16 Tips for First-Time Home Buyers

Wondering how to buy your first home? You’re not alone. 

For the past 20 years, 1 million to 2 million Americans became first-time home buyers every year. In 2020, that number spiked to 2.38 million.^[1]

Even as homeownership is rising, it can still feel like a mysterious process for a newbie. We’ll help you understand what’s what. And with a couple of handy tips and tricks, we’ll help you get the keys to your first home.

1. Get Your Finances In Shape

Buying a home is one of the biggest purchases you’ll ever make, and it will affect you both financially and emotionally. Before you commit to buying a home:

• Take the time to review your finances and decide how much home you can really afford.
• Be honest about your reasons for buying a home.
• Consider how buying a home fits into your long-term financial strategy.
• If you’re buying with a spouse or significant other, make sure you’re both on the same page about long-term plans.

2. Understand That Homeownership Is an Investment

It’s important to play the long game when thinking about becoming a homeowner.

With a little savvy, you can build home equity for the future and save money on housing in the long run.

But a home is a long-term commitment that requires a significant investment in the beginning.

If you aren’t sure that you can commit to a home for at least 5 years, you may want to wait before you buy.

3. Go Beyond Your Monthly Home Payments

When you see a mortgage rate listed, it’s easy to think, “Well, that’s the same amount I’m paying in rent. I can totally afford a mortgage!”

Before you buy, it’s important to know that the mortgage is only a part of your overall home expenses. When determining your monthly housing payments, you’ll also need to account for:

• Homeowners insurance: If you buy a home, you’ll be required to purchase homeowners insurance before you close.
• Mortgage insurance: If you can’t make a down payment of 20%, you may be required to pay an additional monthly fee for private mortgage insurance or insurance premiums.
• Property taxes: These taxes pay for your local government and its services and can vary wildly based on where you live.
• Other expenses: Don’t forget to include utilities, home maintenance and repairs in your monthly housing budget.

4. Learn About Upfront Housing Expenses

Before you make your first mortgage payment, buying a home will include other expenses that you’ll need to be ready to cover.

• Down payment: This is the money you’ll need to pay in advance for your home. While many experts recommend a down payment equal to 20% of the home’s value, you can usually get a loan for a one-unit primary home with as little as 3% down.
• Closing costs: When you buy your home, you’ll need to cover all of the expenses related to its purchase. This can add up to as much as 6% of the value of your mortgage loan.
• Moving expenses: Once you own your home, you’ll need to move your old stuff in, buy new stuff, repaint and renovate. These costs can add up quickly, so make sure you have the money to cover them.

5. Get Help With Government-Backed Loans for First-Time Home Buyers

If you do decide to buy a home, you’ll want to get as much help as possible, especially if you have a credit score below 620 and can’t afford a 20% down payment. 

Two of the most important programs are government-backed loans offered by the Federal Housing Administration (FHA) and the Department of Veterans Affairs (VA).

• FHA loans: Designed to help first-time home buyers, home buyers with low credit scores or other credit issues and lower-income home buyers
• VA loans: Exclusive mortgage loans and refinancing programs for veterans and their families

6. Learn About Low and No-Money-Down Loans and Assistance Programs

Some programs make it easier for first-time home buyers to buy a home with a lower down payment. 

These loans may have specific conditions to qualify.

• Fannie Mae and Freddie Mac programs: There are low down payment programs for first-time buyers with lower incomes and lower credit scores. There are also specific programs to help teachers and first responders. Conventional loans through Fannie and Freddie start around 3% down.
• FHA loans: You can typically qualify with a credit score as low as 580 and a down payment of 3.5%.
• VA loans: For eligible active-duty service members, reservists, National Guard personnel, veterans and surviving spouses, the big benefit of a VA loan is that no down payment is required.
• Housing Finance Authority (HFA) loans: These state-based programs help first-time home buyers with down payment assistance and home buyer education.
• Payment assistance programs: These are programs at the city, county and community level that help home buyers with down payment assistance, education and forgivable loans.

7. Understand How Credit and Debt Affect Your Mortgage

No two mortgage loans are alike. The amount you can borrow is based on several factors, including your income, employment and credit history. Lenders base your ability to get a mortgage on two key numbers:

• Credit score: Your credit score sits on a scale between 300 and 850. Where you fall on that scale indicates your creditworthiness to lenders. The higher your score, the better your chances of getting a mortgage and favorable terms. If you don’t know where your credit score falls on the scale, there are lots of ways to get a copy of your credit report for free.
• Debt-to-income ratio (DTI): This is a measure of how much you owe and how much you earn. The higher the ratio, the harder it will be to qualify for an affordable mortgage. To qualify for the most options, it’s a good idea to have a DTI of 43% or less.

