Buying Your First Home in Six Simple Steps

First time homebuyers are faced with mountains of information. You can simplify the process by learning a few terms and developing a plan.

Get Financed

Before you even look at one house, get pre-approved for a loan. There's nothing more distressing than finding the home of your dreams and then getting turned down for financing. You should try your bank, a home mortgage company, a credit union, or ask a realtor to direct you to financing.

There are three mortgage types: VA loans (guaranteed by the Department of Veteran Affairs), FHA loans (Insured by the Federal Housing Administration), and Conventional loans (not insured or guaranteed by the Federal Government). Loan periods can run 15, 20, or 30 years.

Each mortgage is subject to interest. There are fixed-rate mortgage loans, when the interest rate is locked in over the life of the loan, or adjustable-rate mortgage (ARM) loans, when the interest varies according to the market index.

You must also decide if you want a principle/interest only loan or if you want a principle/interest loan with an escrow account built in. A portion of your monthly mortgage payment goes into the escrow account and covers mortgage insurance, homeowner's insurance, and property taxes. If you choose not to have an escrow account then you must pay the items yourself in full when they are due - which can strain your budget.

Don't be afraid to shop around, even after approval by one lender, because you may get a better deal or a lower interest rate from a different source. For example, a first approval can boast a 10% interest rate. Another lender may offer you 6% or lower.

Many factors will come into play during this process. Your credit score, bank statements, pay stubs, auto loans, utility payments, rent, and other cost of living issues will be reviewed. Do you have money for a down payment or are you looking for a zero down deal? You will have to sit down with a mortgage loan officer and they will crunch the numbers to figure out what you can afford.

Once you've been pre-approved, verify how long the approved interest rate will be locked in. This is your time frame for finding and buying your home.

Hire an agent

You should locate an agent who is familiar with the area you are interested in. They should be reputable. Look for one that is a REALTOR; they belong to the National Association of Realtors (NAR). The NAR is an organization that sets standards and codes of ethics for realtors. An agent or broker is a REALTOR only if they don the REALTOR trademark, usually a pin on their person.

Explore areas

Where do you want to live? Research the city or county on Google. Some factors to consider in choosing a neighborhood are crime rates, tax rates, community growth, community amenities, school districts, and distance from work and shopping.

Schools are particularly important even if you don't have any kids. What's the school's ranking? How's the student to teacher ratio? What percentages of students graduate from the district and attend college?

Will you have to travel a long distance to work, buy groceries, or bank? Does the community have a maintenance association? (There are annual fees.) Is there a clubhouse, pool, park, tennis court or golf course? Is the neighborhood a new development with few houses now but will be full of houses in the near future?

Another good way to find out about a neighborhood is to drive through it on your own. Is it noisy? Is there a lot of construction? How's the traffic? Is there a neighborhood watch? Are the yards well kept? Are there kids playing? Go with your instincts here. Also, think resale.

Find your home

What's on your wish list? How many bedrooms, bathrooms and living areas do you need? How many cars would you like to park in your garage? A lot of this depends on the amount of your pre-approval.

Are you willing to work on a fixer-upper or add on later? Your best bet is to buy the best house you can afford in the best neighborhood and make it your own.

You should allow your realtor to search for you; but you won't be stepping on any toes if you do a little research on your own. Some Realtors may limit their search to the inventory listed with their office. You may want to search the multiple listing service (MLS) for a better variety. A good source for locating a home is www.realtor.com.

Stretch the limit in your search. Your realtor may not consider showing you a house if the asking price is a little over your pre-approval. Remember, they are working for you; ask to see it anyway.

If it's a buyer's market (a situation where there are more homes for sale in an area than there are buyers), you may get the seller to take your offer. The opposite would be a seller's market, or hot market, when there are more buyers than sellers; homeowners receive multiple offers, usually getting more than asking price.

Strike a deal

Once you've found it you'll know. Sit down with your realtor and ask them to make an offer. Knowing the market can help you a lot here.

When you drove the neighborhood, were there a lot of homes for sale? Could mean a buyer's market. Try to find out if there have been any offers on your house. What was the lowest bid? How long has it been on the market? Was the house vacant when you looked at it? If so, the seller could be paying two mortgages and might take a lower offer.

What's the tax appraisal amount? A good rule of thumb for sellers is to sell at 25% over appraisal. If the market is slow, the seller may take 20%, 15% or lower if they're desperate.

Does the home need any repairs or updating? Anything you can throw in to lower your offer will assist you in getting a better deal.

Closing the deal

Your offer has been accepted! A contract will be written and signed by both you and the seller. It must be accompanied with earnest money to show your good intent to buy the house.

The lender will check your situation to see if it still matches the pre-approval. They must also verify that the house is a good investment for them, should you default on your loan; this involves inspections, surveys, appraisals, and title searches. These are some of the closing costs. The signed contract will state who is responsible for paying the closing costs. If you are lucky, the seller will pay all closing costs; however, it's likely you will have to pay a portion of them.

Now you and your realtor will go to the title company and sign all of the paper work. Once the money changes hands, all previous mortgage debts are settled, and the seller has been satisfied, you will be a homeowner. Congratulations!