10 essential tips for first-time homebuyers

Buying a home often starts long before you step into one. Here are 10 steps you can take to navigate the process successfully:

The homebuying process ideally should begin before you even hire an agent or look at houses. Consider saving for your closing costs and down payment. Closing costs usually range from 2% to 5% of the value of the buyer's mortgage and are paid in addition to the down payment, according to mortgage giant Fannie Mae. Instead, depending on what kind of mortgage you take out and what kind of homebuyer you are, you can pay as little as 3.5% down. And if you’re taking a mortgage from the Department of Veterans Affairs or the U.S. Department of Agriculture, you could get a loan without putting anything down.

State and local housing organizations, government agencies, lenders and nonprofits offer grants and loans to help buyers with down payment and closing costs.

Knowing your income, expenses and debt can help you create a budget to narrow your options, so you don't waste time looking at homes that are too pricey.

Mortgage lenders will use this information to determine your debt-to-income, or DTI, ratio. That's the difference between your gross monthly income and how much you're spending on recurring payments, like your credit card or car loan, as reflected on your credit report.

A lower DTI generally indicates better financial health. A good rule of thumb is to keep your DTI ratio around 50%, according to Nicole Rueth, a residential lender in Denver. You should be putting about half of your monthly income toward payments on your credit report.

Ultimately, though, that ratio depends on the borrower and the type of loan. For example, if you have a low credit score, your lender could require a lower ratio. On the other hand, a first-time homebuyer may have more flexibility, and lenders could accept a DTI up to 57%, according to Rueth.

Like a DTI ratio, there isn't a one-size-fits-all credit score for borrowers, but it can be too low to qualify for a mortgage, according to Rueth. Usually, you'll need to be above at least 500.

"A credit score of 670 to 739 is considered good," Experian.com advises. "Credit scores of 740 and above are very good, while 800 and higher are excellent."

Rueth said credit scores can be judged differently depending on your situation, so you should still consult with a loan officer about your options before you rule out the possibility of owning a home.

One of the best ways to bolster your score is by showing that you can manage debt, she said. Some ways to do that include holding more than one credit card, keeping your credit cards open, paying your bills on time and not spending more than 30% of your credit limit on each card.

As you prepare to buy a home, it's best not to make major purchases such as a car or a dining room set. That could change your DTI and affect your mortgage approval, real estate agents say. It’s also wise to check your credit report for errors through the three major bureaus: Equifax, Experian and TransUnion.

The most popular home loan is the 30-year fixed-rate mortgage. A 15-year mortgage comes with a lower interest rate but larger monthly payments. Adjustable-rate mortgages, or ARMs, start with a lower fixed introductory rate but can increase or decrease over time depending on market conditions, making this an option with more risk.

Some buyers arrange to get prequalified for a mortgage. That's when a lender estimates how much home they can afford. But a preapproval is a more thorough review of your finances and credit history that allows a lender to provide a more specific loan amount.

Preapprovals show sellers you're serious about buying and can secure a mortgage. That can lend your offer more credibility, an important factor if a seller is weighing other offers.

But buyers shouldn't necessarily shop for houses that cost as much as the lender has approved, said Gary Lanham of Coldwell Banker Realty in Fort Lauderdale, Florida.

"Just because the lender says you can doesn’t mean you should," Lanham said. "I help buyers focus on what will still feel comfortable five years from now, not just what the numbers say today."

Your real estate agent, also called a buyer’s agent, should act in your best interest to get you the best purchase price possible and guide you through the process.

You can find a real estate agent through referrals or by doing your research. This typically involves reviewing an agent's online profiles and specialties, the number of transactions completed, and their professional affiliations and experience in the local market. Homes.com offers an agent search based on location, home type, price range and experience.

Traditionally, agents of buyers and sellers have divided the standard 5% or 6% commission, and the sellers paid the entire cost out of the sale proceeds. But the National Association of Realtors now requires buyers who elect to have representation sign contracts spelling out how their agents will be compensated. Buyers can pay their agents directly.

