Whether you’re on the verge of buying your first home or or just looking to learn more – congratulations! Buying and owning a home is a central component of the American dream. At the same time being a first-time home buyer can be a very daunting proposition. Buying a home will likely be one of the largest and most significant investments you make in your lifetime. As discussed in our overview of mortgages, buying a home has represented a great investment over time:

chart showing home prices in the us over time

All in all, while being a first-time home buyer might be unsettling, there are lots of reasons to be very excited about taking this next step!

First-Time Home Buyer Guide

We’ve laid out in great detail everything you need to know to prepare you for your first home purchase. As you know, the home buying process can be quite challenging. In addition, because of rapidly rising home prices across the United States, it isn’t uncommon for a first-time home buyer to feel pressure to make faster decisions. But this often results in decisions that could be financially imprudent in the long-term. It is important to get it right the first time. For example, no one wants to end up with a poorly negotiated mortgage that hurts them in the long run. Therefore, we pulled together a list of 15 tips to help a first-time home buyer thoroughly prepare as they embark on purchasing their first home. You can also read our post on first-time home buyer mistakes to learn about common errors that you cost you both time and money. Our hope is that by putting these into practice the home buying process will be as smooth as possible!

15 Tips For First-Time Home Buyers

  1. Calculate your current net worth
  2. Calculate your monthly income and expenses
  3. Determine how much you can afford
  4. Start saving early
  5. Decide which features are must-haves and deal breakers
  6. Check and strengthen your credit
  7. Understand your rights
  8. Research home buying programs
  9. Research mortgage loan options
  10. Get pre-approved for a mortgage
  11. Choose a local real estate agent
  12. Choose a local real estate lawyer
  13. Utilize open houses
  14. Make a competitive offer
  15. Put contingencies in writing

1. Calculate your current net worth

The first step should be a self-assessment of your families’ financial situation. First, make note of how much you have saved currently and compare this with your total debt. From your savings you should exclude items like your 401(k) and college savings plans. Neither of these will be accessible. On the debt side of things, your calculation should be comprehensive. Include credit cards, auto loans, student loans and other personal loans. The difference between your savings and total debt is a rough estimate of your current net worth. Your net worth is something banks will look at before deciding whether to approve you for a mortgage. As a first-time home buyer, there will likely be greater scrutiny of your financials as you have never taken out debt as large as a mortgage. There are no hard and fast rules here but you want to have a positive net worth to improve your odds of getting approved for a mortgage.

2. Calculate your monthly income and expenses

For the next step we’d recommend calculating your monthly, quarterly and annual financial obligations. Again, this should be a comprehensive assessment, try to be as detailed as possible. Next, compare this against your income levels: what level of savings do you have each month?

For example, if your income is $8,000 a month and your expenses are $4,000 a month, that means you can save $4,000 each month. The reason why this exercise is important is because it helps you figure out how large of a mortgage loan you can afford. In the above example, if you hope to save $1,000 a month that means you can afford taking on a mortgage loan that has a $3,000 a month payment.

3. Determine how much you can afford

The combination of the last two steps should give you a solid idea of how much of a home you can afford. For example, suppose you have a net worth of $100,000 and monthly savings of $4,000. This means you can comfortably afford a $100,000 down payment and up to $3,000 monthly to cover your mortgage. Using this information you can use mortgage calculators to figure out how much you can afford. For example, a home that costs $500,000 with a $100,000 down payment would have a $2,100 monthly mortgage payment(1). And so, this home would be well within your affordability range.

(1) this assumes a 30 year mortgage with a 3% interest rate

4. Start saving early

The ideal situation for a first-time home buyer is to start saving multiple years before you decide to buy. It is a very good idea to start saving even if you won’t be buying your first home for a while. Purchasing a home involves several out-of-pocket costs which you will need to pay for throughout the home buying process. Also, the more you have saved the easier it will be to get approved for a mortgage. Some of the main expenses to consider when saving:

  • Down payment: the amount that you need to save for your down payment depends on the price of the home and the type of loan. On average in the United States down payments are 20% of the home purchase price. However, some conventional loans may allow you to put down as little as 3% of the value of the home. But even saving for a 3% percent down payment can be difficult. Because the down payment is the single largest outlay in the home buying process, saving early is a good idea. Saving early helps ensure that this won’t be a constraining factor.
  • Closing costs: these are costs that typically a first-time home buyer might be less familiar with or totally unaware of. Most of the time your closing costs will consist of the loan origination fees, appraisal fees, discount points, property taxes, and other mortgage-related expenses. On average, you may spend 2% – 5% of the mortgage loan amount on closing costs.
  • Move-in expenses: You’ll also need to save an amount to handle your moving costs, minor repairs and living expenses for the next six months.

5. Decide which features are must haves and deal breakers

It’s a good exercise to lay out what you want in a home before starting the process. For example, what is the minimum number of bedrooms and bathrooms you will need? Is the square footage of the home more important or the outdoor space? Are there any features that you definitely must have? Is it important to have a home that is in a quiet neighborhood? If you will be commuting, how long of a commute are you OK with? Does a single-family home make more sense than buying a condo or townhouse?

As with everything in life there are going to be trade-offs. But it’s a good idea to take some time to reflect and then outline what you need before you start house hunting.

6. Check and strengthen your credit

chart showing credit scores for mortgages

Your credit score plays one of the most significant roles in determining the loan amount, interest rate, and other loan terms you will receive when you take out a mortgage to buy your home. According to data from the New York Fed and Equifax, 90% of mortgages that was originated over the past 5 years had a credit score of at least 640. To get the best loan terms, you must strengthen your credit score before sending in your mortgage application. To improve your credit score, you can take the following steps:

  • Get free copies of your credit reports from each of the three credit bureaus: Experian, Equifax and TransUnion
  • Dispute any errors that could be hurting your score
  • Pay all your bills on time and keep your credit card balances as low as possible
  • Keep current credit cards open. The length of time you’ve had credit cards for is one of the inputs used to calculate your credit score. Therefore closing a card can lower your score
  • Check your credit score frequently, we’d recommend once a week in the months leading up to your mortgage application

7. Understand your rights

Spend some time familiarizing yourself with two federal acts that outline your rights as someone looking to buy a home in the United States:

  • Real Estate Settlement Procedures Act (RESPA) – RESPA became effective in 1975. The law requires lenders, mortgage brokers and servicers of home loans to provide borrowers with “pertinent and timely disclosures” about the various costs associated with buying property. The law also prohibits activities like kickbacks.
  • Fair Housing Act – the Fair Housing Act became effective in 1968. The law makes it illegal to discriminate in the sale or rental of housing and also prohibits mortgage lenders from refusing to make a mortgage loan due to race, color, religion, sex, national origin, disability or familial status.
  • Squatters Rights – becoming a homeowner also means that you become vulnerable to squatters. Depending on which state you live in, the odds of someone squatting on your property and being able to successfully file an adverse possession claim can vary considerably. Familiarizing yourself with squatters rights laws in your state before you purchase a home is a good idea.

8. Research home buying programs

Many states have several programs to assist individuals looking to buy a home. For example, in California the California Housing Finance Agency provides home buyer programs including assistance for down payments and closing costs in addition to foreclosure prevention resources. Particularly if you are a first-time home buyer, it is a good idea to review the various home buying programs in your state because if you qualify for assistance it could ease some of the financial burden.

9. Research Mortgage Loan Options

One of the challenging aspects of being a first-time home buyer is finding the right mortgage program. With several mortgage options available to you, it is important to take your time and understand the various mortgage loan options, their offerings and eligibility requirements.

Here are the main categories:

  • Conventional Loans – the government does not guarantee conventional loans. For a first-time home buyer, there are some conventional loans that require as little as a 3% down payment. A Conforming Loan is a type of conventional loan.
  • FHA Loans – these loans are insured by the Federal Housing Administration and allow down payments as low as 3.5%.
  • USDA Loans – these loans are guaranteed by the U.S. Department of Agriculture. These loans are intended for rural home buyers and usually require no down payment.
  • VA Loans – these loans are guaranteed by the Department of Veterans Affairs. They are for current and veteran military service members and their families. VA loans usually require no down payment.

You will also need to choose a loan term that matches your mortgage expectations. While it is common for home buyers to choose a 30-year fixed-rate mortgage, there are many other options available. For example, you could explore getting a 15-year fixed-rate mortgage or an adjustable rate mortgage. When researching the various mortgage options you are ultimately solving for the option that gives you the highest financial flexibility while also being highly cost effective.

10. Get pre-approved for a mortgage

Once you’ve saved enough money for your down payment and closing costs and have a good idea of the types of homes you’d like to buy and ideal mortgage options, the next step is to reach out to a lender for a pre-approval letter. A mortgage pre-approval is a letter from a lender that shows that they are willing to offer you a loan up to a certain amount. The letter will spell out the terms of the loan, including loan amount, down payment, and interest rate. As part of the process of getting a pre-approval letter, your lender will need to verify your credit history, financial information (proof of income etc.) and submit your loan for preliminary underwriting.

Getting pre-approved is helpful as it shows the sellers of the home and real estate agents that you’re a serious buyer and can give you an edge over other home buyers who don’t have a pre-approval.

11. Choose a local real estate agent

While it is possible to buy a home without external help, it isn’t advisable. This is especially the case if it is your first home buying attempt. Working with an experienced local real estate agent can help you properly vet homes, schedule viewings, decide on a competitive offer and effectively negotiate with sellers. It is a good idea to find a real estate agent that focuses on the areas where you’ll be looking to buy a home. This is because these agents will have the inside scoop on the neighborhoods as well as background information and history. Asking family, friends, coworkers for recommendations and interviewing a handful of real estate agents is a good idea.

12. Choose a real estate lawyer

Real estate lawyers help with drafting the contract for the sale of the home between you and the sellers. This is a critical and often overlooked step in the process. Having a good lawyer helps you avoid some problems that could arise after you have taken ownership of the home. For example, there could be damaged areas of the home that aren’t determinable during the home inspection, or issues with the title of the property. Having a good real estate lawyer ensures you will have a negotiated contract that protects you from such eventualities.

13. Utilize open houses

Once you’ve decided on the type of home you’d like to buy and narrowed your search down to specific neighborhoods, you’ll need to start attending open houses. Your real estate agent can be helpful in scheduling these. It is recommended that you physically attend these open houses as it helps you get a direct feel of the home. Due to the covid-19 pandemic, many home sellers and real estate agents now post three dimensional or video tours online. This makes it easy to tour virtually in the event that an in-person tour is not possible.

14. Make a competitive offer

Now at this point, you’ve finally found the home that checks all the relevant boxes. Since you’re already pre-approved by a lender, sending in a competitive offer is the logical next step. Keep in mind that in many cases, as part of your offer you will be sending a copy of your pre-approval letter (not to be confused with commitment letters). Therefore, you want to make sure you are pre-approved for an amount consistent with your offer. You don’t want to go overboard with your offer on the house and at the same time you don’t want to lose the house because of an offer that is not competitive. This is where having the expertise of a local real estate agent comes in. Take advantage of your real estate agent’s expertise to help you ensure that you’re making the right offer. The right offer must be competitive enough to win but also not too far away from the value of the home. Your real estate agent will be able to guide you on your offer by comparing the price of similar homes sold in the neighborhood. Finally, be careful not to send in an offer on impulse that is far higher than what you can afford. This happens sometimes because buyers fall in love with a particular house and act on emotion.

15. Put Contingencies in writing

After you’ve found the right home and are ready to send in your purchase offer, you should consider putting all your desired contingencies in writing. By this, we mean including certain conditions or clauses in your real estate purchase offer that must be met by either you, the buyer or the seller to continue to the next step in the purchase.

These contingencies may include home inspection or mortgage contingency. With a home inspection contingency, you’re allowed to walk away from the purchase with no penalty if you discover a costly repair issue with the property. Similarly, a mortgage contingency will enable you to walk away from the sale if your mortgage approval falls through or you do not get approved for a specific loan amount.

By putting your contingencies in writing, you can back out of an offer with your earnest money deposit in hand if the deal doesn’t go as planned. A real estate attorney will guide you in drafting contingencies into your purchase offer.

Final thoughts for First-Time Home Buyers

The home buying process generally takes a lot of time and usually lasts several months. A common mistake first-time home buyers make is to assume that once the mortgage pre-approval is done, that’s all that is needed to get a mortgage. However, a mortgage pre-approval from a lender doesn’t mean you will receive a loan as described in your pre-approval letter. In fact, it is very common for lenders to recheck your credit history, bank accounts, income, and employment before the final approval of the mortgage. Lenders will do this before closing the loan to make sure that there hasn’t been a significant change in your financial situation since your initial mortgage application.

Taking out new debts, making a large purchase which lowers your savings, closing credit cards or even changing jobs can modify your mortgage terms, delay and even disqualify you from getting a mortgage loan. So it is a good idea to wait on any decisions which will significantly impact your financial situation before getting the final approval for your mortgage.