First-time homebuyer guide
Key takeaways
- A first-time homebuyer is someone who has either never owned a home or who has not owned a home in the last three years.
- First-time homebuyer programs offer mortgages with low down payment requirements and other favorable terms or assistance.
- Buying a new house involves many steps, from securing a mortgage to negotiating with sellers. A real estate agent could be a valuable resource to help you navigate the process.
A first-time homebuyer is someone who has never owned a home before, or someone who hasn’t owned a home for at least the previous three years. In certain tax circumstances, the IRS considers someone who hasn’t owned a home in the prior two years a first-time buyer, as well.
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Step 1: Assess your finances
A home is the single biggest purchase most people make. If you can’t pay all cash, you’ll have to get a loan, so it’s important to ensure your finances are in a good position to handle a mortgage. Start by checking your credit report and score, examining your budget and assessing your ability to make a down payment and pay closing costs.
Credit
With a higher credit score — ideally, 760 or more — you’ll qualify for more favorable loan terms that could save you money over the life of your mortgage. That said, you can still get a loan with a score as low as 620 for a conventional loan or 500 for an FHA loan. You might not get the most attractive interest rate with that score, however, and might need a larger down payment.
Debt-to-income ratio
Calculate your debt-to-income (DTI) ratio. Depending on the type of mortgage you’re getting, the ideal spend for housing costs — including the mortgage payment, property taxes and homeowners insurance — is 28 percent of your gross monthly income. For all of your monthly debt payments, including housing costs, the ideal spend is 36 percent.
For a conventional loan — the most popular kind — many mortgage lenders look for a maximum 43 percent DTI ratio, but some go higher, up to 50 percent. The higher your DTI ratio, the more likely you are to pay a higher mortgage rate.
Down payment
If you’re interested in a conventional loan and can put 20 percent down, you’ll avoid paying private mortgage insurance (PMI). This is an extra monthly fee that covers the lender should you default on, or stop paying, the loan.
You don’t have to put down 20 percent, though — you can pay as little as 3 percent with PMI. If you’re getting a VA loan or USDA loan, you likely won’t have to make any down payment. FHA loans, meanwhile, require a minimum of 3.5 percent down.
Savings
Closing costs can range from 2 percent to 5 percent of the home’s purchase price. There’s also the earnest money deposit, which is a smaller deposit submitted with your initial offer to buy a home. This cost varies, but is usually 1 percent of the home’s purchase price.
Don’t forget: You’ll also want some savings lined up for moving expenses and furniture or possible repairs or updates you’d like to make to the home.
Step 2: Decide which type of mortgage to get
There are many types of mortgages. Your first consideration is whether you want a fixed-rate or adjustable-rate mortgage (ARM).
Fixed or adjustable rate
Fixed-rate loans tend to have slightly higher rates, but the rate never changes. An ARM typically starts with a lower rate for a set time (such as five or seven years) and then adjusts up or down at a predetermined interval, such as once every six months. If the rate goes up, your monthly payment will increase.
Fixed-rate loans offer more stability for those who plan to stay in one place. If you don’t plan to live in a home for a long time, an adjustable-rate mortgage can potentially save you some money.
Loan terms
Also consider your loan term, such as 15 or 30 years. Shorter-term loans have lower rates but larger monthly payments. This means less flexibility in your monthly budget in exchange for lower overall borrowing costs. Most first-time homebuyers get a 30-year, fixed-rate mortgage.
Step 3: Get quotes from at least three mortgage lenders
Comparing mortgage loan offers is one of the essential steps to buying a house. Aim to get rate quotes from at least three lenders, as mortgage interest rates vary considerably and change often.
You can might be able to get a free quote through the lender’s website if you provide basic information, like your desired loan amount, down payment and credit score range. Otherwise, you’ll need to contact the lender. Be sure to weigh all the fees that come with a loan — sometimes, a loan with a lower rate has a higher annual percentage rate (APR) because of fees.
Keep in mind: While quotes can be a valuable means for comparison, your rate won’t be finalized until you lock it in with the lender.
Step 4: Get preapproved for a mortgage
When you’re ready to search for a home and make offers, get preapproved for a mortgage. A preapproval is a written, preliminary commitment from a lender to loan you a certain amount of money at a certain rate. It is not a finalized offer.
When you request a preapproval, be prepared for your mortgage lender to dig into all aspects of your financial life. You’ll submit pay stubs and bank statements from at least the past two months, your W-2 forms and federal tax returns from the past two years and any other information on other assets and debt you have.
Be sure you’re actually getting a preapproval, not a prequalification. A prequalification could indicate that you might be approved for a mortgage, but is better used to help you determine how much you might be able to afford. You’ll need a preapproval, not a prequalification, to make an offer on a home.
Step 5: Find a real estate agent
Once you’re preapproved and ready to start looking for homes, connect with a real estate agent who has experience with homebuyers in your area. Ask family or friends for a recommendation, or research agents online. Bear in mind, some might specialize in working with sellers instead of buyers.
