Tips for First-Time Homebuyers: Make All The Right Decisions Before Purchasing Your New Home

Written By
G. Dautovic
Updated
October 19,2022

Buying a place of your own for the first time can be a good investment, especially if it’s your dream house, 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 financial health tips, a rundown of different mortgage lenders and mortgage loan types you should explore, as well as advice on how to choose the most suitable home loan.

We’ve also included tips on how to make the most of a real estate agent’s help, and helpful advice on finalizing your purchase and avoiding frequent mistakes first-time buyers make.

Money-Saving Tips for First-Time Homebuyers

Scrolling through pages of online listings is one of the most exciting aspects of the home-buying process. However, the last thing you want is to find that your dream home is a property you simply cannot afford, even if you start saving early.

That’s why you should thoroughly examine your accounts to get a precise idea about your overall financial health before you even think of looking for your first home.

A financial audit will tell you whether you’re ready to purchase your first house, and how much house you can expect to buy, so to speak.

Here are the steps we suggest you follow in this phase:

Repay Your Debts and Build an Emergency Fund

The first step of your home-buying journey should involve paying off all of your past debts (including student loans and outstanding credit card balances) or at least lowering your debt-to-income ratio. Why is this so important for first-time buyers?

The deal is simple - if your DTI ratio is as low as possible (ideally around 28%), you’ll be more likely to qualify for the lowest available interest rate, and your monthly mortgage payments won’t be overwhelming.

When you find your ideal property and decide to purchase it, not only will you have to make a mortgage payment every month, but you’ll also face upfront expenses.

That’s why we recommend you start an emergency fund and save money to cover these costs and 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 you must pay upfront upon choosing your home loan. Depending on your mortgage lender and type, the required percentage may vary considerably.
    A conventional loan designed for first-time buyers with above-average credit scores may let you put down only 3% of the home’s purchase price. Still, remember that even a small down payment may be difficult to save for, so start early.
    Also, look into down payment assistance programs for aspiring homeowners available in every state.
  • 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 take the time to shop around and compare mortgage rates down to every detail, 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 and, therefore, the monthly payment you can afford to make for the next several decades, 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: rent payments and utilities, student loan debt, car payments and maintenance, credit card limits, 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 score. Not only does that determine whether you’re eligible for a home loan at all, 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, and keep your credit card debt minimal, but your credit accounts open with balances as low as possible.

You should also monitor your credit score by requesting free copies of your reports from the credit bureaus and disputing any errors hurting your profile.

Finally, avoid opening new credit accounts until you’ve secured a mortgage and a house, as additional available credit will actually lower your credit score until you’ve shown you can pay it off.

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 research home loans can ultimately save you a lot of time and money.

You can do this yourself, or hire the services of a loan officer or mortgage broker to do it for you, although this can be quite expensive in the short term. 

Here are the steps either you or your housing market expert 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. These mortgages usually come with fixed interest rates and stricter borrower requirements such as a higher credit score, lower debt-to-income ratios, and bigger down payments.
  • FHA loans: The Federal Housing Administration (FHA) loan program is part of the US Department of Housing and Urban Development’s initiative to give newcomers a chance in the real estate market. An FHA loan imposes less stringent borrower requirements and allows down payments as low as 3.5% of the loan amount.
    However, it often comes with expensive private mortgage insurance (PMI) the borrower must pay to offset the lower interest rate and likelier mortgage approval they get with a government-guaranteed home purchase loan. Also, using an FHA loan limits how much mortgage you can get, as these loans are always capped below the average.
  • VA loans: Guaranteed by the US Department of Veterans Affairs, this type of first-time homebuyer loan is made 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: USDA loans are zero-down-payment mortgages designed for homebuyers from suburban and rural regions, 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 terms 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 accommodating a larger monthly payment.

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 to ensure a competitive market for aspiring homeowners.

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 (either alone or with the help of a mortgage broker), we suggest you request loan estimates from multiple lenders to compare the interest rates and any additional costs, 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 Preapproved for a Loan

One of the best tips for first-time homebuyers is to try and get a preapproval letter. A mortgage preapproval 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 preapproval 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.

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 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 an experienced real estate agent.

Here are our top tips for first-time homebuyers in the current housing market:

Find a Good Real Estate Agent

A real estate agent’s job isn’t just to help you with house hunting 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 guide you through the purchasing process and help you with everything from making an offer to applying for a loan, especially if you’re dealing with the seller’s agent, not the seller themselves. 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, remember 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.

Your checklist should also include long-term goals and planning for your family. While visiting an open house, examine the property's overall condition 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 higher than you can comfortably afford to repay, or you may feel pressured to spend more than you 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.

What’s more, look into the property taxes you’ll have to pay in each neighborhood, as that will significantly impact your monthly payments.

Sealing the Deal: Home Purchasing Tips

You’ve found a 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 accept it, decline, 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 valuable 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, 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 (usually about a month) with the contractual expectation that you’ll buy 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, hiring a professional to assess it is still a good idea. Inspectors look for property quality and safety problems 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 better understand 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 unclear.

Note that standard property inspections don’t include tests for radon, pests, or mold, so if you want these, you’ll have to pay extra. Make sure you figure out what other inspections you may need.

Should the property inspection reveal severe defects 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 property's price or make repairs.

Get Homeowners Insurance

Our list of home-buying 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 be able 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 consider, and it’s 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 home-buying journey.

Here’s a list of mistakes we suggest you avoid as a first-time homeowner:

Being Careless with Credit

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 to avoid a higher interest rate.

Not Setting 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 set, 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 for a Down Payment

Some mortgages 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 for 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

Essential steps to buying a home include getting rate quotes from multiple home loan providers, as not shopping around for mortgage rates can be a costly mistake down the road.

Skipping Preapproval

One of the most common mistakes that homebuyers make is not getting preapproved for a mortgage. Before extending an offer on a property you’ve fallen in love with, make sure you get a preapproval 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 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.

Put money for your first home in a separate account to protect your emergency fund and retirement savings. 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 the 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.

FAQ

Which loan is best for first-time homebuyers?

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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?

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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 setting a budget.

From there, 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 you like, place an offer and negotiate until you seal the deal.

How much money should you have saved up before buying a house?

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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.

About author

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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