potential issues.  

Be Sure You Have Earnest Money Ready

When you make an offer, you might have to put down Earnest Money.

Earnest Money is a deposit you include with your offer to show you are serious about buying the home. The amount you put down in earnest money varies by state, but most often people put down one percent of the purchase price. 

If you’re in a situation where you’re competing with other potential buyers, you can put down more earnest money to make your offer more competitive. 

Sometimes, the check isn’t cashed (your agent will know) but you still need that money in your account should it get cashed (different states have different customs). 

If your offer is accepted, earnest money is applied toward the purchase/closing costs. If your offer is rejected you’ll get your earnest money back provided that is stated on the purchase agreement. 

In the event that the offer is accepted and you back out for reasons other than what is stipulated in the purchase agreement, the seller may have the right to keep your earnest money. 

Talk with your realtor when making your offer to be sure you are clear on how to avoid that scenario. 

The Purchase

This section covers all that you need to do between making an offer and the closing.

  • Don’t panic.
  • Negotiate everything.
  • Get every inspection.
  • Maintain lines of communication and stay updated.
  • Review your loan documents. HUD-1, etc.
  • Get homeowner’s insurance.
  • Consider a home warranty

Don’t Panic

Buying a home is a serious milestone and you can easily fall prey to panicked decisions, so take a step back and realize that there is no rush on anything. 

There is no rush to buy (more houses will come up for sale) and no rush to back out (unless you have a good reason to. It can be difficult to do, but now is the time to step back and make calm assessments of your decisions. 

Yes, it can be scary to buy a home. But even if you make a wrong decision it can be corrected by selling. 

Negotiate Everything

When you’ve found a home you want to buy, don’t be afraid to ask for things. For instance, you may want to ask that a playset in the backyard stays with the property or that the pool table remains in the family room. 

It’s important to take a good look at the house and make note of features about the house you like. Are the features you love about the house items that will automatically stay with the house or are they items the seller can take with?

Real estate law dictates that anything attached to the house is (typically) considered a fixture and stays with the house when it’s sold. In most cases, this includes items like curtains, built-in speaker systems, and built-in security systems.

However, there are some gray areas such as appliances and televisions. For that reason, it’s important to make note of items in the house that you want to stay with the house. 

If there’s some concern about whether an item qualifies as a fixture that you have your realtor include those items in the purchase agreement when you make your offer.  

Negotiating also applies to your lender. They will provide a Loan Estimate worksheet that outlines the loan costs. Don’t be afraid to try and negotiate down some of their fees.

Get Every Inspection

Getting an inspection on the home you buy is important as well. There are several types of inspections you may want to consider having, depending on the home. 

  • General Inspection
  • Well Inspection
  • Septic Inspection 
  • Termite Inspection
  • Radon Inspection

Think about which types of inspections are important to you and which apply in your area. For instance, there’s not a terrible termite issue in some parts of the Midwest, so a termite inspection isn’t often necessary there. 

Your real estate agent should be able to tell you which inspections are common and necessary for your area. And they might be able to recommend inspectors to you as well. 

However, it’s important to note that there are unscrupulous real estate agents out there that might recommend a less-than-trustworthy inspector that will gloss over potential problems. 

For that reason, asking family members and friends if they know of a good inspector might be helpful too. But in the end, if you trust your agent you should be able to trust their recommendations as well. 

Inspections can be costly, but if you have a good inspector it’s well worth the money. It may cost $500 to get a septic inspection, but $500 is a lot cheaper than the $20,000 or more it can cost to have to replace a faulty septic system.

Also, it’s important to note that different areas of the country have different rules or “norms” about who pays for which inspections. 

For instance, in some states it’s normal that the seller coordinate and pay for a septic inspection before selling their house. However, in other states, it’s typical that the buyer pays for and schedules a septic inspection. 

Your agent should be able to tell you which types of inspections a seller might be asked to pay for.  

It can be tempting to waive the home inspection or give up some other concession to make your offer look stronger. Don’t. You are purchasing a major asset you will have to live in for many years, don’t waive these.

