First-Time Homebuyer Guide

There’s nothing like a first-time home purchase to bring on a sense of excitement, nervousness, and confusion all at the same time. Especially if you don’t know much about mortgages and real estate transactions.

Buying a home could be the largest purchase in your life, but that’s not stopping the millions of Americans who say they want to buy their first home in the next five years.

From choosing a loan term to closing costs, navigating the mortgage landscape can be tricky for first-timers, but taking your time and doing your due diligence are an important part of the process.

Follow these first-time homebuyer tips to help you prepare and make better decisions.

Figure out how much home you can afford based on your income and debt

You’ll need to have your finances in order before you start shopping for homes. Take account of all your expenses and income. This will help you figure out how much you can spend on a home.

You should be able to answer questions such as:

  • How much can I afford to spend on my mortgage each month?
  • How large of a down payment in cash can I afford to make?
  • As a homeowner, how much would I need in savings for things like home repairs and taxes?
  • What does my current debt load look like?

To answer these questions, go through your current income and expenses and take stock of your savings, investments, and debts. List all of your monthly expenses, including fixed (car payments, loans, utilities) and variable expenses (credit card purchases, travel).

Understand the costs of homeownership and start budgeting for them

Most experts recommend that you shouldn’t spend more than 30 percent of your income on housing. That means if you earn $5,000 each month, it’s best to have mortgage payments under $1,500.

Owning a home means your general expenses will probably go up, as there are a number of costs associated with homeownership, such as:

  • HOA fees
  • Higher utilities (water, gas, electric)
  • Homeowner’s insurance
  • Mortgage insurance
  • Property taxes
  • Potential repairs or renovations

If you don’t have much saved for a down payment, come up with a plan to start saving.

Pro tip: When planning your budget, put extra money away in an emergency fund. This may help provide cushion in the event of income or job loss, since you’d still need to pay your mortgage. If you can’t pay your mortgage, you could lose your home in foreclosure.

Prepare for a mortgage (and everything that comes with it)

When you start researching for a mortgage, you should already know how much you can comfortably afford to pay each month. But it’s important to prepare yourself for other costs that go into a mortgage, as well as hidden costs homeownership will bring.

Here’s a simplified calculation of down payment and closing costs that come with buying a $100,000 home:

  • Down payment: 3 to 20 percent = $3,000 to $20,000
  • Closing costs: 2 to 5 percent = $2,000 to $5,000

If you can’t afford to put 20 percent down, you may need to purchase private mortgage insurance (PMI), which protects the lender in case you default on your loan and your house goes into foreclosure.

Don’t forget about costs associated with moving expenses and a home inspection. After you move, it’s likely you’ll need to spend money out of pocket to get situated. Plan to budget for necessary furniture and home goods.

Choose a mortgage type

As a first-time homebuyer, consider learning about the different mortgage types. Familiarize yourself with some of the common terms so you’ll know what you’re dealing with when it’s time to sign.

Keep in mind that most states have programs for first-time homebuyers, including tax credits and affordable payment options. Do your homework to find out what your state offers. Here are two loan types you should be aware of:

FHA and 3 percent down

An FHA loan is part of a government program to get first-time homebuyers into their first home and requires at least a 3.5 percent down payment. Interest rates may also be lower, depending on financial factors such as credit score and income.

Veteran or USDA loans

If you are military, you may qualify for a VA loan or a USDA loan (for rural areas). Both loans may not even need a down payment.

Keep in mind that, smaller down payments typically have higher interest rates and larger mortgage payments.

Get pre approved for a mortgage

Once you’ve decided on the type of loan you want, it’s time to get pre approved. Pre approval doesn’t mean your mortgage is guaranteed and is only good for about 60 to 90 days before it expires.

Reasons to get pre approved:

  • Helps you understand what kind of interest rate you’d qualify for when you decide to buy. (This, in turn, helps you accurately figure out how much mortgage you can afford.)
  • You can also take your pre approval and shop around to different lenders. (You can check with your bank to see if they will offer you a better rate.)
  • Shows that your intent to purchase a home is serious, which helps your cause if you’re bidding on a house against another buyer.
  • Could make the closing process faster since your information is already in the lender’s database.

You may be able to use your pre approvals to get a better deal on your home. Sellers are often hesitant to accept an offer when there’s a risk the buyer can’t pay. Showing that you’re able to pay and serious about buying may help you with your negotiation.

Here is a list of documents you need to gather before you get pre approved:

  • Two years of your tax returns
  • Your recent W2s
  • Your pay stubs from the past month
  • Your latest bank account statements (typically two months)
  • Information about your other investments and assets

Pro tip: Getting pre approved may affect your credit score if your lender performs a hard credit inquiry. During the pre approval process, don’t apply for new credit such as credit cards or other loans. If you aren’t sure whether pre approval will affect your credit rating, ask your lender.

Remember: preparation is key

Above all, get a good gasp on your budget and what your monthly finances would look like as a homeowner.

It’s also smart to improve your credit, as it could help you secure a lower interest rate. Pay your bills on time and try to pay off your credit card debt. This will help your credit score utilization rate and improve your score.

Talk to your friends, family, and colleagues about their home buying experience and learn as much as you can before you start the process.

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Claire Tak

Claire Tak is a writer and content expert with a background in personal finance. She is an advocate for improving financial transparency and literacy through content and education. Claire's work has been featured and syndicated in Bloomberg, MarketWatch, GoBankingRates, and The Motley Fool. When she's not writing, you can find her on a snowboard, watching a movie, or traveling.