Becoming a first time home buyer is a mix of excitement and confusion. Too many people really just dive right into it without having done any research first, which really isn’t a smart idea.
As exciting as it may be to buy your first home, it’s all too easy to get in over your head, make a bad purchase decision, and set yourself up for financial struggles (or worse) down the road.
In my 17 years as a mortgage broker, I’ve been asked the same questions by first time home buyers again and again. In order to eliminate some of the confusion, I’ve compiled my best tips and created an ultimate eight-step plan to follow of what every first time home buyer needs to know, to ensure you make the best of this exciting time in your life!
Commonly Asked First Time Home Buyer Questions
Everyone has questions with every house they buy, whether they’re on house number one, or house number 100. Give these a read to make sure you’re caught up!
What does “first time home buyer” mean?
You may not have thought of this question yourself, but it’s worth bringing up here.
Did you know that under certain circumstances, you may be considered a “first time home buyer” as far as various program guidelines are concerned, even if you owned a home in the past?
That’s right, some programs that are designed to help people buy their first homes can also be used by those who have NOT owned a home within the last 3 years, according to Bankrate.
What are first time home buyer qualifications?
This is going to differ at least somewhat depending on exactly where you intend to buy and what mortgage lender you intend to work with.
Different markets will have different first time home buyer requirements, which can be based on things such as local cost of living, the economy in the area (and the country overall), and size of the lender.
In general, since the specifics will differ, you’ll want to have:
- A good credit score (anything over 700 has a high likelihood of successfully getting you a mortgage). But even a credit score as low as 500 could possibly qualify, although with many strings attached and a high interest rate.
- Finances available to make a considerable down payment. Most conventional mortgages require at least 10% down (although that number can often be 20% instead), regardless of credit score, but it is possible to find options with smaller down payment requirements, such as 0% down with a VA loan or as low as 3.5% down with an FHA loan.
- A full-time job with a stable income. Unless you’ve been working your 100%-commission-paid job for a number of years and have a reliable track record to of income show for it (or possibly considerable assets), you’ll be hard-pressed to prove to a bank that you will be capable of making the payments in full and on-time.
- Low debt-to-income (DTI) ratio. Regardless of your level of income, if you’re paying a hefty portion of your income towards debt each month, your mortgage application may be frowned upon, regardless of your credit score. The simple math ratio that the banks follow is that your total debt to income ratio should not be more than 50%, depending on the specific loan program you use. You can use this calculator from Wells Fargo to determine your current DTI and see what it means. The lower your DTI, the better!
What are first time home buyer programs/grants?
There are a number of both private and government first time buyer programs in existence, in an effort to make homeownership more attainable for more people.
The specific programs you qualify for will vary depending on a variety of factors, such as:
- Your current state of residence.
- State you will be purchasing in (if different from where you live).
- Military status.
- Your profession.
- Your chosen lender (some offer their own programs or grants).
- Your socio-economic status.
Can I buy a house no money down?
The short answer for almost everyone reading this is: no.
While there are some programs available to certain members of society (as just discussed), in general, the average buyer will have to put up some of their own money to buy their new home.
The only unlikely but theoretically possible exception to that is finding a lender that allows you to be a first time home buyer with a cosigner, such as a parent for their child buying their first home, and that accepts the down payment from the cosigner instead of the home buyer (although this is an unlikely scenario since a cosigner is different from a co-borrower).
What is earnest money down, or a “good faith deposit?”
While most people think you just offer on a home, apply for a mortgage, and you get a bank check for the down payment at closing, that’s not always/entirely true.
In most situations, your offer contract will have you put earnest money down, sometimes called a “good faith deposit.” This is essentially like putting a cash hold on the home you’re buying – you’re giving the seller some sort of collateral as an indication that you will stick to your word and see things through to closing.
The good news, though, is that this money is essentially an advance percentage of your down payment — whatever you put down for your good faith deposit is applied towards your total down payment.
You can learn more about earnest money down, here.
What is the first time home buyers tax credit?
This was a program that existed only from 2008-2010, in an effort to boost and repair the recession and housing bubble at the time.
Currently, the only tax credits for a first time home buyer is about the same as are available for existing homeowners, such as property taxes and mortgage interest payments. You can find a fairly comprehensive list of possible tax deductions from TurboTax.
Can a first time home buyer buy a foreclosure, auction, or short sale home?
In a short answer: yes, it is theoretically possible. It’s probably not possible or advisable for most first time home buyers, however.
The catch is that the average first time home buyer will likely find it much more difficult, due to:
- competing buyers (i.e. investors) also eager to snag a lower-priced property,
- slower turnaround for securing financing (if your finances even allow for qualifying for any mortgage for the property in question), and
- general lack of funds (many times these properties can be sold as a cash-only, simply making it difficult for a first time home buyer to save enough money for that size purchase all at once).
These properties, often being trickier to purchase in general, require close cooperation with both an experienced real estate agent and an experienced real estate lawyer, if you are unfamiliar with this particular purchasing situation.
The biggest consideration before purchasing a home in this sort of condition is the number of potential repairs that may be needed following purchase. Most of these home will be noticeably neglected and in disrepair.
If they are being sold in as-is condition, it is not out of the realm of possibilities that a house may be determined uninhabitable upon inspection after purchase. A number of other problems could arise, such as discovering an intense mold problem, that could mean the authorities quarantine the house entirely, requiring demolition.
Word to the wise: proceed with extreme caution when looking to buy a foreclosed home or similar, especially if you are very new to the real estate world!
First Time Home Buyer Tips
As you continue working along your journey to first time homeownership, you’ll find the following tips will help you get ready in advance, so that the whole purchasing and closing process can be smooth sailing!
Start planning for buying a home as early as possible.
If you just leased your first apartment and you know you want to buy when that lease is up, you’d be doing yourself a big favor to start fixing your financial situation and/or saving for the down payment starting on day one in your new apartment.
Calculate what home purchase price you can afford for a monthly mortgage payment based on your current income – don’t base your plan on hypothetical raises – and make a plan to have at least 5% of that amount saved.
You’ll need enough to cover the absolute minimum 3-3.5% down payment for some loans, plus some extra for things like application fees. Aiming for 20% of that amount is wise, if it’s possible, to minimize your interest rate, monthly payment, and the likelihood of needing any type of mortgage insurance.
Know the location in which you want to buy.
If you’ve never looked at real estate values in your dream city/town, now is the time to do so.
Saying you’re going to save a 10% down payment for a $100,000 house, as in the previous tip, sounds great — until you find out that even the worst houses in the absolute worst part of town still have higher price tags!
Ok, that may not necessarily be true in most areas, but it is possible that your savings goals don’t match reality.
Do yourself a favor and make sure you study the area you’re hoping to live in and make a note of things like commute time to work, cost of living (if it’s not your current city/county), distance to the nearest grocery store, quality of school district (will affect your taxes, at the very least), etc. All of these can and should factor into your final decision of which home to buy.
Have a 5-year plan, but also have a reality check.
Jobs can be lost, medical issues may arise, and the economy is out of your hands.
Having a 5-year plan to get out of a bad neighborhood, buy a bigger house, or refinance for a better rate is a smart thing to have.
That said, if you are 100% sure you want kids in the future (especially in 5 years or less), you’d be wise to buy a house in a decent school district, that’s big enough to accommodate a baby (500 square feet with one bedroom isn’t ideal), and that isn’t in an area where you’d go to bed fearing for your safety every night.
Also worth noting, is that if you are currently child-less but planning on having one spouse stay home with the kids, I cannot stress enough that you should do all your home-buying planning with ONE income in mind! Don’t fall for the trap of being pre-qualified for a mortgage based on two incomes, if one income can’t cover the mortgage payment for your house! The last thing any new parent needs is the threat of foreclosure looming over their heads!
Find a happy medium between today and your future plans, that won’t be a stretch but that also will still be at least tolerable if your big dreams hit a few snags along the way.
Know what you can afford AND what you are willing to afford.
Just because you CAN afford a $500,000 house doesn’t mean that you’re willing to pay that price. If you stretch your mortgage payment over too much of your take-home income, you’ll end up living a miserable life in a pricey house under constant financial stress.
Be warned now that banks love to qualify mortgage applicants for amounts that would absolutely stretch your income to the very limit.
Pick a number that feels comfortable to your budget, and find a house that fits the bill.
Know what loans you may qualify for, in advance.
It doesn’t do anyone any good (and in fact wastes a lot of time) if you go to every lender possible only to have no idea which loan is best for you, or to end up unable to qualify for any due to inability to meet any of the requirements.
You can see a list of current (as of 2019) mortgage requirements here. Use it to get a basis for your financial planning.
Know the general process for how to get a mortgage.
It’s not like opening a checking account – you can’t just walk in, ask for a mortgage, and walk out 30 minutes later with an account number and a smile on your face.
In general, you’ll need to do the following (we’ll expand on these below):
- Take stock of your financial situation and pull your free credit report.
- Start addressing any bad marks on your credit report, and work towards paying off debts (a considerably bigger barrier to mortgage approval than almost anything else).
- Work towards meeting general minimum mortgage qualifications, if needed.
- Find a real estate agent and/or mortgage broker that you trust. They’ll be a key asset for finding a lender with whom you can get the best rates for your situation. They can also advise in advance of which lender(s) you should contact for pre-qualification.
- Start gathering any records that will be needed for the mortgage application. Your real estate agent or mortgage broker can help with this.
- Have patience. It can sometimes take a long time to find a house, have your offer accepted on a house, and go through the paperwork required before closing. You’ll get there!
First Time Home Buyer Mistakes
Just the same as there are a few “golden nuggets” to know to make the home-buying process go smoother, there are also some common pitfalls that can quickly ruin the experience (and possibly cost you a lot of money).
Checking out the Joneses while you’re searching.
Sure, almost everyone wants a mansion. It’s just that little problem of the cost of them that keeps most of us at bay.
Following the tip above of knowing both what you can afford and what you’re willing to spend on a home, use that second number as the maximum price when you’re home shopping.
You would be wise to not set foot in any homes above that price, and maybe even not look at them online, or you run the risk of falling for the old “well, we DID get approved for a higher mortgage than this…” trick.
Be firm. Make a budget, stick to it, be happier than the Joneses in the long run.
Putting down too high of a down payment.
While putting as much down as you can is absolutely the right mentality when it comes to buying a home, there is such a thing as putting down too much.
Did you leave yourself any money leftover to cover closing costs and various fees, if necessary?
What about after you move in – will you be able to afford purchasing renovation/updates supplies (paint, new area rugs, etc) right off the bat, or will you have to wait a few months to build up a little buffer before you can buy those items?
(If you bought a house decorated anytime between 1960 and the late 1980s, you’ll probably regret spending every penny on the down payment and not being able to replace that bright green or bright orange rug in your bedroom…)
Not taking a chance with their offer.
The exception to this is if you live in an area where your real estate market is very high on buyers and very low on available houses, and you’ve got a deadline to NEED to be in a house by a certain date (like the end of your current apartment lease) – in that scenario you probably don’t want to play the negotiation game much, or you risk the market running out of inventory.
Most first time home buyers, however, are buying in areas where supply and demand are fairly well-matched, and they have the flexibility of putting in an offer that is below asking price, and maybe even pushing it a little farther than expected. If those buyers aren’t doing everything they can to negotiate the best deal for themselves overall, then they’re seriously missing out.
If the house you’re offering on, for example, has been on and off the market for 3 years, there’s a very good chance you might be able to get away with offering $20,000 below asking price and the seller accepts. Discuss this with your real estate agent, as they’ll know what sorts of offers (relative to asking price) are more or less likely to be accepted.
If the average house for sale in your market only lasts 3 days, however, keep your offer a bit closer to the asking price or you’re sure to miss out.
Not doing their due diligence research, outside the scope of the home inspection.
Many first time home buyers plan on getting a home inspection before closing, as is often required by lenders before granting final mortgage approval (although it is typically not required as part of the purchase otherwise).