Maintain Lines of Communication and Stay Updated

Another important move is to stay updated and communicate with your agent, loan officer, and other professionals you’re working with as you prepare to buy. 

Your buyer’s agent will be your main point of contact with all of the various individuals advancing the process of your purchase. He (or she) will be working with the seller’s agent to get the different inspections, title work, etc. 

However, while they are your agent, you are ultimately responsible for the process because you’re buying your future house.

If your agent is on top of things, then you’re in good shape and don’t need to micromanage. If you feel your agent isn’t, you must take charge and get updates and explanations.

Don’t be afraid to check in with your agent – or other professionals such as your mortgage rep -regularly. 

Review Your Loan Documents, Closing Disclosure, etc

The lender should have given you a Loan Estimate that estimates the costs, but the Closing Disclosure (sometimes called a Settlement Statement) is the official document for your close. 

You have the right to review it at least 24 hours before closing, be sure to do it. Here’s an excellent guide on how to review your Closing Disclosure.

Get Homeowners Insurance

If you already have an insurance company for something else (renter’s, auto, life, etc.), it’s often cheapest to go with them right off the bat. 

You can comparison shop later on once you’ve settled in, or you can do that beforehand.  Just be sure you have a homeowners insurance policy in place before you move.

This is a must with mortgage companies. If you pay cash you may be able to get away with not having homeowners insurance, but it’s not a risk I would recommend taking.

Consider A Home Warranty

You may want to consider a home warranty if you want peace of mind, especially if it’s an older home with older systems.

All home warranty companies work differently, but generally, they cover repair or replacement of major mechanicals and appliances to some extent. 

The buyer will pay a small deductible for each incident, similar to an insurance policy. Here’s a list of home warranty companies you might want to consider.

Get Ready To Close

You’re almost there!!  Here are some steps you’ll want to take as you get ready to close on your first home. 

On or Near Closing Day:

  • Is the house in move-in condition?
  • Bring a certified check to the closing.
  • Don’t forget your photo ID, proof of homeowners insurance, and your copies of the Loan Estimate and Closing Disclosure.
  • Sign on the dotted line. 🙂

Closing day is the day you sign all the papers and the house becomes yours. 

Is the House in Move-in Condition?

Once you sign the papers it’s your house. It better be in the condition you expect because you lose a lot of leverage once the house is yours. 

Final walk-throughs are scheduled by your agent and usually done within a day or so of closing. If you recently did a final walk-through and there were no major issues, you’re golden. 

If you did it a while ago and there were some open items, you need to double-check that they were resolved before you sign the closing papers.

Bring a Certified Or Cashier’s Check To The Closing

The Loan Disclosure will show you how much you’ll need to bring to the closing table in the form of a certified or cashier’s check. This is often the best way to pay for closing costs and is usually required by the title company. 

Sometimes a wire transfer is OK but that often takes time and can delay the process.

Be Aware Of Wire Transfer Fraud Potential 

Speaking of wire transfers, know that wire transfer fraud is common in real estate and does happen. For that reason, your agent may warn you in advance not to wire transfer the closing money. 

And if you get a call asking you to wire transfer funds to the closing, don’t do so without talking to your real estate agent first. 

Don’t Forget Your Documents 

When you come to closing, you’ll need your photo identification to prove you are who you say you are. You may also need proof of homeowner’s insurance if you haven’t already turned it in. 

Bring your copies of the Loan Estimate and Closing Disclosure too, and be sure they match the statements you’re signing at the closing table. 

Prepare for the Move

Whether you go with a moving company or rent a truck yourself, you need to organize this ahead of time. Try to avoid moving on the last day of the month, pick a “slower time” like mid-week where you won’t face as much competition for moving trucks or services.

Schedule Any Post-Move Work You Want to Get Done

Want to replace the carpeting or get some painting done? Replace the appliances or the water heater? This is all best completed before you and all your furniture is moved into the home, so schedule the work before the closing date. 

With enough time, you can get multiple quotes and save money with the best offer and schedule.

Sign on the Dotted Line

There will be a lot of dotted lines to sign on, but you get the idea.

Boom! – congrats homeowner.

