How to Buy Your First Home in 9 Steps

by Aiden White

Mortgage rates are recorded low which could mean it’s the perfect time to buy your first home.

As a first-time homebuyer, you might be worried about the whole complicated process. Don’t worry! In this post, we’ll break homebuying down in 9 basic steps.

1. Browse the market

Beyond dreaming, have you started checking out the area? Tools like Redfin and Zillow give you access to what your area looks like in terms of cost per square foot and the variability of prices by neighborhood. Check out the real estate websites and go through the ‘buy and sell’ section in the newspapers to find out the properties that interest you.

The purpose of browsing: You may need to regroup later if you’re not financially ready to invest in your first home.

2. Determine Affordability

With automated budgeting in your nav.it money app, budgeting has never been easier.

Affordability is a primary factor in the home buying process. Buying too expensive of a home could leave you feeling house poor later. How best to avoid that? Identify how much YOU can afford.

While lenders usually recommend buying a home that is no more than two to three times your annual income, your personal situation may reflect something different. If ⅔ of your income is going to student loan repayment, your monthly payment may need to be lower, lowering how much house you can afford.

If you haven’t already started, now’s a good time to start tracking your expenses. (Pst, there’s an app for that. )

While you can use general mortgage calculators, they may not include personalized considerations.

3. Saving

While there are ways to buy a home with nothing down, particularly for Veterans or with grants, how much you have saved can be a determining factor for your purchase. It goes without saying, the more you have saved, the more you can buy.

Pro-Tip: Automate your savings.

With automated savings, you’ll set aside a certain amount monthly for a more realistic way to tackle big goals like a large down payment. It’s an intentional behavioral change without the burden of thinking about it monthly.

4. Check and improve your credit score

Personal credit is your ability to borrow money or access goods and services with the understanding that you’ll pay for those things later. Scores can also be referred to as credit ratings, and sometimes as FICO® Scores, created by Fair Isaac Corporation, and typically range from 300 to 850. Credit bureaus like Equifax, Transunion, and Experian assign scores based on an accumulation of history, utilization, and repayment.

Mortgage lenders use these scores to determine your loan eligibility and how much you pay in interest. The higher the risk to them, the higher your interest will be.

Start by checking your credit.

Avoid third party credit estimation sites like CreditKarma to determine your score. They use estimates rather than pulling your hard data and hav been accused of being wildly inaccurate. Head directly to the sources. You’re entitled to three credit reports annually. So head over to AnnualCreditReport.com or call toll-free 1-877-322-8228.

The minimum credit score that you need for a home loan is 620. An above 700 score can help you qualify for a mortgage on the best terms. (A lower interest rate means you pay less.)

If your credit score is low, lenders may not be willing to offer you a mortgage. 

Improve your credit score by paying current bills on time.

The most important aspect of improving your credit score (and not damaging it) is paying your bills on time. Lenders are VERY interested in how reliably you pay your bills. Past performance is a good predictor of future performance.

Furthermore, reduce your credit utilization ratio and remove negative information from your credit report to boost your credit score.

5. Reduce your debt to income ratio:

Your DTI or debt to income is the ratio of your monthly income to your debt. You can calculate your debt to income ratio by dividing your debt by monthly income.

This is yet another factor that lenders should check before approving your loan application. The higher your monthly debt to income ratio, the lower your chance to qualify for a mortgage.

How to calculate your debt to income ratio:

In the simplest terms, you add up all your monthly debt payments and divide them by your gross monthly income. 

Your monthly credit card payments – $1200

Your gross monthly income – $3,600

 You debt to income ratio – ($1200 / $3,600) x 100 = 33.5%.

It is best to calculate your debt to income ratio before you approach a lender. You will have time to reduce it as much as possible.

6. Determine the type of mortgage loan to take 

Determine your mortgage loan type. Do you want to take out a fixed-rate mortgage or an adjustable-rate mortgage? Your monthly payment amount will depend on the type of mortgage you take out. With fixed rate lows, your interest rate is locked in. (Rates are historically low right now, so chances are, they will rise. But the only way to get out of a rising interest rate is to refinance later.)

*Pro-Tip: Use the APR calculator inside the nav.it money app. You’ll see how much interest can cost you.

 Apart from the loan type, you also need to think about the term.

Do you want a 15-year mortgage or a 30-year mortgage?

While you may benefit from a longer term with lower payments, you’ll be paying more interest over the life of a long. Analyze the pros and cons of each type of mortgage loan. For instance, FHA, private, FRM, ARM, etc. The right type of loan improves your chances of qualifying for a mortgage pre-approval. You can also get a clear idea of your monthly mortgage payment amount before making any financial commitment.

7. Get prequalified for a mortgage loan:

You’ve saved, you tracked your expenses, and improved your credit utilization/history. You’ve taken these steps 1-5 to get here: mortgage prequalification.

Unless you are a millionaire, you have to take out a mortgage to buy your first home. But do you have any idea how much you can get from a mortgage lender? Without adequate financial support from the mortgage lender, you may not be able to buy your first home. So, even before you initiate the home buying process, get pre-qualified for a mortgage.

How to get mortgage pre-approval

There is a difference between mortgage prequalification and mortgage pre-approval.

Pre-qualifying is just the first step, giving you an idea of how large a loan you’ll likely qualify for based on financial information you provide to the lender.

Pre-approval is the second step, a conditional commitment by the lender to actually grant you the mortgage based on not only the information you provide, but also your score.

Documents you have to submit
  • W-2
  • Paystubs
  • Bank statements*

(If a family member is gifting you a portion of your down-payment or a large sum of money, your bank will want to know about it. All income has to be accounted for.)

Remember that the pre-approval letter is usually valid for 60 to 90 days, while pre-qualifications last 90. If you are unable to buy a home within that period, you need to update this letter.

8. Calculate your closing cost:

 You have to pay closing costs before entering your new home.  How much will you have to pay?Well, it depends on various factors. The closing cost usually varies between 3% and 6% of the fair market price of the home.

If the fair market value of your new home is $300,000, you have to pay anywhere between $9000 and $18,000.

Other factors include the type of your mortgage loan, the lender with whom you are working, and the place where you are buying the property.

Apart from the closing cost, you have to pay the appraisal fees and the title insurance. You may also have to hire the services of a real estate attorney.

9. Find a trustworthy real estate agent

An experienced real estate agent can help you find the right home within your budget. They can find the property as per your requirements, plus negotiate with the seller to lower the price of the property. They can also guide you through the entire home buying process. So one of the most essential first-time homebuyer tips is to find the best real estate agent in your area.

Final words

Like your personal finance journey, homebuying is personal. What’s right for you may not be right for someone else. Take these steps to position yourself in the best situation for you, avoiding future financial stress. You’ll be working with the seller, mortgage lender, and the real estate agent to complete the paperwork, but nav.it has your back if you need more support for managing your money.

Related Reads:

How to Improve Your Credit Score

Best Financial Goals to Set After Graduating

Downloadable Guide to Budgeting


Aiden White is a financial writer who lives in Dudley, Massachusetts. She started her financial journey in 2016 and has been associated with Consolidate Credit Card  for the last 2 years. Through her writing, she has inspired people to overcome their credit card debt problems and solve their personal finance based queries. Being a debt fighter in her personal life, her goal is to share innovative thoughts and knowledge in the debt communities. You can find her on Twitter or email aidenwhitejoe@gmail.com


More Stories
Gratitude can benefit your mental, financial, and physical wellness
Psychology and Gratitude: How Being Grateful Can Improve Your (Financial) Wellness
%d bloggers like this: