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There’s almost always a wrong and right way to do something. If you’re buying a home for the first time, you want to make sure you’re doing everything right.
Taking your time and doing research beforehand will save you money and keep you out of financial danger.
The whole home buying experience can be a daunting task. It isn’t as simple as picking a house you like and moving in. And it’s even more intimidating if you are a first-time homebuyer.
To help make the process smoother, we’ve put together a list of the 20 best tips for first-time homebuyers. This article should put all the homebuying steps in perspective and point out areas where you should focus.
Tips to Prepare You for Buying a Home
1. Get Rid of Debt
Your first step as a first-time homebuyer should be to pay off or pay down as much debt as possible. Having high-interest credit card or auto loan debt hurts your cash flow and can make it harder to get approved for a mortgage.
A mortgage will increase your debt load, but the interest rates are typically lower than other loan types. A home can be considered more of an investment as well, the value of it can increase, and you’ll gain equity.
It’s best to keep other debts in check before getting yourself into more. Especially when you are buying a home.
2. Build an Emergency Fund
After paying down high-interest debt, you want to build an emergency fund. Aim to have around 6-months of living expenses saved up.
If you don’t have an emergency fund, you probably shouldn’t be considering buying a home.
It’s perfectly fine to continue renting until you get your finances in order. There are unexpected costs of homeownership that can damage you financially if you’re not prepared.
Buying a home without any sort of nest egg is irresponsible. You’ll likely end up getting yourself deep into debt if a significant repair or emergency comes up.
3. Start Saving for a Down Payment
Alright, so you have saved up for an emergency fund! Now it’s time to save even more, this time for a down payment.
The ideal down payment for a home has always been 20%. Do you have to have 20% down to buy a house? Not at all. Is it better if you do? Yes.
With a 20% down payment, you avoid having to buy mortgage insurance. Your loan size will be smaller–meaning lower monthly payments and paying less in interest.
Not everyone can afford to save up a sizeable down payment. That is okay.
You should still try to come up with as much as possible, even 5%-10%.
While it is possible to get a mortgage with no money down, it’s not always easy, nor is it a good idea.
4. Save Additional for Closing Costs
Closing costs are all the fees, expenses, and different services involved in finalizing a mortgage.
It is financially wise to pay for the closing costs out of pocket. Why? Because the alternative is stuffing them in with the loan. Doing so costs you a lot more in interest down the road. And not all lenders allow you to lump the closing costs with the mortgage.
Closing costs are usually between 2% and 5% of the total loan amount. For a $400,000 home that means $8,000 to $20,000. Not a small chunk of change.
This additional expense is something many first-time homebuyers fail to factor in.
5. Save Even More for Repairs and Furniture
Okay, you have built an emergency fund, saved for a down payment, saved for closing costs, now you need to save more? Yes, if you can.
Plumping up your emergency fund or creating a separate savings for home repairs is a smart idea. You’ll likely need to make some updates, buy furniture, pay for movers, cleaners, and more.
Having the money saved to conquer all the furnishings and fixings for when you move in makes it a whole lot easier. How much more you should set aside depends on the home you plan to buy, and your budget.
6. Check and Improve Your Credit
You should pull up your credit reports and check your credit score. Go through everything with a fine-tooth comb and ensure it is all accurate.
Having good credit health is crucial when it comes to qualifying for a low-interest rate mortgage. The better your score, the better the interest rate (in most cases).
Don’t let bad credit make you pay thousands more in interest.
If you find that your credit is less than stellar, start strengthening it right away. There are many ways you can improve your credit score, and you don’t have to get into more debt.
7. Put Credit Activity on Pause
After you are satisfied with your credit health, it’s time to leave it completely alone. Consider freezing your credit. This will prevent any hard inquiries and can stop credit fraud.
Keep your credit activity paused for 3-6 months before you plan on applying for a mortgage.
Don’t open any new accounts or make any changes that can negatively affect your credit. You don’t want to hurt your score with hard inquiries or other dings.
8. Figure Out How Much House You Can Afford
Time to run some numbers and estimate how much house you can afford.
The standard rule used by lenders is the 28/36 rule. The rule says your mortgage payment should not exceed 28% of your gross income. And your total debt should not exceed 36% of your gross income.
The mortgage payment should factor in property taxes and insurance. Your total debt should include all of your debt, including the mortgage.
The 28/36 rule is a good one to go by. It’s easy to determine how much you can and cannot afford by using an online calculator.
Try the affordability calculator by Zillow. It is a bit generous, but you can adjust the monthly mortgage payment to your liking.
9. Study the Different Mortgage Options
You will most likely end up getting a 30-year fixed-rate mortgage like most homebuyers. It’s paid off in 30 years, and the interest rate doesn’t change. However, you should look into all your options, such as:
- 20-year term – pay less interest, but your monthly payment is bigger.
- 15-year term – pay even less interest, but your monthly payment is much bigger.
- FHA loans – down payments as low as 3.5% and insured by the Federal Housing Administration.
- Conventional mortgage – available through banks, private lenders, credit unions. It is not secured by the government.
- VA loans – secured by the Department of Veterans Affairs, for active and veteran military members. It has the possibility of no down payment.
- USDA loans – secured by the US Department of Agriculture. The loan is suited for rural homebuyers and may not require a down payment.