After You Close

The post-closing process is less stressful and involved but there are still a few things you’ll want to take care of.

  • Change the locks
  • Clean it (or hire a cleaning service)
  • Submit a change of address form with the post office
  • Update your address
  • Ensure utilities are turned on and in your name
  • Take a home inventory once you finish moving
  • Re-evaluate your emergency fund

Change the Locks

You want to control who has a key to your house and the best way to do this is by changing the locks. The seller gave you every key they had but can you be sure they gave out every key in existence? 

Probably not. Getting locks changed isn’t cheap and if you’re handy you can do it yourself, but it’s important to get it done.

Clean Your New Home (or Hire a Cleaning Service)

Some sellers are nice and will hire cleaners to give the house a once over after they move out. Others will leave garbage cans full of trash (when we moved into our second home, two huge garbage cans full of trash were left behind!). Be prepared to clean up or hire yourself a cleaning crew to do the job for you.

Update your Address

Once you move you’ll need to change your address with the post office. You can do it online, over the phone (1-800-ASK-USPS) for $1.05, or do it in person at your local post office with a PS Form 3575 for free.

You’ll also need to update your address on everything from magazine subscriptions to your driver’s license. 

A change of address is valid for a whole year (this is for first-class mail, the period is shorter for some other types of mail) and each piece of mail that gets forwarded gets a handy yellow sticker. I use that as my guide to notify companies of an address change.

Get Major Home Systems Serviced

It’s one thing to get a home inspection and it’s another to get systems serviced. The technician who comes out to do the work of servicing systems can also estimate the remaining useful life of the unit so you aren’t surprised. 

While they’re there, ask a lot of questions so you understand the systems. Asking a human being who is working on a system is easier than trying to figure it out with Youtube videos later on.

Ensure Utilities Are Turned on and in Your Name

Most utilities won’t be shut off because they won’t know the ownership of the house has changed hands! Call up the utility companies and inform them that you purchased the home, the date the utilities should’ve been transferred, and be ready to supply a Closing Disclosure as proof of closing.

Take a Home Inventory Once You Finish Moving

You’re in a bigger place, you might have purchased more furniture or items, take this time to compile a home inventory. If you used a moving company, ask them for a copy of the manifest and you have yourself a solid head start.

Re-Evaluate Your Emergency Fund

The last time you thought about your emergency fund, you didn’t own a home. Now you own a heating system, a cooling system, a water heater, and a thousand other different systems that need to work correctly for you to remain comfortable. 

So take stock of your equipment and adjust your emergency fund to account for potential problems.

Finally, enjoy your home! Explore the area around it, whether it’s hiking trails or the downtown scene. This will be your home for the foreseeable future – get to know it, learn how to best enjoy it, and have some fun!

Buying your first home can be a very daunting task but I hope this guide demystifies some of it. If there’s something I missed, please let me know!

Summary

Buying your first home can be an overwhelming experience and an exhilarating experience all at the same time. The more prepared you are, the better the experience will go. 

Are you considering buying a home for the first time? If you’re already a homeowner, what was your experience like when you bought your first home? 

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Jim Wang

About Jim Wang

Jim Wang is a thirty-something father of three who is a frequent contributor to Forbes and Vanguard's Blog. He has also been fortunate to have appeared in the New York Times, Baltimore Sun, Entrepreneur, and Marketplace Money.

Jim has a B.S. in Computer Science and Economics from Carnegie Mellon University, an M.S. in Information Technology - Software Engineering from Carnegie Mellon University, as well as a Masters in Business Administration from Johns Hopkins University. His approach to personal finance is that of an engineer, breaking down complex subjects into bite-sized easily understood concepts that you can use in your daily life.

One of his favorite tools (here's my treasure chest of tools,, everything I use) is Personal Capital, which enables him to manage his finances in just 15-minutes each month. They also offer financial planning, such as a Retirement Planning Tool that can tell you if you're on track to retire when you want. It's free.

He is also diversifying his investment portfolio by adding a little bit of real estate. But not rental homes, because he doesn't want a second job, it's diversified small investments in a few commercial properties and a farm in Illinois via AcreTrader.

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