The First 7 Steps When Buying Your First Home

Reader Question: “I plan to buy a home later this year, and it will be my first real estate purchase. What are the basic steps to buying a home for the first time? I’m mostly interested in how to get started.”

Since you’re most interested in the beginning of the process, I’ll outline all of the home buying steps but with a focus on the initial stages. In truth, if you start this process on the right foot, the rest of it will be fairly easy for you. It’s in the beginning where most first-time buyers make the biggest mistakes. So let’s talk about the first steps to buying a home, and how to do them right.

Home Buying Steps for First-Time Buyers

Many first-time buyers think the process begins with the house-hunting stage. But this is wrong. In truth, there are many steps to take before you start looking at houses. You’ll need to do some financial homework first. So let’s talk about these important (but often overlooked) steps to buying a first home.

Step 1 - Review Your Finances

When you apply for a mortgage, the lender is going to examine every facet of your financial background. They want to know how much you earn, how much debt you have, and how you’ve handled your finances and credit in the past. So it’s a good idea to start examining these things for yourself. Get a copy of your credit reports from all three of the reporting bureaus and review them for errors.

Check your credit score to see where you stand (an important lending criteria), and work on improving your score if necessary. Be sure to make this one of your first steps to buying a home, because it can take time to improve a credit score. Even if you think you’re a year away from buying a house, you should find out where you stand today.

Start saving money — the more of it the better. You’ll need cash reserves to cover your down payment, your closing costs, and moving expenses. Your lender will actually check your bank balances to see if you have sufficient funds for these kinds of things. So start saving now.

It’s also a good idea to calculate your debt-to-income (DTI) ratio, and to pay down your debt as needed. Your DTI ratio is simply a measurement of your debt, relative to your income. In other words, it shows what percentage of your monthly income goes toward debt payments. If your DTI is over 30% or so, you might want to work on paying it down. Of course, this is a balancing act with saving money. This is why it’s so important to start these home buying steps early on — it takes time to get yourself in the right financial shape for the mortgage application process.

Step 2 - Determine Your Budget / Spending Limits

A lot of first-time buyers over look this step to buying a home, and you see evidence of this every time you turn on the news. Failing to set a realistic budget (and sticking to it) is the primary cause of mortgage default and home foreclosure. Many first-time buyers rely on their mortgage lenders to tell them what they can afford, but that’s not a lender’s job. They are in the business of lending money, not giving financial advice.

You should determine your own home-buying budget long before you even speak to a lender. That’s why I’ve listed it here, as one of the first steps to buying a home wisely. I recently answered a buyer’s question about this very subject, so it’s definitely worth reading: How Much House Can I Afford?

Step 3 - Get Pre-approved for a Mortgage Loan

This is another important step when buying your first home, and for several reasons. But let’s start with a definition first. When you get pre-approved for a mortgage, the lender will review your financial background (income, debt, credit score, etc.) and tell you what amount they’re willing to lend you. You can see why this is such an important step for home buyers. It helps you limit your home search to those you can afford, and it also tells the sellers that you’re capable of buying their house.

Step 4 - Find a Real Estate Agent

Do you really need a real estate agent? Is this a necessary step when buying your first place? I would say yes. Without a doubt, yes. Your first house will probably be the largest purchase you ever make, up to that point. So it pays to have professional help along the way.

Step 5 - Start House Hunting

The Home Buying Institute recently published a 2009 house hunting checklist for first-time buyers. I recommend reading through that article, because it’s very well done. Your agent will help you find a home that matches your needs, but you shouldn’t rely solely on that. Do your own searching as well.

You can find homes online that are within your desired price range and location, and then you can ask your agent to set up a showing. Realtor.com is a good place to start. On that website, you’ll find plenty of homes for sale in your area.

Step 6 - Make an Offer

If you’ve followed the recommended steps to buying your first home, you’ll be making an offer before long. During this process, your agent will prepare a written offer with other important terms (length of escrow period, purchase price, contract contingencies, etc.).

The important thing to remember here is that the seller’s asking price is exactly that — the amount they are asking for. That doesn’t mean the house is actually worth that price. Your agent will review recent sales in the area to see what comparable homes are selling for. These are known as “comps.” Your initial offer should be based on this kind of hard data.

Step 7 - Negotiate the Offer

When you make an offer on the house, the seller with do one of three things — accept the offer, reject it, or make a counteroffer to negotiate the price. You need to have a plan for this, and you should also be willing to walk away at some point. In some cases, the sellers may be unrealistic with their asking price (and unwilling to negotiate). These are the cases when it’s okay to walk away. In other cases, they sellers will be more motivated to sell the home quickly. You’ll know when the time comes. And your agent will be able to guide you through the process.

Wrapping Up the First Steps

Obviously, there’s more to the process than this. But you were mostly interested in the first steps to buying a house, so there you have them. At this point in the process, you’ll need to go back to your lender to get final approval for the mortgage loan. The lender will send an appraiser out to evaluate the home, to make sure it’s worth the price you’ve agreed to pay. If all goes well with the appraisal and the home inspection, you are well on your way to closing.

These are the first steps you’ll take when buying a home. I hope this helps you understand the process better, and I wish you well in your real estate endeavors. Good luck.