Buying a home for the first time could be a smart money move. After all, there are many benefits to homeownership, including the potential to build generational wealth and provide a safe place to live for your family. But because there are so many loan options and upfront costs, buying your first home can be confusing or overwhelming.
The key to combatting those feelings is education. Knowing how to navigate the homebuying process before you get started can help you make an informed homebuying decision – and find the best loan for your needs.
10 Tips on Buying a Home for the First Time
- 1. Assess whether you’re ready to buy a home
- 2. Research first-time homebuying programs in your area
- 3. Save up for a down payment
- 4. Get your credit score, finances into shape
- 5. Get preapproved for a mortgage
- 6. Consider home loans aside from conventional mortgages
- 7. Hire an experienced real estate agent
- 8. Stick to your homebuying budget
- 9. Make a strong offer
- 10. Close on your home purchase
1. Assess whether you’re ready to buy a home
One of the most important tips for buying a home is to make sure you’re ready for homeownership. Although buying a home comes with many benefits, it also comes with upfront and long-term costs.
Here are some important questions to ask yourself:
- Could I comfortably handle my monthly mortgage payment in addition to my current expenses?
- Could I handle other housing-related expenses, such as repairs and mortgage insurance, without stretching my budget?
- Do I have enough money saved for emergencies in case I’m faced with an unexpected expense?
- How long will I stay in my home?
The answers to these questions can help you decide if you’re ready for homeownership. Before purchasing a home, review your finances to see how much you can afford to spend on your first home. Use a home affordability calculator to help you crunch the numbers.
If you’re purchasing a home with a partner, sit down and review your finances together. If you’re unmarried, ask tough questions to ensure you’re both on the same page if there’s a break-up.
2. Research first-time homebuying programs in your area
The second most important new homebuying tip is to make sure you look first-time homebuyer assistance programs in your area. If you need help with upfront costs, such as your down payment or closing costs, these programs may provide a path to homeownership. In addition, you might be able to find a special loan that’s geared toward helping you as a first-time homebuyer.
It’s important to note that you could be a first-time homebuyer even if you’re not purchasing a home for the first time.
Here are some of HUD’s requirements for a first-time homebuyer:
- You or your spouse haven’t owned a primary residence in three years
- You’re a single parent and you only owned a home with an ex-spouse during marriage
- You’re an adult who owned a home with a spouse but you were a stay-at-home parent or caretaker
To find programs in your area, use the HUD Directory to contact your local or state housing agency for more information.
3. Save up for a down payment
Saving more money for your down payment can be beneficial in multiple ways, including:
- Reducing your monthly mortgage payments
- Lowering your loan-to-value (LTV) ratio and qualifying for more house
- Eliminating the need for private mortgage insurance (PMI) if you put 20% or more down
- Lowering your closing costs
To save up for your down payment, you can do two things: boost your income or lower your spending – or both. Increasing your income might involve picking up a side hustle or asking for a raise. To trim back on expenses so you can save more money, consider cutting cable, eliminating monthly subscriptions you don’t use, or reducing dining/entertainment spending.
Another option is asking a family member or friend to gift you the money for a down payment. Many loan programs allow borrowers to do this so long as the money isn’t expected to be paid back and the gift donor provides documentation showing where the funds are coming from.
4. Get your credit score, finances into shape
When you apply for a mortgage, a lender will look at your credit score and credit reports to assess your ability to repay the loan. If you don’t meet the lender’s minimum credit score requirements, your loan application may be denied.
Before applying for a mortgage, check your credit report and scores. The higher your score is, the better your chances are for securing a lower interest rate.
Using a loan calculator with estimated annual percentage rates (APR) helps you see how your monthly mortgage payments are affected by a higher interest rate over the life of a mortgage. For example, as of June 16, 2021, FICO’s loan savings calculator shows that borrowers with a FICO score between 760 and 850 would have an average APR of 2.605%. Meanwhile, borrowers with FICO scores between 620 and 639 receive an average APR of 4.194%. Here’s how your monthly mortgage and lifetime interest payments compare in these two scenarios.
|30-Year Mortgage Example|
|Credit score range||Average APR||Lifetime interest||Monthly mortgage payment|
|760 to 850||2.605%||$132,650||$1,202|
|620 to 639||4.194%||$227,760||$1,466|
*The APR examples above assume a 30-year, fixed-rate conventional mortgage for $300,000 with a 20% down payment. The APRs are national averages from thousands of lenders collected daily by Informa Research Services, Inc.
In other words, you’d save $95,111 over the life of the loan and $264 a month if your credit score falls between 760 and 850 versus 620 and 639.
5 ways to improve your credit score and finances
To boost your score and improve your chances of qualifying for more competitive rates, here are some steps below to increase your score before applying for a mortgage loan:
- Make on-time payments each month
- Don’t open new credit accounts or make large purchases
- Pay down accounts where you’re using more than 30% of your available credit line
- Don’t close accounts with long credit histories
- Check your credit reports for errors and correct them
To review your progress, use free credit scoring websites to check your credit score. And to get a free copy of your credit reports from each of the three major credit agencies (Experian, Equifax, and TransUnion), visit AnnualCreditReport.com. Due to the COVID-19 pandemic, you can view your credit reports for free weekly through April 22, 2022.
5. Get preapproved for a mortgage
One of the most important steps you can take when learning how to choose your first home is getting preapproved for a mortgage. In a preapproval, a lender reviews your credit, income, and liabilities to determine if you’re ready to buy a home. While a preapproval doesn’t guarantee that you’ll be approved for a loan, it’ll show sellers that you’re a serious buyer.
To ensure you get the right loan for your needs, shop with three to five different lenders. Applying with multiple mortgage lenders will count as just one hard credit inquiry so long as you complete your shopping within a 45-day window.
A mortgage preapproval letter can give you a better idea of the maximum loan amount you can borrow. However, you don’t have to take out that amount; pay closer attention to the monthly mortgage payment and how it fits into your budget. The key is being able to comfortably afford your current bills and debt obligations as well as your monthly mortgage payment and other housing expenses, such as homeowners association (HOA) dues, ongoing maintenance, and repairs.
6. Consider home loans aside from conventional mortgages
Before buying your first home, explore all of your loan options. Although conventional loans are widely popular with homebuyers, they’re not your only option. Other loan programs include USDA, FHA, and VA loans, which are guaranteed or insured by government agencies. These loans may have lower credit score and down payment requirements than conventional loans.
Here’s a look at some key requirements of FHA, VA, and USDA loans.
Government-Backed Loan Requirements
|Loan type||Minimum credit score||Minimum down payment||Who can apply|
|FHA||500-579 (with 10% down)
580 (with 3.5% down)
|3.5% (with 580+ FICO score)
10% (with 500-579 FICO score)
|Anyone, but ideal for homebuyers with lower credit scores or down payments|
|VA||None set by the VA, but 620 is the minimum required by many lenders||0%||Active-duty military servicemembers, veterans, and eligible spouses|
|USDA||None set by the USDA, but 640 is the minimum required by many lenders||0%||Low- to moderate-income homebuyers who meet income limits in USDA-approved rural areas|
7. Hire an experienced real estate agent
Having an experienced real estate agent to help guide you through the homebuying process can help protect your investment. A good real estate agent should understand the housing market in your area, find homes within your budget, help you submit an offer, and negotiate with the seller (or their agent).
Ask friends or family members for referrals if they’ve recently bought or sold a home. You can also search online for local agents who have positive reviews. From there, interview at least three different agents to find the right fit for you.
To narrow the field, ask questions about their professional experience, if they work more with buyers or sellers, how they communicate with clients, and what level of service you can expect from them.
8. Stick to your homebuying budget
When applying for a mortgage, lenders may approve you for a loan amount that’s higher than you can comfortably afford once you calculate the monthly mortgage payment. Don’t feel pressured to borrow the maximum amount a lender approves you for, though.
Do a thorough review of your finances, and consider other monthly financial obligations that lenders don’t factor into the approval process. These expenses may include childcare, education, healthcare, utilities, groceries, and other recurring bills.
Sticking to your homebuying budget is critical to ensure you can afford your monthly mortgage payment and other housing expenses while meeting other financial goals. If you overextend yourself on housing payments, repaying your loan (and keeping your home) may be difficult if you face a financial hardship down the road.
9. Make a strong offer
Once you find a home you love and can afford, the next step is submitting an offer to the seller. Your real estate agent can help you come up with an offer price based on comparable homes in the area that have recently sold.
In a buyer’s market, you may have more negotiating power to submit a lower offer price or request wiggle room on the closing date. However, in a seller’s market where you’re up against strong buyer demand with fewer homes on the market, there’s less room for negotiation.
Regardless of market conditions, be sure to include contingencies when making your offer if certain items are a deal breaker. Contingencies are conditions that must be met before the purchase goes to the closing table.
For first-time homebuyers, the most common contingencies are for home inspections and financing. A home inspection contingency gives you an out if the inspection reveals major issues that may be too costly or cumbersome to fix, or if the seller won’t repair. The financing contingency gives you an escape from the home purchase if you’re not approved for a loan. In a seller’s market, though, be careful not to request too many contingencies. A seller who’s fielding multiple offers on their home isn’t likely to entertain an offer with numerous conditions.
10. Close on your home purchase
Your final step in the homebuying process is closing on your home. At closing, you’ll sign your loan documents and pay closing costs and/or a down payment.
Before that happens, here are four key steps to take:
- Get a home inspection: Although it’s not required, scheduling a home inspection can help identify any issues with the home’s condition. Knowing about any potential problems ahead of time can help you factor in future repair costs. These can greatly increase the cost of buying the home and be a deal-breaker if major problems are discovered.
- Review the appraisal: An appraisal will give you an idea of how much the home you’re trying to buy is worth. This can help you avoid overpaying for the home, and many lenders require it. If the appraisal is lower than the purchase price, you’ll have to come up with the difference or ask the seller to negotiate.
- Review the Closing Disclosure: Three business days before closing, you’ll receive a Closing Disclosure form from your lender. The form will list your loan details, the final purchase price, closing costs, down payment amount, and other key loan information. Review and compare the form against the initial Loan Estimate to ensure there aren’t major changes. Ask questions if you spot errors or don’t understand certain terms.
- Take a final walk-through: Before closing day, you’ll do a final walk-through of the home. During this time, inspect the home thoroughly, and ensure that any repairs the seller agreed to make are complete. This is your final chance to ensure the home is in move-in ready condition.
At closing, you’ll sign several documents such as the Closing Disclosure, promissory note, the mortgage/security instrument (or deed of trust), and the warranty deed (or transfer of ownership document). Depending on where you live, an attorney, escrow officer from the title company, or other closing agent will oversee the signing of final paperwork and collect all payments.
After you’ve signed the papers and paid your closing costs and/or down payment, you’ll get the keys to your home. Congrats, homeowner!
Ready to buy your first home? Contact a local FAM Mortgage Advisor who can help you explore your home loan options.