What Are the Steps for the First Time Home Buyer?

Written by Bill MacDonaldJuly 21st, 202210 minute read

The Department of Housing and Urban Development defines a first-time home buyer as someone who satisfies any of the following criteria:

  • A person who has not owned a primary home for the previous three years, ending on the date of acquisition of the property.
  • A spouse is included in this (if either meets the above test, they are considered first-time homebuyers).
  • A divorced single parent who has solely owned property from a previous marriage.
  • A person who has only owned a spouse and is a displaced homemaker.
  • A person who has only owned a principal home that is not legally obliged to be securely connected to a permanent foundation.
  • A person who has only owned a property that failed to comply with state, municipal, or model building codes and could not be brought into compliance for less than the cost of constructing a permanent structure.

Steps to buying your first home

1. Get your free credit report from Equifax, Experian, and TransUnion. All three credit reporting agencies now offer a look at your credit report online. The credit score page explains the procedure to obtain your credit report and credit scores. Even if you have a high credit score, you can benefit from a lower interest rate by increasing your credit score because interest rates are tied to your credit score.

2. Gather up your papers for a pre-approval application. The documentation needed for mortgage pre-approval contains a list of required paperwork.

3. After reviewing your credit report for errors and pulling together all of your information, you should meet with a mortgage lender for a pre-approval application. I recommend meeting with your bank's loan officer first. Why? Because banks offer special financing to comply with the Community Reinvestment Act (CRA). The CRA programs are based on area income or census tract location. The Federal Reserve System offers home buyer programs that are available to member banks. Some of the Federal Reserve programs are unbelievable. For example, the Federal Home Loan bank of Pittsburgh offers a FREE grant of up to $5,000 to eligible home buyers in Pennsylvania, West Virginia, and Delaware. Veterans may be able to obtain as much as $10,000 from the Federal Home Loan Bank of Atlanta.

You want the lender to submit your application through the automated underwriting system. You might be surprised to learn that the initial loan approval is made by a software program. Automated underwriting is the real deal.

4. The next step is to contact a real estate agent. Ask the loan officer for a reference. Loan officers may not know all the Realtors® in their area, but they know the bad ones.

5. Call the Realtor® and request a meeting. After speaking to the agent for a short period of time, you'll get a sense of whether you can work with the agent. Ask the agent what he or she can do to find you a house. If you don't feel comfortable with the agent, thank the agent for his or her time, and leave. Most real estate agents and companies want home buyers to sign a “buyer's agreement". It's really a loyalty pledge that the real estate agent is your exclusive representative and will be owed a commission if you come together with a seller. If you're presented with a buyer's agreement, take it home and read it carefully. Highlight or circle any elements of the contract that you don't understand or disagree with. The worse thing for the home buyer is to be tied to a real estate agent who's a dud.

6. Now it's time to go look at houses. Try not to be caught up with emotion when you find the right house. Talk with the seller if possible. Ask the seller why he's moving and ask what improvements were made to the house.

7. Once you've decided to make an offer on the house, go to making an offer for some offer tips. For example, did you know that if the current owner filed an insurance claim, you could pay a higher homeowners premium? Everyone purchasing a home should ask the home seller to give the buyer a C.L.U.E. report. It's free every 12 months. The C.L.U.E. report is a loss history report that includes any insurance claims a home has had in the last few years; including flood damage, fire, theft, etc.

With the help of your real estate agent, write up the sales contract. Ask the loan officer for a pre-approval letter. The pre-approval letter tells the seller that you are qualified to purchase their home. The lender should provide you with a loan estimate based on your offer. The loan estimate defines the costs associated with the loan; including the monthly mortgage payment.

There are several contingencies that should be included with your offer. A contingency is a way out of the sales contract if certain conditions are not met. For example:

  • Mortgage contingency
    The mortgage contingency says in so many words, "if I can't get a mortgage", then there's no sale.
  • Home inspection
    Included in the sales contract is a request to bring in an individual to inspect the home for any "serious" defects. Choose the home inspector carefully. Is the home inspector qualified? Will the inspector get up on the roof and carefully inspect the roof. Will the home inspector get into the attic? Is the home inspector qualified to render an opinion on the condition of the furnace and electrical systems? The home inspector will probably ask you to sign a contract that gives the home inspector immunity if he or she misses something. Read the contract carefully.
  • Pest inspection
    Bugs can really damage a house. Make sure you have a pest inspection
  • Other inspection options include mold and radon

8. Now, here's where it gets tricky. The contract will require that you meet specific dates. Make sure the home inspector can inspect the home quickly and provide you with the home inspection report within the date specified in the contract. If he or she doesn't meet the inspection date, you could run into trouble with the seller if you want repairs made.

Make a formal application with the lender, but don't hand over any money to cover the appraisal and credit report fees. The reason is that the home inspection report might reveal a problem that will prevent you from completing the sale. A home inspector might charge up to $500 and the lender might want $400 for the appraisal and credit report. That's a lot of money for a house that you might not own. If everything checks out, write the lender a check.

9. Start shopping for homeowner's insurance. Many insurance companies are sending out their agents or their home inspectors to determine whether they're going to insure the house. In a hot market, it might take a week or two for the insurance company to visit the home.

