9 Steps for Buying a Primary Residence
Buying a primary residence as a first-time homebuyer is one of the most significant financial decisions a person can make. It’s more than just a purchase; it’s an investment in a home base that can offer stability, tax benefits, and a pathway to long-term wealth.
In this post, we will cover essential steps and considerations for buying your first primary residence, from budgeting and financing to evaluating properties and making an offer.
1. Determine Your Budget
Setting a realistic budget is the first step. This process includes evaluating both your finances and the costs associated with homeownership, including:
Down Payment: Traditional loans typically require a down payment of 5–20% of the home’s price. Some loans, like FHA or VA loans, offer lower down payment options for eligible buyers.
Closing Costs: These one-time costs, covering items like title insurance, home inspections, and appraisal fees, usually amount to 2–5% of the home’s price.
Monthly Expenses: Your mortgage payment isn’t the only cost to consider. Homeowners also have to budget for property taxes, homeowners insurance, utilities, and maintenance while balancing existing lifestyle costs.
2. Get Pre-Approved for a Mortgage
A mortgage pre-approval gives you a clearer idea of how much you can borrow, your likely interest rate, and the loan terms you qualify for. This helps in two ways:
Setting a Realistic Price Range: Knowing your loan limit narrows down your search to homes within your budget.
Strengthening Your Offer: Many sellers prefer pre-approved buyers, as this signals a serious and qualified buyer.
TIP: DIFFERENCE BETWEEN PRE-APPROVAL AND PRE-QUALIFICATION
Pre-approval requires the lender to do a hard credit check and provide you with an official letter that will accompany your housing offer. However, it does not guarantee approval. Rather, it states that their loan underwriters are willing to provide the loan upon further document verification to the best of the lender's knowledge.
Because pre-approvals expire, you should wait until you are ready to make an offer. The turnaround time to get a pre-approval letter can be in 24-48 hours if you are already pre-qualified with a lender.
Pre-qualification allows the lender to run similar estimates, but without actually running your credit score just yet. You still need to provide your estimated credit score, income, and assets in order to provide realistic purchase scenarios.
This allows you to get multiple quotes from different lenders without having numerous hard inquiries on your credit file, as the multiple inquiries could negatively affect your credit score.
3. Identify What You Need in a Home
Your primary residence should suit your lifestyle now and in the foreseeable future. Create a checklist of essential features and prioritize your needs:
Location: Consider the neighborhood, school districts, commute time, and nearby amenities.
Size and Layout: Think about the number of bedrooms and bathrooms, the layout, and whether you’ll need space for a home office, guest room, or future expansion.
Condition of the Property: Decide if you want a move-in-ready home or if you’re willing to invest in a fixer-upper for a lower initial price.
4. Find a Real Estate Agent
An experienced real estate agent can guide you through the complexities of home buying, including negotiations, local market insights, and paperwork. Choose an agent who understands your needs and has a good grasp of the neighborhoods you’re interested in.
5. Tour Properties and Make a List of Pros and Cons
As you tour properties, keep track of your impressions. Use a checklist to evaluate each home’s pros and cons, such as:
Condition of Major Systems: Check for red flags in systems like HVAC, roofing, and plumbing that might need costly repairs.
Natural Light and Orientation: Small factors like sunlight exposure can make a big difference in daily life.
Noise Levels: Consider the surrounding area, traffic noise, and whether it fits your comfort level.
6. Make an Offer and Negotiate
When you find a home that fits your needs, it’s time to make an offer. Your agent can help you determine a competitive yet reasonable offer price. If the seller counteroffers, be ready to negotiate on aspects like:
Price: Many buyers and sellers negotiate back and forth until reaching an agreeable price.
Closing Date: You may negotiate the closing date to accommodate both parties’ schedules.
Contingencies: Common contingencies include inspection and financing contingencies, which give you an out if the home doesn’t pass inspection or if financing falls through.
7. Complete Home Inspections and Appraisals
Once an offer is accepted, it’s time to conduct a home inspection and appraisal:
Home Inspection: This is your opportunity to identify any issues with the property. If significant repairs are needed, you may renegotiate or request that the seller cover these costs.
Appraisal: Lenders require an appraisal to confirm the home’s value matches the loan amount. If the appraisal is lower than the offer price, you may need to renegotiate or bring additional funds to the table.
8. Secure Homeowners Insurance
Homeowners insurance is a crucial part of protecting your investment and is required by most mortgage lenders. Here’s what you need to know:
Policy Coverage: Standard homeowners insurance covers the structure, your personal belongings, liability for injuries on your property, and additional living expenses if you need temporary housing due to damage.
Dwelling and Replacement Costs: It’s essential to choose a policy that covers the cost of fully rebuilding your home in case of a disaster. Replacement cost coverage ensures you can repair or rebuild at today’s prices, not depreciated values.
Additional Coverage: Depending on your location, you may need extra coverage, such as flood or earthquake insurance. Review any specific risks to your area to ensure you’re adequately protected.
9. Finalize Financing and Close on the Home
The final steps involve locking in your mortgage rate, reviewing loan terms, and signing the necessary paperwork. During this time, you’ll finalize your financing, arrange for homeowners insurance, and review closing documents.
Closing Day: On closing day, you’ll sign the final documents, transfer funds, and receive the keys to your new home. Congratulations—you’re now a homeowner!
TIP: SELECTING LOANS AND DECIDING ON POINTS OR LENDER CREDITS
1. Selecting Loan Type
If rates are rising: Consider a longer-term fixed-rate mortgage (e.g., 30-year fixed) to lock in a stable rate and protect against future increases.
If rates are falling or expected to drop: An Adjustable-Rate Mortgage (ARM) (e.g., 5/1, 7/1 ARM) might be suitable, offering lower initial rates with potential for future refinance if rates decrease further.
2. Points vs. Lender Credits
Paying Points (when rates are high): Pay points upfront to reduce your interest rate for long-term savings if you plan to stay in the home for many years.
Lender Credits (when rates are low or rising): Accept lender credits to lower closing costs, especially if planning to refinance soon or if cash flow is a priority.
NERVOUS ABOUT BUYING YOUR FIRST HOME?
Buying a primary residence is often equal parts financial and emotional, making it both exciting and stressful. A financial advisor can help you navigate the financial impact, offering a steady and rational perspective throughout the process. At DiversiFi, we simplify all 9 steps and develop a strategy tailored to your overall financial goals. Our goal is to ensure your decision aligns with your long-term plans.
If you are interested in consulting with an advisor about buying a primary residence, contact us today.
Final Thoughts
Buying a primary residence is a major milestone with financial and personal implications. By following these steps, from budgeting and getting pre-approved to inspecting and closing, you’ll be well-prepared to make a sound investment in your future. Homeownership is a rewarding journey, offering the stability and long-term potential that can lead to a more secure financial future.
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Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed.