Tips for First-Time Homebuyers -
Make All The Right Decisions Before Purchasing Your New Home
Buying a place of your own for the first time can be a good investment, but it’s also a lot of work. To simplify the process of buying a house, we’ve made a list of tips for first-time homebuyers.
Here, you’ll find money-saving and budget-setting tips, a rundown of different mortgage types that you should explore, and advice on how to choose the most suitable home loan.
We’ve also included house shopping tips, suggestions on how to make the most of a real estate agent’s help, useful advice on how to finalize your purchase, and advice on how to avoid frequent first-time homebuyer mistakes.
Money-Saving Tips for First-Time Homebuyers
Scrolling through pages of online listings is one of the most exciting aspects of the homebuying process. However, the last thing that you want is to fall in love with a property you simply cannot afford.
That’s why you should thoroughly examine your finances before you even think of looking for your first home. A serious financial audit will tell you whether you’re ready to purchase your first house.
Here are the steps we suggest you follow in this phase:
Repay Your Debts and Build an Emergency Fund
The first step of your homebuying journey should involve paying off all of your past debts or at least lowering your debt-to-income ratio. Why is this so important for first-time homebuyers?
The deal is simple - try to keep your DTI ratio as low as you can (ideally around 28%), and you’ll be more likely to qualify for the lowest mortgage rates.
When you find your ideal property and decide to purchase it, not only will you have to pay your mortgage every month, but you’ll also face upfront expenses.
That’s why we recommend you start an emergency fund with enough money to cover not only these costs but also three to six months of living expenses. Look into certificates of deposit, short-term bonds, fixed-income portfolios, or FDIC-insured high-yield savings accounts to find the best solution.
Here’s a breakdown of the main upfront costs you must consider while saving for buying your first home:
- Down payment: Your down payment is the percentage of the chosen property’s purchase price that you need to pay upfront upon choosing your home loan. Depending on the mortgage type and the lender you choose, the required percentage may vary considerably. Some conventional loans designed for first-time homebuyers with above-average credit scores may let you put down only 3% of the purchase price. Still, keep in mind that even a small down payment may be difficult to save for, so start early.
- Closing costs: As a first-time homebuyer, you should also be prepared for the expenses and fees to finalize your mortgage. Closing costs generally range between 2% and 5% of the loan amount. In some cases, the seller may agree to pay for a portion of these expenses. If you shop around, you may also be able to save a little on home inspection fees.
- Move-in expenses: Lastly, you’ll also need some cash after you finalize the purchase. We suggest you allocate some money for house upgrades, immediate repairs, and furnishings.
Review Your Monthly Spending
You shouldn’t start the process of buying a house until you’ve figured out what you can afford. To determine the amount you can safely spend on your first home, you’ll have to analyze yourself as a consumer.
In other words, to get a good idea of how much you’ll be able to allocate to mortgage payments, you’ll need to calculate how much money you’re already spending each month and on what.
Make sure to include everything you can think of - from utilities to student loan debt, car payments and maintenance, retirement savings, regular savings, food, clothing, entertainment, children’s activities, and any miscellaneous items.
Keep an Eye on Your Credit
Our list of tips for first-time homebuyers would be incomplete if we didn’t mention how important it is to strengthen your credit. Not only does your score determine whether you’re eligible for a home loan, but it also affects the mortgage rates lenders will offer you.
We recommend you keep your debt-to-income ratio low, make on-time payments, keep your credit card accounts open with balances as low as possible. You should also monitor your score by requesting free copies of your reports from the credit bureaus and disputing any errors that are hurting your profile.
First-Time Homebuyer’s Mortgage Selection Tips
As a first-time homebuyer, you may feel overwhelmed by the myriad of available financing options. However, taking a few hours to do the research on home loans can ultimately save you a lot of time and money. Here are the steps you should take:
Explore Home Loan Options
When it comes to mortgage types, options can vary, especially when it comes to down payment requirements and borrower qualifications. Let’s take a look at the main categories of first-time homebuyer loans:
- Conventional mortgages: Conventional home loans aren’t guaranteed or insured by the government. Typically less costly than government-backed options, these mortgages usually come with fixed interest rates and stricter borrower requirements such as higher credit scores, lower debt-to-income ratios, and bigger down payments.
- FHA loans: These loans are insured by the Federal Housing Administration which is part of the US Department of Housing and Urban Development. Excellent for first-time homebuyers, FHA mortgages impose less stringent borrower requirements and allow down payments as low as 3.5% of the loan amount.
- VA loans: Guaranteed by the US Department of Veterans Affairs, this type of first-time homebuyer loan is meant for current and veteran members of the military and typically requires no down payment. Note that the VA doesn’t extend loans itself but guarantees mortgages offered by qualified lending institutions.
- USDA loans: Defined as zero-down-payment mortgages designed for homebuyers from suburban and rural regions, USDA loans are guaranteed by the US Department of Agriculture. Much like VA loans, these mortgages also have relaxed eligibility requirements.
Keep in mind that no matter which loan type you go for, there will be multiple mortgage term options to choose from. The most common choice among those buying their first home is a 30-year fixed-rate mortgage.
If you prefer a lower interest rate, we suggest you go for a 15-year loan, provided you are comfortable with larger monthly payments.
Learn About Additional First-Time Homebuyer Assistance Programs
In addition to the aforementioned government-backed federal-level loan programs, there are more options sponsored by government institutions and agencies on the state or local level.
Ohio, Illinois, Washington, and many other states provide some form of financial assistance with closing costs, down payments, and even home improvement expenses.
Native American homebuyers can apply for Section 184 loans. Although it’s one of the best first-time homebuyer government programs, this option still requires a 1.25% to 2.25% down payment and can only be used for single-family homes.
Compare Different Mortgage Offers
Once you choose the mortgage type that makes the most sense for your circumstances, we suggest you proceed with requesting loan estimates from multiple lenders to compare the interest rates and any additional cost such as origination fees.
At this point, funding providers may give you the chance to lower your rates by buying discount points. Consider such offers only if you don’t plan on upgrading to a larger home in the coming years.
Get Pre-Approved for a Loan
One of the best tips for first-time homebuyers is to try and get a pre-approval letter. A mortgage pre-approval is a lending institution’s preliminary offer to lend you a certain amount of money under specific loan terms that you’ve been able to qualify for.
How can this help you? Not only will having a pre-approval letter make it easier for you to establish a reputation as a serious buyer, but it may also give you an advantage over other home shoppers.
Still, we don’t think that applying for a mortgage pre-approval is a good idea unless you’re ready to start home shopping. Note that this procedure consists of pulling your credit report and reviewing documents to verify and evaluate your assets, income, and debt.
During your house buying process, you can apply for a preapproval from multiple lenders without hurting your credit. Just make sure to complete all applications within a month or less.
Tips About Home Shopping and Finding the Best Real Estate Agent
Once you’ve planned out your finances, found the most suitable home loan type, and maybe even identified the best mortgage lenders, it’s time to start looking for the perfect home. Remember that this part of the journey will require patience and persistence along with guidance from a real estate professional.
Here are our top tips for first-time homebuyers who reach the house hunting stage:
Find a Good Real Estate Agent
A real estate agent’s job isn’t just to help you find the properties and meet with you for house showings. These professionals play an equally important role once you pick a house you’d like to buy.
Good real estate agents will be there to guide you through the purchasing process and help you with everything from making an offer to applying for a loan. They’ll also help you gather and complete all the required paperwork.
To find the best real estate professional to help you through the process of buying a house, look for agent referrals from friends who recently made a home purchase, interview a few candidates, and ask for references.
Choose the Right Home in the Right Neighborhood
Keeping your budget and lifestyle in mind, weigh the advantages and disadvantages of different home types that appeal to you. While a townhome or a condo may be more affordable than a standalone house, especially for those buying a home for the first time, sharing walls with neighbors means more noise and less privacy.
Also, keep in mind that properties in condominiums and planned communities come with homeowners association fees.
If you aren’t afraid of home renovation projects, you should also think about buying a fixer-upper. If you choose a property in need of repairs over a move-in ready home, you’ll get more square footage, but you’ll need to allocate some time and money for remodeling.
Note that renovation mortgages finance both the house price and improvement expenses.
The first-time homebuyer’s checklist should also include long-term goals and planning ahead for your family. While visiting an open house, make sure to examine the overall condition of the property and get to know the neighborhood. Test out the commute during different hours and check if the community has all the amenities that are important to you.
Don’t Go Over Budget
You may get approved for a loan amount that’s higher than you can comfortably afford to repay, or you may feel pressured to spend more than you’ve originally planned just to beat another buyer’s offer. No matter what happens, stick to your budget. This is one of the most valuable tips for first-time homebuyers.
To avoid financial stress and the risk of becoming house poor, carefully set a price range and look for homes priced below your limit to allow for some wiggle room in case you need to enter a bidding war.
Sealing the Deal: Home Purchasing Tips
You’ve found your dream home within your price range. Game over, right? Not yet. There are still a few steps before you can celebrate the completion of your home buying process. Here’s what you need to do.
Make an Offer and Negotiate
With the help of your real estate agent, decide how much you can comfortably offer for the house and think of any specific conditions you want to ask for. Your agent will present your offer to the seller who may either accept it or respond with a counteroffer.
Depending on the local market, you may be able to negotiate and ask the seller to pay for a portion of the closing costs or compete with multiple offers from other buyers.
This stage of the process may be nerve-wracking, so one of the most useful tips for first-time homebuyers is to rely on your real estate agent to help you understand the market and create your strategy accordingly. Also, make sure to take another look at your budget before making your final offer.
This time remember to factor in any immediate expenses such as closing costs, mandatory appliances, and home repairs along with property taxes, home insurance costs, property inspection fees, and homeowners association fees.
Should the seller accept your final offer, you’ll be a few steps closer to buying the house. You’ll make a deposit, and the seller will take the house off the market for a short period of time (usually about a month) with the contractual expectation that you’ll end up buying the property - unless a home inspector uncovers some serious problems that could make you reconsider.
Have the Property Inspected
The place you hope to call your own may seem flawless. However, it’s still a good idea to hire a professional to assess the property. Inspectors look for problems related to the property’s quality and safety to help you make the right decision about buying it.
We suggest you attend the inspection not only to ensure that the inspector can get to every part of the house but also to get a better understanding of the home’s condition and ask questions on the spot.
This is especially important for those buying a first home. Still, if you can’t be there in person, review the report carefully and ask for explanations about anything that appears to be unclear.
Note that standard property inspections don’t include tests for radon, pests, or mold. Make sure you figure out what other inspections you may need.
Should the property inspection reveal a serious defect the seller failed to disclose, you'll be given the opportunity to withdraw your offer and get your deposit back. Alternatively, you can ask the seller to lower the price of the property or make the repairs.
Get Homeowners Insurance
Our list of homebuying tips wouldn’t be complete if we didn’t point out that you should get the property insured before closing the deal. This usually isn’t a legal requirement. However, your lender will probably request it. Why is this type of coverage so important?
Not only does home insurance help you in the event of an unexpected loss by covering the costs of replacing your belongings and repairing the property, but it also provides liability insurance if you're held responsible for an accident or an injury.
We suggest you buy the right amount of insurance to enable you to rebuild your home if it gets damaged or completely destroyed.
