Buying your first home is one of the most meaningful moves you’ll ever make. It’s also one of the most complicated — particularly in today’s housing market, which has stubbornly expensive home prices, limited inventory and the highest mortgage rates in over two decades.
“It’s not a great time to be buying a home,” said Greg McBride, chief financial analyst at Bankrate. “The cost of financing is the highest it’s been in more than 20 years. In a lot of different markets, you may be seeing insurance premiums and property taxes increasing at a very rapid clip.”
However, if you’ve been squirreling away your savings for the past few years, now could be the time to purchase your first home. Read on for some key tips to make your search as stress-free as possible.
What to do before entering the housing market
Review your finances
Mortgage lenders want to see that you have good credit, so your credit score is one of the most important factors taken into consideration. Before you start looking for a house, review your credit report (it’s free) to dispute any errors and see how much of a risk you are in the eyes of a lender.
In addition to your credit score, the next number lenders focus on is your debt-to-income ratio. Most lenders need to see your DTI at 43% or lower to approve your application. This means that all your monthly payments — for your credit cards, student loans, car payment and mortgage — shouldn’t exceed 43% of your monthly income. So if you earn $6,000 each month, your overall debt load should be $2,580 or less.
Save for a down payment while tackling your credit card debt
Saving for a down payment while paying off high-interest debt like credit cards is a balancing act. But the closer you can get your credit card debt to zero, the better your DTI will be, and you’ll improve your credit score in the process.
How much should you save for a down payment? The answer ultimately depends on the type of loan you’re using to buy the house (more on that below). Simply put, the more you can put down, the more you can save. A down payment of 20% or more may help you secure a lower interest rate, lower your monthly payments and help you avoid having to pay private mortgage insurance. However, you don’t have to hit that 20% mark. Instead, you can explore other options such as loans that require only 3% down or Zillow’s 1% down payment option, as long as you’re aware of the pitfalls.
Understand the importance of cash reserves
Don’t put all your money in your bank account toward a down payment. In fact, most lenders like to see a cushion in your account to help cover your mortgage payments in case of an emergency such as a job loss. You also have to be prepared to pay for things like closing costs and other fees associated with purchasing a home. Plus, depending on your home inspection, there may be repairs you’ll need to pay for after receiving the keys to your home.
Get preapproved for a home loan
Getting preapproved for a mortgage gives you an estimate of what you’ll be able to borrow and verifies your creditworthiness. Most importantly, it tells sellers you can actually afford the offer you’re making on your first home. It’s a simple process that involves handing over financial documents and having a lender conduct a credit check. With some online lenders, you might be able to get preapproved in just 15 minutes, while other lenders may need to manually review your application.
Try not to finance anything new before buying a home
When you’re trying to take out a home loan, don’t borrow money to do anything else. That means putting off financing a new car, opening up a new credit card or doing anything else that will raise the eyebrows of a mortgage underwriter. Buying a home should be the main priority on your list.
Tips for starting your home search
Know what you need vs. what you want
This is the fun part. Once you have an idea of your budget, you can start to scroll through Zillow or Redfin. Looking for a home online has become something of a national pastime, but you should also go to local open houses, as well as talk to realtors, brokers and neighbors who have recently purchased their first home.
You’ll want to decide at this step what features are important to you in a home: the number of bedrooms and bathrooms, square footage and home type, for example. At the same time, you need to think about what you’re willing to do without. Real estate often requires some degree of compromise, so you may have to wait a while to update your kitchen or add an amenity.
Find the right real estate agent
Next, you’ll want to find a professional, experienced and well-reviewed realtor who understands the market. Start by asking friends and colleagues for recommendations and then reach out to local brokerages and agents until you find one that feels right to you. Trust your gut and make sure the agent is responsive and knowledgeable about the area you’re looking before signing any paperwork.
Consider new construction too
You don’t have to limit your search to homes that already have an owner. According to Redfin, nearly one-third of homes for sale are brand new, and builders are working to attract buyers with all kinds of incentives. Some might pay to buy down your mortgage rate for a few years, and others may cover a portion of your closing costs. And even if a builder won’t throw in a perk, new construction can still have advantages because you won’t need to worry about upgrading anything in the home.
Tips for choosing a mortgage
Know your home loan options
Knowing the types of mortgages available to you can help determine the best option for your financial situation. Here’s a rundown of some of the most common options:
Conventional loans: These can be fixed-rate or adjustable-rate, and they require a minimum credit score of 620 and a down payment of at least 3%.
FHA loans: Backed by the Federal Housing Administration, these require a down payment of 3.5% (10% if your credit score is between 500 and 579). The big downside to FHA loans is that they have mortgage insurance premiums that typically can’t be canceled unless you refinance into a new loan after you’ve built up enough equity.
VA loans: If you qualify as a service member, veteran or military spouse, VA loans are a great option. No down payment is required, and many lenders will approve low credit scores. These also have some of the lowest interest rates of any mortgage option.
USDA loans: If you’re planning to buy in a rural area, USDA loans should be on your radar. These require a credit score of 640, but you don’t have to make a down payment. In most cases, these loans are for low- and moderate-income borrowers.
While these are the four most well-known mortgage types, there are loads of other options. Some lenders even offer programs specifically for physicians and health care workers, and others offer nonconforming loans to help applicants with complex finances – such as freelance workers and independent contractors – to buy a home.