There are 2 problems with that plan:
- You likely won’t have the home inspection completed until after you’ve put in the offer. That means you may not know about some problems until after you’re already in the process of closing, and some contracts are very tough to get out of. You could have an inspection done before purchasing, but you’ll be paying for it out of pocket and also running the risk that your offer on the home isn’t accepted anyway, meaning you wasted a few hundred dollars on the inspection.
- Regardless of the timing of the inspection, it may not cover everything you need to know about the home you’re hoping to purchase. Some home inspection companies may be far more detailed than others, but you may not get information about things such as if the home lies in a flood zone until after you close and acquire all the deeds. You’ll be a little disappointed if you find out after purchase that you need to spend extra money on homeowner’s insurance for the necessary coverage.
Not doing enough of your own leg-work prior to applying for your mortgage.
As mentioned above, it’s wise to pull your (free) credit report when you start the home search process, to see if there are any errors, old debts, “bad marks,” etc. against your name, and give you enough time to work on repairing any damage prior to applying for a mortgage.
In addition, don’t think that just because rates may look similar at most every lender, means that YOUR rate will be the same at every lender.
But it’s just based on my bank accounts, income, and credit score, right?
Wrong. Each mortgage lender wants you to finance with them because they want to be paid the interest!
Often, you’ll find that each lender also has its own incentive programs for encouraging more people to hold their mortgages there. It may be something like an excellent rate on a savings account, a special limited-time program offering a discount on interest rate or an assistance in your down payment, or it may be as simple as the size of the bank means they have a better or worse interest rate, all things considered, than another bank down the road.
Work with your real estate agent and/or mortgage broker to “shop around” and make sure you’re getting the best rates possible.
Applying for new credit too close to the mortgage application.
If there is one thing mortgage lenders hate, ironically, it’s debt.
Got too much debt? You’ll be denied a mortgage.
Have too many/too high a total of recent debts? You’ll likely be denied.
Have no debt other than a new (or even used) car you just bought within the last couple weeks or month and financed it? There’s actually a decent chance that a number of lenders will turn you down, for fear that you’re not taking care to not overspend.
Along with repairing your credit report if necessary, and paying down debts, avoiding adding any new debts in the months and weeks leading up to your application is very important!
The Ultimate First Time Home Buyer 8-Step Guide To Success (In A Nutshell)
Many of these points were mentioned above, but here we’ll dive into these 8 crucial steps to take to make sure your first home purchase goes smoothly.
Step 1 – Review Your Personal Finances
Before you even start looking for homes or talking to mortgage brokers, you should review your personal finances. Being familiar with your own financial situation gives you a sense of control during the decision-making process. Here are a few specific things to make sure you know:
- How much money you have saved for a down payment (and at least a rough idea of how much more you might need to save, if applicable).
- How much debt you have (including credit cards and student loans).
- How much income you make per month.
- How much money you spend per month (on average, including utilities, cell phone bill, entertainment, etc).
- How much you can comfortably spend on a mortgage payment per month.
Make special note of the fourth item on this list, “how much money you spend per month.” Determining this may involve looking back at your bank records unless you’re diligent with budgeting, but it also may involve using software or a spreadsheet to track your spending for 1-3 months before moving on to the next step. Having a budget ready and in-use, in advance, will make this bit of math considerably easier!
T$C Note – If you don’t already use apps like Personal Capital and Mint, adding these into your financial planning wheelhouse will make tracking your month cash flow very simple. Both of these companies are free to use!
Everyone knows that budgeting, analyzing your spending, and taking a hard look at what needs changing is no fun. But this is a crucial aspect of buying your first home.
- If you can’t stick to a budget, you’ll never be able to get a down payment saved. Bye, homeownership dreams.
- If you can’t get your spending in check now, you’re unlikely to make the right choice as to how much home you can practically afford (i.e. what monthly payment fits comfortably within your budget). Otherwise, you’ll be buying a very small and cheap house.
- If you have no clue what your debt level is, and if it happens to be above the lenders’ DTI (debt-to-income) ratios, then you’ll quite likely be flat denied a mortgage.
