How to buy a house for the first time

What do you need to buy a house?

Well before you find the house you want to buy, start familiarizing yourself with the information, qualifications, and resources you need including:

• A credit score that qualifies you for a mortgage
• Proof of reliable income and savings
• The cash required to close on the house
• A home-buying budget
• A pre-approval for a mortgage
• A mortgage loan approval
• A real estate agent

Steps to buying a house for the first time

Once you're ready to start the process, follow these steps to buying a house:

1. Get your finances in order

• Assess your financial situation: Analyze your income compared to your debt. If you're financing the home, prospective lenders may require a certain debt-to-income ratio, which means your monthly debt payments shouldn't exceed a certain percentage of your monthly earnings. You need to maintain a steady income to qualify and pay for your mortgage.
• Determine how much home you can afford: Progressive has a home affordability calculator, which will give you an estimate of how much house you can afford based on your income, debts, and expected mortgage rate.
• Check your credit score: Get a copy of your credit score from the major credit bureaus from AnnualCredit.com and clear up any errors you may find. According to Experian, a fair rating of 620 will qualify you for a conventional mortgage with most lenders. If you apply for a FHA loan, you may get approved with a 500 score. A higher credit score may get you a better mortgage interest rate. ConsumerFinance.gov has a credit report checklist to help you review your scores.

2. Establish your budget

• Down payment: Knowing how much house you can afford will help you determine if you've got enough money for a down payment, often 20% of the home's value, but many people pay less — as little as 3% sometimes. However, the more you put down, the lower your monthly payments.
• Earnest money deposit: An earnest money deposit is a check that will accompany your offer, typically between 1% to 3% of the home's value. This money is held in escrow and shows the seller you're committed to purchasing the home. Later it’s applied to your closing costs or down payment. Learn more about how escrow and homeowners insurance work.
• Closing costs: Ensure you'll also have sufficient funds to cover closing costs. You'll receive a Closing Disclosure from your lender listing the closing costs, which include items such as loan origination fees, discount points, title searches, insurance, and more.

3. Get pre-approved for a mortgage

When you're ready to start house hunting, getting pre-approved for a mortgage or home loan lets you know how much of a mortgage you qualify for and shows sellers that you're a serious buyer. Some real estate agents require a pre-approval letter before working with you. It can also give you an advantage over someone who hasn't yet taken that step. Work with a mortgage loan officer or your bank to find out your pre-approval options.

4. Get your documents in order

Your lender will request financial records when you apply for a home loan. These can include recent pay stubs, two years of tax returns, bank statements, rental history, and a copy of your driver's license. Having these documents ready when you apply for a mortgage can make the process go smoothly.

5. Determine what you need and want in a house

Newer home vs older home: Would you prefer a new home so that you don't have to deal with the maintenance issues of older homes? If you're handy with tools and don't mind putting in the physical effort, a fixer-upper is one way to reduce costs.

Location: What is the best location for you? Consider proximity to schools, shopping centers, and hospitals as well as access to highways and public transportation.

Size and type: Think about how much property you want. Do you want ample front and backyard space, or are you OK with your neighbors being closer to your house? What type of house appeals to you, such as a split-level, ranch, or a Cape Cod? Modern or traditional style? How many rooms do you need? What about an attached versus detached garage, an enclosed porch, a finished or unfinished basement, and landscaping?

6. Hire a real estate agent

Preparing to buy a house can be stressful, but a real estate agent can help you navigate the home-buying process more efficiently, find houses that have what you what, navigate what to look for when you're buying a house, and negotiate with the buyer. It's their job to do everything in their power to find you a home that fits your desires within your budget.

7. Start house hunting

Check your local real estate listings, attend open houses, and tour homes privately with your real estate agent. As you get familiar with the market, identify your deal breakers. You might not find a house with everything you want, but you can make sure it has everything you need.

8. Make an offer

Once you find a house that checks your boxes, consult with your agent, and consider what amount you're comfortable with to make an offer on the home. You'll put in an offer, typically with an earnest money deposit, typically between 1% to 3% of the home's value. Consider including a home inspection contingency in your purchase agreement, which allows you to negotiate further or back out if major issues are found during the inspection. The seller may negotiate with you before you settle on a final purchase price and terms.

9. Get a home inspection

After the house is under contract (meaning the buyer accepted your offer), find a home inspector and schedule a home inspection. You pay for the home inspection out of pocket rather than as part of the closing costs. If the inspector finds aspects of the house that need repairs, you may negotiate with the seller to pay for the repairs or reduce the negotiated sales price.

10. Buy homeowners insurance

Homeowners insurance is required by most home lenders, and while they may refer you to an insurer, you can also compare homeowners insurance rates to find the right policy for you. Get answers to your questions about homeowners insurance as a first-time homebuyer.

11. Secure your financing

To finalize your mortgage financing, your lender will likely require an appraisal, which they will handle. You typically pay for the appraisal out of pocket.

12. Close on the home

Your last step is the real estate closing, where the buyer and seller finalize the home purchase. Before closing, resolve any issues raised in the inspection, finalize the mortgage with your lender, and review the list of closing costs in the Closing Disclosure. At the closing, you sign your title transfer and mortgage documents and take possession of your new house. Congratulations—you're a homeowner!

Buying a house? Get a homeowners quote through Progressive.