10. Step 10 is take a deep breath and prepare to sign the closing papers.

Types of loans for first-time home buyers

There are four popular home loans:

  • FHA (Federal Housing Administration)
  • VA (Veteran's Administration)
  • USDA (United States Department of Agriculture)
  • Conventional (Fannie Mae and Freddie Mac)

Home buying may seem like a maze. Each home-loan program has its own guidelines and relative merits. For example, an FHA loan only requires only a 3.5% down payment and you do NOT need to be a first-time home buyer, however, the maximum lending limit is lower than a conventional mortgage.

The USDA home loan program does not require a down payment (100% financing), however, the home must be located in a designated rural area and there are income limits.

The Veteran's mortgage (VA) does not require a down payment and the seller can pay all closing costs... but of course, you must be an eligible veteran to take advantage of the VA mortgage.

Let's take a look at your loan options

FHA Home Loan - Number one choice for low cash and low credit score!

Benefits of an FHA loan -The FHA loan is a government-backed home loan program that offers a low down payment of 3.5% (except the 203(H) program which is a zero down payment loan available in declared disaster areas), there are no first-time home buyer requirements with the FHA, and the seller is permitted (not required) to pay up to 6% of the sales price toward closing, escrow, and prepaid costs. The FHA permits qualified "donors" to gift the entire down payment to the home buyer(s). The FHA will permit a 500 credit score. The FHA also offers a purchase plus rehabilitation program, 203(K). All FHA programs can be used for mortgage refinancing.

Disadvantages of an FHA loan -There are maximum mortgage amounts with a FHA mortgage. There is a funding fee and a monthly mortgage insurance (MIP) expense, even if you make a down payment of 20% you are required to pay the upfront mortgage insurance and monthly fee. Read more about FHA home loans

Veteran Home Loan - No down payment!

Benefits of a VA loan -VA home loans do not require a down payment requirement - "0", and the Veteran's Administration permits the home seller to pay all closing costs on behalf of the vet. Closing costs include title insurance, transfer taxes (if any), settlement fees, pest inspection. The is no monthly mortgage insurance premium (MIP/PMI).

Disadvantages of a VA loan - There is a funding fee. The cost to "fund" the VA mortgage program is based on the down payment, if any, whether the veteran has ever used his or her entitlement and whether the veteran earned his or her eligibility as an active duty service member or as a reservist/national guard veteran. Disabled veterans and purple heart recipient are exempt from the VA funding fee requirement. Read more about VA home loans

USDA Home Loan - No down payment!

Benefits of a USDA loan -The USDA home loan is another government home loan program to help home buyers in rural areas of the country to purchase a home. The USDA mortgage is a zero down mortgage. There is an upfront mortgage insurance cost, however, the USDA funding fee can be financed with the loan. There is a modest monthly mortgage insurance premium (pmi/mip).The home seller is permitted (not required) to pay up to 6% (and possibly more) of the sales price toward the buyer's closing costs. If the appraisal exceeds the purchase price, the difference may be used to finance the closing costs.

Disadvantages of a USDA loan - There is a funding fee. The cost to "fund" the USDA mortgage program is one percent of the mortgage amount. The funding fee cost is less than an FHA mortgage. And like the FHA loan, there is a monthly mortgage insurance premium; however, the monthly cost is less than the FHA mortgage insurance premium.Read more about the USDA loan program

Conventional Mortgage - Your grandfather's mortgage

Benefits of a conventional loan -The conventional loan is not associated with the federal government. The conventional mortgage meets the lending requirements of the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). The Fannie/Freddie loans compete with the government backed home loans. The conventional mortgage does not have the upfront funding fee. There is a monthly mortgage insurance premium (PMI) if the down payment is less than 20%. If the loan is made to refinance an existing loan, monthly PMI is not charged if the equity is 20% or more. This mortgage is often identified by down payments of 5, 10, 15 and 20 percent. The lending limits (the amount you can borrow) are greater than FHA.

Fannie Mae has two popular 3% down payment programs; the HomeReady
and Conventional 97 loans.

Disadvantages of a conventional loan - The interest rates tend to be higher with conventional loans than with the government backed mortgages. The reason is that lenders are on the hook for the entire loan amount with a foreclosure, however, the government absorbs some of the loss with the government backed loans. There is a limitation on lender paid closing costs (lender assist), however, Fannie Mae has loosened the closing cost limitation. Read more about conventional mortgages

Frequently Asked Questions About Home Buying

Q. How does a home inspection help buyers?
A. Home inspectors are objective observers of the home's condition. They are not swayed by the emotion of the purchase. A home inspector should be able to evaluate the condition of the home objectively.

Q. How does a first home buyer grant work?
A. The grant programs vary from free money for the down payment and/or closing costs to a forgivable loan for closing expenses. The most popular grant programs are the forgivable loans.

Q. What are the benefits for first-time home buyers?
A. The single and most important benefit of homeownership is owning your home free and clear at some point in time. If you rent for 30-years, what do you have? I'll tell you, nothing. And each year the rent goes up, but with a fixed-rate mortgage, the payment will only increase with an increase in property taxes and homeowner's insurance.

Q. Who is eligible for a first-time home buyer's grant?
A. The grant programs are usually structured for low to moderate income home buyers. The household income limit is very generous. The grant programs also include over-income home buyers who are purchasing in designated census tracts.

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