- If you can’t find a budget, now, that can fit a mortgage payment and a monthly “home repairs” fund for those things that will come up out of nowhere during ownership (a leaky faucet, a dead furnace, etc), then you’ll find yourself in a bit of a sticky spot when you’re living in your house and struggling to both make ends meet and keep the heat on (either for a can’t-pay-my-bills reason or a it’s-broken-and-can’t-afford-to-repair-it reason).
Step 2 – Eliminate as much debt as possible, before buying your first home.
We already talked about starting to gear up your efforts to be an ideal lending candidate basically the minute you decide, for sure, that you are going to buy a house.
There are two reasons why I recommend paying off your debt before buying a home, and I urge you to consider these reasons before you dismiss this step.
First, you probably already know that it’s difficult to pay off credit card and student loan debt while also having to pay for living expenses such as rent, gas, and food. When you add a mortgage payment and home ownership costs (such as insurance, taxes, and occasional repairs) on top of that, you will be sinking in debt even faster than before. Paying off your debt will eliminate (or at least reduce) this problem before it can happen.
The second reason why I suggest paying off your debt first is because the less debt you have the better your mortgage rate will be. In the long run, putting your home purchase off by 6-12 months is well worth it if it allows you to be more comfortable with your finances and secure a better mortgage rate.
While you’re taking a few months to pay down your debt, you can also use this time to improve your credit rating (another way to expand your mortgage options). Use this time period to make a habit of always paying bills on time and avoid accruing any new credit card debt.
Step 3 – Save For Your Down Payment
The higher your down payment is, the more comfortable you will be, financially. Although it is possible to buy a house with as low as 3% down, the mortgage rate you will be given is not favorable to you in the long run. I always recommend that homeowners try to have 20% down on their first home purchase, per the traditional conventional loan standards.
Unfortunately, saving for a larger down payment could mean postponing your house hunt by 6-12 months, but it’s worth it in the long run.
If you find that you’re struggling to save much money (or make much progress against debts) during this timeframe, you might want to consider making some money on the side (and documenting it thoroughly and carefully!) as a way to boost your down payment amount.
Do keep in mind that a lender likes to see stable employment leading up to a home purchase, so this is definitely not the time to switch jobs completely, regardless of the pay increase that may come with it (a promotion with the same employer is generally acceptable, however).
Some options for boosting your saving power while you get started on your house purchasing process are:
- Starting a small side hustle.
- Starting a business (just don’t accrue debt to do so).
- Make money on Facebook.
- Get paid to take surveys.
Step 4 – Familiarize Yourself Common Mortgage Terms
This step certainly isn’t exciting, but I do believe that first time home buyers should do a little internet research on common mortgage terms so that they can feel more confident when meeting with banks or mortgage brokers. Having a better understanding of what the terms mean will also put you in a better position for negotiating.
Simply search Google for things like “common mortgage terms explained” to educate yourself. You don’t need to know everything, but having an understanding of the basic will help you a lot.
Step 5 – Research All Of Your Mortgage Options
Some mortgages are locked in at lower prices for a long period of time – which gives you very little flexibility down the road. It’s also important to note here that once you pre-qualify for a mortgage, they will typically give you a term length after which the quoted interest rates no longer apply, and you would need to re-qualify or apply for the mortgage outright.
Other types of mortgages may be a bit more expensive up front/per month, but they allow you to pay off your mortgage faster. You need to consider what your future needs may be, not just what you can afford right now.
If you anticipate a considerable income change, such as retirement or one partner leaving the workforce to stay home with future children, then factor that into your decisions. Are you going to apply with both names on the application? Will you apply with just one name, to limit the approval amount and make sure you don’t over-buy?
Step 6 – Get Pre-Approved For A Mortgage
If you’re looking for a home in a particularly competitive market, then having a pre-approved mortgage will show sellers that you are a serious buyer.
If you are a buyer with a higher budget, this may also be a (somewhat arbitrary) requirement before some real estate agents will even schedule showings for the more expensive homes, to simply not waste their time showing a higher-priced home to those who just want to wander through and dream “what if.”