If you have too much debt, look for ways to pay it down before you apply for a mortgage.

8. Explore Different Mortgage Options To Save Money

Once you’ve qualified for your mortgage, you’ll need to make other decisions that can affect how much you pay each month and how much you’ll pay in mortgage interest over the life of the loan.

• Fixed rate vs. adjustable rate: Two key ways that lenders determine how much interest you’ll pay each year for your mortgage.
• Loan terms: How quickly do you want to pay back your mortgage? Most lenders offer 10-, 15-, 20- and 30-year terms.
• Mortgage points: If you have cash available after you make your down payment, you can pay extra to lower your mortgage interest rate.

9. Research and Prepare Before Buying

Before you start house hunting, take the time to figure out what you want in a new home. This is especially important if you’re buying with a spouse or significant other or have children. Take your time and:

• Create a budget for buying a home
• Decide what you want to spend on housing expenses each month
• Target neighborhoods or areas that fit your current and future needs
• Research property value trends in your area
• Create a list of needs versus wants for a potential home

10. Get Preapproved

Before you can buy a home, you’ll need to get preapproved.

Preapproval is an agreement between you and a mortgage lender.

The lender takes an initial view of your finances, credit score and credit history and then gives you a preapproval letter. The letter states that the lender has agreed to loan you a certain amount of money to buy a home, subject to conditions like appraisal and final review.

Learn about the preapproval process and take the time to research lenders and mortgage types. A good lender should be able to offer you multiple mortgage options.

11. Get Help Looking for a New Home

Buying a home can be challenging under the best of circumstances.

Look for helping hands by talking to real estate agents, mortgage brokers and other professionals in your area. A real estate professional can help you find a home, look at a home with unbiased eyes and help you negotiate with sellers.

Best of all, using a real estate professional costs you nothing.

Real estate agents are paid a commission by the seller. Mortgage brokers are paid by the mortgage lenders.

Friends and family can be great sources of recommendations and advice, too. Just make sure and do your own homework before you commit, and work with a real estate professional that you trust.

12. Be Ready To Make an Offer

Once you find a home you love, you usually can’t afford to wait. You don’t want to lose out to another buyer, do you? You’ll need to provide a preapproval letter and be ready to make an earnest money or “good faith” payment (typically equal to 1% – 3% of the purchase price). Once you make this payment, the seller agrees to not entertain other offers.

If it’s a seller’s market, be ready to negotiate. Your real estate agent will be an essential part of this process.

13. Get a Home Inspection

Once your offer has been accepted, you’ll want to have the home inspected by a professional. This can reveal any concerns with the home that may need to be addressed before closing.

A good home inspection should include a detailed report on the condition of the following:

• Foundations and structure
• Plumbing and sewer
• Electrical wiring and appliances
• Roofing and insulation
• Energy efficiency
• Yard and property

If you’re concerned about termites or other kinds of infestation, you may want to ask about getting your home inspected by a pest control professional as well.

If the inspection raises concerns, you can use your concerns to negotiate. You may be able to get things fixed or repaired before you buy. You may even be able to adjust the purchase price, so you can fix the problems yourself.

14. Know When To Walk Away

Negotiating for a home is pretty standard, and it can – potentially – be a very exciting part of the home buying process. But don’t let the thrill of the moment drive you to spend more than you can afford.

And if your home inspection raises issues that the current owners aren’t willing to discuss, it may be a red flag and a sign that it’s time to bow out.

Make sure you walk away in good faith. Otherwise, you might lose your earnest money deposit.

15. Be Prepared for the Underwriting Process

During the underwriting process, your lender takes a deep dive into your finances to determine whether you’re eligible for the mortgage and the offered interest rate.

The better organized your financial paperwork is (and ready to share), the easier the process will be. Be ready to provide:

• Recent tax returns
• Proof of employment
• Pay stubs or other proof of income
• Bank account and credit card statements
• Student loan statements
• Statements for investments and other assets you may own

16. Check Your Closing Costs

Before you can officially call yourself a homeowner, you’ll attend a “closing.”

At the closing, you sign some documents, pay some money and – finally – get those keys.

Make sure you’re ready to cover your closing costs (aka settlement costs). You’ll be able to fold some of these expenses into your mortgage loan, but other costs may require payment at closing.

Take as much time as you need to review all costs before you sign on the dotted line. Your lender may be willing to let some costs go or give you a discount.

Why Being a First-Time Home Buyer Matters

Becoming a first-time home buyer can be challenging, but it can also open doors.

As a homeowner, you’ll be able to build equity that you can use to finance your future plans. You’ll also be able to build a foundation for the future if you decide to become a second or even third-time home buyer.