First-time homebuyers guide: What you should consider before buying your first home

Happy parents and kids in home with moving boxesImage: Happy parents and kids in home with moving boxes

In a Nutshell

Buying a house is a major decision, but with a little organization and planning you could be well on your way to owning your first home.
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When it comes to housing, few things are as exciting as purchasing your first home. Renting has many benefits, but as a homeowner you get the opportunity to be your own landlord as well as the chance to build equity in your property.

However exciting it may be, buying a home is still a weighty decision. It will likely have a significant impact on your finances for years to come — and there can be more to the homebuying process than meets the eye, especially if you’ve never gone through it before. To minimize the stress of house hunting, you should learn about what it takes to purchase a home before you start shopping.

Get a grasp of your current financial status

You’ll want to assess your financial situation, as it will be a key factor in your ability to purchase and maintain a home. Everyone’s finances are different, but generally you’ll want to be in a secure place economically before you buy a home. 

If you aren’t as comfortable as you’d like to be, it may be better to hold off until you have your finances in order. In addition to being stressful, financial instability can make it more difficult to purchase a home.

For example, if you have a lot of debt relative to your income, you may have difficulty getting approved for a mortgage, or you may only qualify for a loan with higher interest rates — both issues that can throw a wrench into the homebuying process. 

For the best results, it pays to examine your outgoing debt compared to your monthly income. Work on reducing the amount you owe until your debt-to-income ratio is below 43% (aim for lower if you can manage it though). That means that no more than 43% of your total monthly income should be taken up by your monthly financial obligations. The earlier you start working on your debt, the better.

To calculate your debt-to-income ratio, add up all of your monthly debt payments and divide this amount by your gross monthly income, which is typically the amount of money you make before taxes and other deductions each month.

Look at your savings

Saving for a down payment is a major piece of the home-buying puzzle. How much you are able to save will dictate how much you can spend on a down payment.

Generally speaking, the more money you can put down on a home, the more affordable your payments will be over the life of the loan. 

Depending on the lender and type of loan you qualify for, you may find home loans with down payment requirements as low as 3%. But be aware that if you put down less than 20%, you’ll usually need to buy private mortgage insurance, which will add to your total loan cost.

A smaller down payment can make it easier to buy a home, but less cash upfront can also leave you with higher monthly payments over the life of the loan. You’ll likely also have the additional expense of private mortgage insurance, which lenders charge to protect themselves if you stop paying your loan. 

However, a down payment isn’t the only expense you have to account for when saving to buy a house. Between closing costs and moving expenses, you may need to save more than you initially thought. 

Assess your credit before buying a home

Evaluate your credit before you begin shopping for a home. Lenders will consider a variety of credit-related factors — including your credit scores — when you apply for a home loan. 

Your credit scores are a simple way for lenders to measure the health of your credit. With higher scores, you appear less risky to lenders and are more likely to get approved for loans with more favorable terms.

You may still get approved for a home loan even if you have bad credit or low credit scores, but you should proceed with caution. If you get approved for a loan, you may find interest rates to be much higher from lenders who are willing to work with you.

A costly mortgage can make it difficult for some buyers to manage monthly payments and will increase the overall cost of purchasing a home. To save money and reduce the stress of buying a home, it may be worth waiting until you can get your credit in order.

Familiarize yourself with mortgages

As you look into buying a home, you’ll likely come across several kinds of mortgages. On top of that, each lender has its own criteria for approval. You may not qualify for a certain mortgage from one lender, but because of different approval processes, you could qualify for a similar loan from another lender. 

Just as you need to shop around to find the right home, you need to compare mortgage offerings to find the right loan. When looking at loans, you should consider: 

  • Loan term
  • Interest rate type
  • Loan type

When choosing your mortgage, look at the same type of loan from multiple lenders. You can compare the details of each loan and select the one that works best for your situation. 

Along with your credit scores, lenders frequently look at your income, assets, debts and credit history when reviewing loan applications in order to assess your ability to afford a house and the expenses that go along with it. 

Once you’ve started shopping for a home, it makes sense to get a mortgage preapproval. Getting preapproved for a mortgage — which typically includes a letter from a lender saying that it’s tentatively willing to lend you a certain amount — can help in the home-buying process, since it signals that you’re serious about buying. 

Research first-time homebuyer programs

First-time homebuyer programs help people navigate the potentially challenging process of purchasing a home. These programs are often aimed at those with low to moderate incomes and may require homebuyer education as a condition of receiving financial assistance. To make homeownership more accessible, the programs typically offer such benefits as smaller down payments. 

Even if you’ve bought a home before, you may qualify as a first-time homebuyer. A first-time homebuyer typically includes someone who hasn’t owned a home in three years or more. 

If you’re interested in a first-time homebuyer program, be sure to look into what is offered in your area for specific requirements.

Figure out what type of home best suits your needs (and wants)

With a better idea of your finances, you can begin to think about what type of home you want —  and can comfortably afford — to buy. Your finances are an important factor, but so are your personal preferences and lifestyle. 

Consider the following:

  • What type of home you want, such as a single-family home, townhouse, apartment or duplex
  • Where you want to live
  • What kinds of amenities you want, such as a fireplace or swimming pool
  • The amount of space, including bedrooms and bathrooms, you need
  • The amount of outdoor space you’d like

You can even think about the layout, the amount of kitchen space, the type of flooring, the home’s colors — don’t hesitate to get specific. The more detailed you are in your considerations, the easier it will be to shop for a home.

You’ll also need to decide whether you want a fixer-upper or a move-in-ready home. If the house doesn’t need any work, you’ll avoid the time and money required to make repairs and updates. 

Find a real estate agent who understands your needs

You may want to consider working with an experienced real estate agent who knows the local market and can help you find a home that you like and can afford. 

A real estate agent can guide you through some of the challenges of buying a home, including the paperwork, laws and processes associated with the transaction. 

You can always search for an agent online or by looking at real estate signs in your area. Ask friends, family members and acquaintances about agents they’ve used. Once you have a few contenders, take the time to conduct interviews and get to know them. Be patient and wait until you find someone you like and trust.

Make an offer and negotiate

Once you and your agent find a house you’re interested in, you can put in an offer and begin negotiations. During this phase, you and the seller will decide how much you’ll pay for the house, establish who is responsible for covering certain costs, and discuss potential contingencies (or conditions that must be met to move forward with the sale).

When negotiating, get the home inspected by a professional. Even new or seemingly perfect houses may have significant hidden problems that are costly to address. It is best to negotiate any commitment to purchase a home as being dependent on the property inspection. 

If you and the seller do come to an agreement and all contingencies are met, you can close the deal. At this time, you will have to deal with closing costs, which can include a variety of charges such as appraisal fees, taxes, recording fees, discount points and homeowner insurance.  

Budget for maintaining the home

The costs associated with purchasing a home don’t end once you’ve completed the sale and moved in. As the owner, you’re responsible for all repairs, which means you’ll have to either hire someone or try to fix things yourself.

To help you stay on top of your expenses, it’s a good idea to update your budget to account for home costs. Start with your mortgage, since that’s your largest expense, and work to progressively smaller costs, which typically include insurance, property taxes and routine maintenance. Think about setting aside emergency funds specifically for your home so that you’re more prepared to cover unexpected expenses.