Keep in mind, too, that you don’t have to sign a contract with the first agent you talk to. Interview a few, and ask about their experience, track record and whether they specialize in any particular type of residence, such as condos. Make sure you understand their communication style — will you hear from them every day with new listings? — and ask for references. Ideally, the agent should know the local housing market well and be able to provide valuable insights about neighborhoods, school districts and more.
Step 6: Shop for a home
As you shop for listings on Zillow and other real estate websites, talk to your agent about your budget and top requirements so they can send you listings, too. When you find something you like, work with your agent to coordinate a showing.
Step 7: Make an offer
When you’re ready to make an offer on a home, discuss the terms of the purchase agreement with your agent. They’ll analyze comparable listings (“comps”) recently sold in the area to help you make a competitive offer. The purchase agreement typically includes an offer price, a deadline for the seller to respond (usually within 24 to 48 hours) and any contingencies.
At a minimum, the offer should include appraisal and home inspection contingencies. That means if the home appraises under the offer price or an inspection reveals significant issues, you can walk away without losing your deposit. If a bidding war seems likely, the offer should also include an escalation clause with your top offer limit.
The seller can accept, reject or counter at a different price. Tap your agent’s experience to negotiate with the seller for the best possible outcome. It’s not uncommon for homes to sell quickly or above the list price, so don’t panic if you don’t get the first home you place an offer on.
Step 8: Apply for the mortgage
If the seller accepts your offer, it’s time to apply for your mortgage. This isn’t the same process as getting preapproved, but they are similar. Here are our in-depth guides to the loan application:
- Ins and outs of a mortgage application
- How to read a mortgage loan estimate
- Questions to expect from a mortgage lender
Step 9: Hire a home inspector
After your offer is accepted, hire a home inspector to evaluate the property. Your agent can recommend a home inspector, or you can locate one through the American Society of Home Inspectors, the International Association of Certified Home Inspectors and the National Academy of Building Inspection Engineers. As you did when researching real estate agents, consult online resources to check for complaints and read testimonials.
An inspector will check the home’s foundation, roof, HVAC, plumbing and electrical systems but typically will not check for the presence of lead paint or mold. The inspection can take about two or three hours and range from $300 to $1,000, depending on the home’s size and the extent of the inspection. You and your agent should be present during the inspection so you can ask for clarification on any issues.
If the inspection report uncovers major problems, you could try to ask the seller to fix them, but the seller might not be willing to if there are other offers that won’t require them to pay for repairs. If you have an inspection contingency in your purchase agreement and the seller is unwilling to address the issues, you might choose to walk away instead.
Step 10: Get homeowners insurance, finalize your move and close
Once the inspection is taken care of, your mortgage lender might conditionally approve your loan. This typically means the lender is waiting to resolve a few details or for other contingencies to be met before clearing the loan to close. At this point, the next steps usually include:
Insuring the house
Mortgage lenders require homeowners insurance, which helps protect your (and their) investment. Insurance premiums vary, so get quotes from several companies or work with an insurance broker who can shop rates for you. Assess your needs and ensure you buy enough coverage to completely rebuild your home if it’s destroyed or seriously damaged. If your home is located in a federally designated flood zone, you’ll need to buy flood insurance, too.
Planning your move
Depending on how quickly you plan to move, you’ll likely want to start planning before the closing. As you prepare for move-in day, contact your utility, cable and internet providers to arrange new service for your move-in date.
Closing
Finally, it’s time to put pen to paper and close on your new house. The closing is when you finalize the purchase contract and officially become a homeowner. If you’re paying closing costs on closing day — and most buyers do — follow your escrow company or settlement agent or attorney’s payment instructions very carefully. If you receive an email with wiring instructions, call your settlement agent first to verify it’s legitimate.
A day or two before the closing, you’ll do a final walkthrough of the property to make sure repairs, if any, were made and that the home is vacant. At the closing table, you’ll sign paperwork to finalize the loan and transfer ownership of the home from the seller to you.
- First-time homebuyer programs: If you’re a first-time homebuyer, you might qualify for help affording the home. Some lenders offer a mix of slightly discounted mortgage rates, minimal fees and low- or no-down payment options for qualifying novices. Many states and local governments have programs that offer down payment or closing cost assistance — either low-interest-rate loans, deferred loans or even grants.
- Mortgage credit certificates: If eligible, you might also benefit from a mortgage credit certificate (MCC). An MCC offers a dollar-for-dollar federal tax credit, up to $2,000 per year.
Buying your first home isn’t without challenges. Be ready to:
- Have lots of liquidity: As a first-time homebuyer, you’re not moving from one property you own to another, so you won’t have the proceeds from a home sale to use in a pinch.
- Explain your credit and financial circumstances: As a first-time buyer, you might not have a long credit history, plan to use a gift funds for a down payment or earn income through a gig work or another form of self-employment. These aren’t dealbreakers to getting a mortgage, but you’ll need to be able to prove these circumstances qualify you for a loan. Be prepared for the mortgage lender to ask (and potentially ask again) for lots of documentation.
- Pay for ongoing costs: Budgeting for home maintenance costs is one of the biggest transitions from renting to owning, so make sure you plan accordingly. The average annual cost of owning and maintaining a single-family home is more than $18,000 a year, according to one Bankrate study.