A good agent is willing to show any listing the buyer wants to see, even if it involves a hybrid compensation structure, Lanham said.

Most people start house hunting online, where they can read more information about the properties, look at photos and take 3D tours of the homes. They can also attend open houses or schedule private showings. If you have children or plan to have children who would attend the neighborhood school, research the school district. Homes.com offers in-depth information on school districts and 24,000-plus neighborhoods.

Try visiting the home and neighborhood at different times of the day, and don’t be afraid to talk to neighbors. You can also check out community groups on social media, where people may be more willing to share what living in the area is like.

How long would your commute to work be and how close is the nearest grocery store? Does the home have good resale potential five or 10 years from now?

Find out the condition of the plumbing and electrical systems, along with the age of the air conditioning unit and roof. This is an especially important consideration because some property insurers may not offer replacement coverage on homes with roofs more than 20 years old.

"You can change the paint and flooring, but you can’t change the street or neighborhood," Lanham said. "Prioritize location over perfection."

When you submit an offer on a home, you’re creating a legally binding document. The offer outlines the price you’re willing to pay, along with contingencies, the closing date and costs, earnest money details, and what’s expected of the seller leading up to the final sale. It should also include the mortgage preapproval letter.

It's best to have a handful of houses you like because buyers often lose out on their first choices, especially in a competitive housing market. But buyers should make only one offer at a time, agents say.

"The first home slipping away is often the hardest lesson," Lanham said. "I try to prepare buyers early — and more often than not, they find a better fit on the second round."

Once a seller accepts your offer, both parties sign a contract. It outlines the steps each side must complete to secure the deal by the closing date.

During this period, you can schedule a home inspection. An inspection isn’t required, but first-time buyers, especially, shouldn't skip this step because they typically wouldn't have the money to pay for major repairs, said Ron Phipps, a broker at Compass who works in Rhode Island, Massachusetts and Vermont.

The inspector will compile a report and often will walk through the house with you. Standard sales contracts contain inspection contingencies to allow buyers an out if there is a major problem.

In many cases, sellers would be responsible for making major, undisclosed repairs uncovered during the inspection. For relatively minor items, you can ask the sellers to make the fixes before the closing date. The sellers may agree, decline or offer a credit at closing to cover the repair costs.

Phipps suggested asking the sellers to pay for a one-year home warranty to cover systems and appliances.

"I do recommend both — not either/or," he said.

After the parties sign the sales contract but before closing, the lender will schedule a home appraisal if you’re buying the property with a mortgage. This is an unbiased, professional opinion of the home’s value — work done on behalf of the lender. Lenders require an appraisal to assess the property's value and determine your interest rate, required down payment and whether you will be approved for the loan, according to the Federal Deposit Insurance Corp.

The appraisal could come in lower than your offer — what is known as an "appraisal gap." Because the lender won’t allow you to borrow more than the appraised value, you would need to pay the difference yourself, withdraw the offer if the contract included an appraisal contingency, or negotiate with the seller to split the cost.

At this point in the process, many sellers will work with you. But you may have to prepare yourself to walk away from the deal.

You're officially a homeowner after you sign documents, pay closing costs and receive your keys. As a homeowner, you’re responsible for making timely mortgage payments and paying homeowners insurance and property taxes. While many first-time buyers don't have a lot of spare cash after the down payment and closing costs, it’s important to set money aside, even $200 or $300 a month, for hidden costs such as maintenance and repairs.

“I tell my buyers, now that they are homeowners, they need to protect their home by having a separate savings account and plan for home repairs, unexpected emergencies and other housing-related expenses,” said Bill Kowalczuk, a real estate broker at Coldwell Banker Warburg in New York. “You'll need to save and budget for property taxes and homeowners insurance. If you have that separate savings account, anything unexpected won't come as an unexpected financial burden."