Compare rates from different lenders
While mortgage rates fluctuate on a daily basis depending on what’s happening with the economy, you still want to shop around to find the best rates, as they will vary lender by lender. Sourcing multiple quotes from multiple lenders will save you money — borrowers can save an average of $1,500 over the life of a loan just by getting one extra quote and an average of $3,000 by getting five quotes, according to Freddie Mac.
To gain access to personalized rates online, you’ll typically need to provide some basic financial information, which the lender will use to prequalify you for a mortgage. Prequalification doesn’t guarantee these rates but rather allows you to view rates you’re likely to lock in based on your finances. This step, which is different than mortgage preapproval, typically doesn’t require a credit check.
Look for down payment assistance options and first-time homebuyer assistance programs
Saving for a down payment can feel completely impossible. In fact, data from Bankrate shows that 40% of aspiring homeowners believe they can’t afford the down payment and closing costs. However, don’t let that scare you away from the housing market. Conventional loans will accept down payments as low as 3% of the purchase price, and there are state and local housing programs that can help low- and moderate-income buyers get assistance with their upfront costs.
There are first-time homebuyer programs available at the state level too, so be sure to look into local programs in your area. Some of these are loans that let you borrow the cash you need for a down payment, and others are grants that will never need to be repaid.
Focus on the fees too
When reviewing interest rates, you also need to factor in lender fees, such as underwriting, origination and points fees. If a lender charges high fees, you could actually end up paying more even if they offer a lower interest rate. Lender fees, combined with the interest rates, create your annual percentage rate, which is the actual rate you’ll pay for the home loan.
“Too many people just shop by interest rate,” said Frank Jacovini, associate broker with Remax Century in Philadelphia. “But the fees are built into the calculation of the APR. The APR gives you a true picture of the cost of that loan.”
For example, one lender may offer a 7.75% interest rate while another is offering a 7.5% interest rate, but the latter may charge you a $5,000 origination fee for processing the application, making your APR higher.
Tips for closing on a home
Make an offer
You want to put your strongest foot forward when making an offer as a first-time homebuyer. Making your highest and best offer first is usually what realtors recommend in order for it to be competitive, which is particularly important right now. In today’s market, you need to be prepared to make that offer quickly, which is why it’s critical you have all of your finances and documents ready to go.
Negotiate closing costs and ask for concessions
For a buyer, closing costs are fees you pay for your mortgage lender’s services. They include expenses like title insurance, lawyer fees and your home appraisal, as well as taxes. Typically, your closing costs will be around 2% to 5% of your loan. However, you might be able to get a seller to help lower that bill. Data from Redfin shows that more than 40% of sellers have offered concessions in 2023 to help push a deal over the line. While sellers still technically have the upper hand in most areas around the country, you might have some leverage to negotiate as a buyer.
Schedule an inspection
A home inspection will add a few hundred bucks to your costs as a homebuyer, but this will be some of the best money you ever spend. After all, you’re borrowing hundreds of thousands of dollars to buy the property, so you need to make sure you aren’t going to wind up dealing with major plumbing issues or a roof that needs to be replaced next year.
A thorough inspection should take anywhere from 2 to 4 hours. Make sure you receive a written report after an inspection — the inspector is legally obligated to provide you with one.
Schedule an appraisal
While a home inspection is optional, an appraisal isn’t. Your lender will require an appraisal to verify that the price included in your offer is an accurate reflection of the property’s value. This way, if you default on the loan (not a fun thing for you to think about, but it’s definitely on your lender’s mind), the lender can recoup most of its losses. You don’t have to do anything for the appraisal other than pay for it, but you should be aware of the potential for an appraisal gap: If the fair market value is less than your agreed-upon offer, you will need to either pay the difference out of your own pocket or get the seller to drop the price.
Get homeowners insurance
Before your closing date, you need to make sure your investment in your new home is protected by purchasing homeowners insurance. The average homeowner spends $1,428 each year on homeowners insurance for a $250,000 house, which means you’d need to factor in an additional $119 payment per month to your budget. It’s wise to start your search for insurance with the same company that covers your car insurance to see if there are discounts for bundling services together.
Be prepared for the closing day
The day you close on your home is the day when the property is actually transferred to you and when you’ll be expected to pay the closing costs. Closing costs must be paid with a cashier’s check from your bank, never a personal check. Before your closing date, you need to make sure all of your paperwork is signed — by both buyer and seller — so the house officially can become yours. This is also when the title company needs to verify your identity with a valid photo ID. You’ll need proof that you’ve already purchased homeowners insurance too.
Don’t forget to factor in the cost of your physical move, either. Hiring a moving company can cost you hundreds or thousands of dollars depending on the amount of furniture you’re moving and the distance of your move. A local move costs an average of $1,704, according to HomeAdvisor.
You’ve bought your first home, now what?
Once you get the keys, give yourself a round of applause. Buying a home is a big accomplishment, and in 2023 and 2024, it means you have successfully navigated one of the most challenging housing markets ever. Now, it’s time to make the most of your new pad. Put these three things on your to-do list:
- Install a security system: In addition to providing some peace of mind, a security system can save you some money. Most homeowners insurance providers offer discounts for adding this layer of protection.
- Make a plan for maintenance: You don’t get to call the landlord anymore. Now that you’re an owner, you need to make sure you’re setting aside cash to deal with the regular costs of upkeep.
- Consider ways to accelerate your mortgage payments: At the beginning of your repayment term, the majority of your monthly payment is going to interest. With that in mind, it’s wise to think about ways to make additional contributions toward your principal. For example, if you receive commission checks for your job, perhaps you can put a chunk toward your principal balance.
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