10. Consider First-Time Homebuyer Programs
The VA, USDA, and FHA loans mentioned earlier are all popular first-time homebuyer programs. There may be additional programs available to you, depending on your state.
The FHA loan is the most common first-time homebuyer program. Is it better than getting a conventional mortgage? It depends.
Here are some differences between an FHA loan and a conventional mortgage to help you decide.
FHA Loans
- Easier to get approved with a low credit score.
- Min down payment is somewhat higher (3.5%).
- Tougher property standards.
- Mortgage insurance is required regardless of the down payment amount.
Conventional Loans
- It can be harder to get approved with a low credit score.
- The down payment requirement may be lower.
- Less strict on property standards.
- Mortgage insurance is not required if you have a down payment of 20% or more.
11. Compare Mortgage Rates
Don’t just get a rate quote from one lender. Be sure to shop around. It can save you thousands in interest.
Rates can vary from lender to lender more than you think. You want to find a reputable financial institution that can provide you with the most affordable loan.
Request around 4-5 loan estimates from different lenders. Narrow down the best options and see if they are willing to negotiate to get your business.
12. Find a Good Real Estate Agent
While you do not have to have a real estate agent to buy a house, it is recommended. They can save you time, money, and take care of complicated paperwork.
You want a skilled and trustworthy real estate agent that will make the whole process easier. A good agent will help you find the best houses before they get snatched up. They should be an expert in the real estate game and provide you with honest advice.
Because you are buying, you will want a buyer’s agent. Finding a good one can be as easy as asking your friends and family.
13. Get Preapproved for a Mortgage
At this point, you should have enough money saved and be ready to move forward. Before you start shopping, you need to get preapproved for a loan. If you don’t, sellers won’t take you seriously, and you’ll lose out to other buyers.
The lender will get you pre-qualified by verifying your income, credit, etc. They will then provide you with a preapproval letter.
Once your preapproved buyers will take you seriously, and you’ll be one step closer to buying a home.
14. Specify What Kind of House You Want
Condo? Townhome? Single Family? Multi-Family? There are many options to choose from, and you need to make sure you know what you want.
What are the must-haves for your home? Make them clear from the beginning of your search.
Sure, there may be things you can be flexible on. Like if the basement is unfinished or there’s no bay window. But there are some things you know are deal-breakers.
Define what your house absolutely needs for you to live comfortably. If you settle for something you know won’t work out, you’ll end up with some serious buyers’ remorse.
15. Narrow Down the Area You Want to Live
Now that you know what kind of house you want, it’s time to decide on the right area. You may find the perfect place, but the commute is too long, or the neighborhood is dreadful.
Finding the right home in a good area means you’ll have to compromise in one way or another.
Research the region and neighborhood before you move in. It is worth putting in the extra work instead of finding out after you’ve signed your life away.
16. Make Sure You Are Not Pushing Your Budget
Just because you can afford it doesn’t mean you should buy it. If you push your budget too much, you’ll end up house broke.
House broke is when you can just afford to pay your monthly mortgage and barely scrape by. A nice place is not worth becoming a mortgage slave. No one cares how great your house is, you shouldn’t buy it to impress anybody.
Find a happy medium within your budget so you can continue to save and invest extra income.
How nice of a house and how much you are willing to spend on it is entirely a personal choice. Just remember it is always best to live within your means.
17. Think Long-Term When Deciding on a Home
Homeownership is a long-term endeavor, and you must think long-term when buying real estate.
Are you okay with living in one place for several years? Does homeownership fit your lifestyle?
You want to be honest with yourself and make sure you’re making the right decision. You will not be trapped after buying a house, but it is much more difficult to move compared to renting.
Ensure you love the area, love the home, and don’t have any future catalysts that would force you to move. For instance, if you plan on having children, make sure your house can accommodate them.
18. Get a Home Inspection
It is worth paying a professional to look over the home before you buy it. Don’t be cheap and skip out on a thorough home inspection. It can prevent you from buying a money pit.
The inspector will go over all the vital parts of the home, like the foundation and electrical system. You’ll be informed on what needs to be fixed right away and later down the road.
Be sure to know what the inspection includes and what it doesn’t. There is such a thing as a poorly done inspection. Make sure you get someone that will do it right and not miss anything.
19. Purchase Homeowners Insurance
You don’t have a choice on this one. Every lender will make you buy homeowners insurance, and for a good reason. The home is their collateral, and they want it insured.
Homeowners insurance protects your home and belongings and gives you peace of mind.
Don’t go overboard but don’t skimp out either. Buy an adequate policy covering all the costs of rebuilding the home if an incident were to destroy it.
20. Don’t Be Afraid to Negotiate
Your real estate agent should help you in this department but don’t be afraid to speak up. You shouldn’t leave everything up to your realtor and need to be involved every step of the way.
Almost everything in life can be negotiated. How much you can negotiate on your house depends on the current housing market.
You may need to pay over the asking price to get a home when the market is running hot. And you’ll likely be able to get below the asking price in a buyer’s market.
Final Thoughts
Buying a home isn’t always a walk in the park. The hardest part is saving up enough to cover the down payment and additional costs.
Do not feel inadequate for renting and think you have to own a home. Homeownership is not necessarily better renting. Just like people can FOMO buy stocks, they can FOMO buy a house–which usually ends badly.
Taking your time and getting your finances in order before making the purchase is the right way to go.
A long-term mindset and the discipline to save are the most important factors when buying your first home.
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