Having this upper hand will be beneficial when negotiating, or when you’re in a situation where the house you want has multiple offers. Taking care of this step before you put an offer in on a house will save time during the offer process, and if a seller is looking to close the deal in short time frame your offer may be given preference.
Of course, one of the other reasons for getting pre-approved is so to refine your knowledge of how much money you’re working with and what you can afford. While it’s important to know how much the bank or lender is willing to give you, as we discussed earlier you also need to keep in mind that you should not stretch yourself out too thin.
For example, if you are pre-approved for a $500,000 mortgage that doesn’t mean you should automatically be looking at houses that cost $500,000. Remember to base your “acceptable/maximum purchase price” on what your budget can handle, comfortably, for a monthly mortgage payment (plus taxes, insurance, etc. if not already included), not on what the bank tells you.
Step 7 – List Out All Of Your Home Ownership Fees/Costs
It’s easy to get caught up in the excitement of home buying, which can easily lead to you failing to consider the other costs you will be faced with. Your costs are not limited to your down payment and monthly mortgage payments; you will also need to budget for legal fees, moving fees and home ownership fees.
These fees include (but are not limited to):
- Home inspection fees
- Closing costs
- Legal fees
- Property tax
- Home insurance
- Rental van fees (for moving day)
- Home repairs and renovations (anything from painting to tearing out a bathroom)
- Furnishing your home (possibly including appliances)
- HOA (Homeowners’ Association) costs if your chosen neighborhood has one.
In order to get an accurate idea of what your home ownership fees will be, I suggest that you call around for quotes. You can also ask your real estate agent, friends, and family for input on what their expenses are.
The reason why it’s important to have a good grasp on these fees is to give yourself a fine-tuned glimpse of your future finances. You’ve got your down payment saved or in progress, debts disappearing, and a fairly solid number from the bank as to what you can afford and what to expect for a monthly payment.
Use this list of homeownership costs to adjust your “tolerable monthly payment” amount to a comfortable number.
Step 8 – Get Realistic About What You Need
Everyone dreams about what their first home will be like, and it frequently involves unrealistic expectations such as large walk-in closets and kitchen islands. In order to make a smart home purchase, I suggest you ‘buy with your head, not your heart’.
In order to stick to that rule, you should make one list of what you need to have and one list of what you’d like to have. If you can be realistic with yourself during this step, then you will avoid disappointment down the road.
Here are some things many people might put on the need list:
- Minimum number of bedrooms/bathrooms (especially if you already have kids)
- Minimum yard size to be comfortable (for example, if you have 2 large dogs, a 1/10 acre lawn probably will feel cramped!)
- If a garage is a necessity, the car size (such as at least 1, or “a 2-car garage for our 2 vehicles”)
- School district preferences/needs
- Comfort requirements (air conditioning in Arizona, for example)
- To have or not have an HOA
- A playground for kids nearby (if your yard is too small for a swingset, perhaps)
- A basement for storage
Some examples of things that you’d like to have:
- “His and hers” walk-in closets in a full master suite
- Jacuzzi in the master bath
- Granite countertops
- Separate bathroom for each bedroom
- Media/theater room
- Inground pool with waterfall, lazy river, and separate hot tub
(You get the picture).
Only when you’ve completed this step (and have been honest about what your needs truly are), then you can start the best part of this process – looking at homes!
Here is a quick list of some resources you’ll want to have handy as you begin and travel through your journey to homeownership. Best of luck!
- Minimum mortgage requirements (2019) – LendingTree
- “First time home buyer” qualifications – Bankrate
- Mortgage terms glossary – Bank of America
- First time home buyer programs/grants, by state – NerdWallet
- HUD Grants information page – HUD.gov
- FHA homepage (multiple resources and knowledge base, regardless of loan you end up with) – FHA.gov
- Negotiation Tips – US News & World Report
- Flood Zone Identification – Realtor.com
- Debt-to-income (DTI) ratio calculator – Wells Fargo
- Free mortgage calculator – DaveRamsey.com
- Mortgage lenders & rates (2019) – US News & World Report
- Homeowner tax deductions – TurboTax
- Side hustles to boost your down payment amount – TheSavvyCouple.com