Common First-Time Homebuyer’s Mistakes and How to Avoid Them
Shopping for a house for the first time can be overwhelming. There are so many things to take into account, and it’s so easy to get confused. Some mistakes can do more harm than others, and we’ve made sure to list all the red flags that you can encounter on your homebuying journey.
Here’s a list of mistakes we suggest you avoid as a first-time homeowner:
- Being careless with credit and not monitoring your report
An erroneous item on your credit report could cost you a lot. Remember that mortgage lenders look at more than just your score when evaluating loan applications. Request free copies of your credit report once a year and make sure to dispute any errors in order to avoid higher interest rates.
- Not taking the time to set a realistic budget
Checking out online listings and stopping by open houses can be tempting, especially for a 1st time homebuyer. However, if you don’t have a budget in place, you may end up falling in love with a property you simply can’t afford.
Make sure to review your finances carefully, set a price range, and then start looking for properties that fit your budget.
- Not saving enough for a down payment
There are so many mortgage types on offer. Some options let you put down very small amounts of money, while others don’t require a down payment at all.
While 0% down payments make homeownership achievable to anyone, such loans usually come with slightly higher interest rates and costly monthly payments. To lower your monthly expenses, try to make a down payment of at least 20% of the loan amount.
- Not requesting quotes from multiple lenders
Important steps to buying a home include getting rate quotes from multiple home loan providers.
Not shopping around for mortgage rates can be a costly mistake down the road.
- Skipping the mortgage pre-approval
One of the most common mistakes that homebuyers make is not getting pre-approved for a mortgage. Before you extend an offer on a property you’ve fallen in love with, make sure that you get a pre-approval letter. That way, the sellers will have proof that you can afford the house and take your offer seriously.
- Ignoring government-backed mortgage programs
Before you apply for a conventional mortgage, check if you are eligible for a first-time homebuyer program offered by the government. Given their relaxed borrower requirements, FHA, VA, and USDA loans can make you a homeowner sooner than you anticipated.
- Draining your savings
Emptying your bank account and tapping into your emergency savings can be tempting if you find the perfect home that you can afford. However, doing so can be very risky.
To protect your emergency fund and retirement savings, make sure to save money for your first home in a separate account. The process may take years, but your future self will thank you.
- Not taking homeownership costs into account
Owning a house is expensive, and your monthly mortgage payment is just the beginning. To get a full picture, we suggest you follow our tips for first-time homeowners. Ask your real estate agent about the utility bills and property taxes that you’ll be responsible for.
Shop around for home insurance. Hire a home inspector before closing and set some money aside for maintenance costs and emergency home repairs.
Frequently Asked Questions
Which loan is best for first time home buyers?
First-time homebuyers have multiple mortgage options to choose from. In addition to conventional loans, we suggest you also explore government-backed programs such as FHA, VA, and USDA loans. Make sure to request quotes from multiple providers and look beyond interest rates.
What are the steps to buying a home for the first time?
How does buying a house work? If it’s your first time looking for a place to call your own, you have every right to be confused. To make the process of buying a new home easier, we suggest you start by getting your financial situation in order and set a budget.
From there, you should explore home loan options and choose a mortgage type and provider. After that, you’ll be ready to start exploring the market with the help of your real estate agent. Once you find a home that you like, place an offer and negotiate until you seal the deal.
How much money should you have saved up before buying a house?
One of the most valuable tips for first-time homebuyers that you can ever get is to plan your budget carefully. Don’t forget that purchasing a house does not only involve a down payment and a monthly mortgage.
You should also think of other upfront and ongoing costs. To avoid becoming house poor, make sure that you buy a home that not only appeals to your lifestyle but also meets the limitations of your budget.
I have always thought of myself as a writer, but I began my career as a data operator with a large fintech firm. This position proved invaluable for learning how banks and other financial institutions operate. Daily correspondence with banking experts gave me insight into the systems and policies that power the economy. When I got the chance to translate my experience into words, I gladly joined the smart, enthusiastic Fortunly team.
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