Doing something for the first time means you may not be good at it right away. When it comes to buying a home though, there’s no room for first-time mistakes as they can come back to haunt you financially down the road.
The good news is that first-time home buyers can take advantage of many programs and resources to help navigate the process. From down payment assistance programs to government-backed loan options and the experience of independent mortgage brokers, you can avoid some of the common and costly mistakes that many new home buyers make.
These 13 first-time home buyer tips will help you prepare for homeownership and make the process of getting a mortgage run much smoother.
- Be sure you’re ready to commit to a loan
- Don’t skip pre-approval
- Maintain your credit
- Save for a down payment
- Understand your loan options
- Don’t forget closing costs
- List your needs, non-negotiables, and nice-to-haves
- Work with a real estate agent
- Be confident when you submit an offer
- Hire an inspector
- Stick to your budget
- Save physical copies of your paperwork
- Don’t stop learning
1. Be sure you’re ready to commit to a loan
Buying a home is the biggest investment most of us will ever make and a decision not to be undertaken lightly. Homeownership brings a certain level of pride knowing that you own property and can build equity over time. With your own home, you also have the freedom to paint the walls however you want, or design your dream closet or kitchen.
However, unless you’re buying a house in cash, consider if you’re ready to commit to a mortgage. Mortgage terms usually span 15 to 30 years. The average person lives in their home for 13 years before selling it, according to 2018 data from Zillow. When you own a home, it’s not as easy to pick up and move when the mood hits you.
Ask yourself if you’re willing and able to keep up with a mortgage, maintenance, and home repairs. In addition, be sure to ask yourself some of these key questions to help you decide if homeownership is right for you.
- Why is buying a home important to me?
- What type of home do I want, and can I truly afford it right now?
- What neighborhood(s) am I considering, and am I willing to live there for a few years?
Keep in mind that it’s OK to decide the time isn’t right for you or even that you don’t want to become a homeowner at all. No one is required to buy a home on a fixed timetable — or ever for that matter.
2. Don’t skip pre-approval
If you’re serious about buying a home, one of your first steps should be getting pre-approved. A pre-approval or prequalification letter states that a lender is willing to work with you and how much they will potentially loan you.
Getting pre-approved is not the same as actually applying for a mortgage, but rather demonstrates that you likely qualify for one. The pre-approval process is usually much shorter with the lender looking at your credit and income information.
Pre-approval letters tend to expire after 30 to 60 days, so it’s best to start shopping for homes once you get pre-approved.
Benefits of pre-approval
Being pre-approved communicates that you’re serious about buying a home and lets you know how much you can afford. Once you know your potential loan amount and have at least a general idea of the APR and loan term you might select, you can use a mortgage payment calculator to estimate monthly dues.
Finally, getting pre-approved also assures sellers and their agents that you have access to a home loan to potentially buy the house and this can help eliminate any surprises down the line.
3. Maintain your credit
This is a critical first-time home buyer tip because your credit determines whether you qualify for a mortgage and what interest rate you’ll get. Before applying for a mortgage, check your credit with all three major credit bureaus via AnnualCreditReport.com.
Look for any errors and negative marks, but also review your score overall to see where you stand. If you have some debt balances that are causing your credit score to decrease, consider paying them down first.
Improving your credit could help you save money on your mortgage for years to come if it means you can lock in a lower interest rate.
4. Save for a down payment
A down payment is money you put toward the home purchase to reduce the amount you need to borrow with a mortgage. Some mortgage loans require a minimum down payment amount, such as 3% or 5% of the purchase price.
If you put down 10% of the purchase price, you’d need to borrow 90% from your lender. When you put at least 20% down and get a conventional mortgage loan, you won’t have to pay private mortgage insurance (PMI) with your mortgage payment each month. How much you put down depends on your budget, the type of loan you want, and how much you’re pre-approved for.
You can start saving for a down payment months or years before you start the home-buying process. Track your spending and set a goal of how much you want to save each month. Then, set up automatic transfers to simplify the process of growing your down-payment amount.
As you save for a down payment, try to keep these funds separate from your emergency savings. Aim to keep at least three to six months of expenses in your emergency fund to help with the unexpected costs that come with homeownership.
5. Understand your loan options
There are many types of mortgage loans, so you’ll want to narrow down the best option for your needs. Each type of mortgage has its own maximum borrowing amount as well as minimum down payment and credit score requirements.
Here are four common types of mortgage loans and how they work.
Conventional loans
Conventional loans are one of the most common types of mortgages and you can put as little as 3% down. These loans can have a fixed or variable interest rate but tend to have stricter credit score and eligibility requirements compared to other loan types.
FHA loans
FHA loans are backed by the Federal Housing Administration (FHA). FHA loans are easier to obtain if you have a lower credit score or need to make a smaller down payment. You just need to put 3.5% down. Maximum borrowing limits for FHA loans vary by county.
USDA loans
USDA loans are backed by the U.S. Department of Agriculture. To be eligible, borrowers must have a low to moderate income and buy a home in an eligible rural area.
You can get a USDA loan with 0% down, but you’d have to pay ongoing mortgage insurance premiums.
VA loans
VA loans are backed by the Department of Veterans’ Affairs and are available to U.S. veterans, current servicemembers, and the surviving spouses of veterans.
VA loans are unique in that they don’t require a downpayment and you don’t have to pay any mortgage insurance premiums.
6. Don’t forget closing costs
Closing costs are expenses that need to be paid upon the closing date of your new home. Some of these expenses are required earlier during the process. That’s the case with home inspection and appraisal fees, which can amount to between 3% and 5% of the loan.
Be mindful that you’ll need to pay taxes on your home purchase and other fees, such as attorney fees and insurance. If you’re buying your first house, closing costs can seem like a shock but your lender will give you a loan estimate that includes everything you need to know. Your loan estimate form will include costs for the…
- Loan amount
- Interest rate
- Monthly payment
- Closing costs
- Taxes and other costs
- Basic loan information
7. List your needs, non-negotiables, and nice-to-haves
Create a list of your needs or must-haves when it comes to your new home. Which qualities are you looking for and what are your non-negotiables? Doing this will also help you determine where there’s flexibility.
For example, if you want a basement or a master bathroom, you may be willing to compromise on a home that has these things but lacks other features, such as a big yard. Knowing what you want going into the homebuying process will help you shop for places more effectively and be less stressed.
8. Work with a real estate agent
A real estate agent is someone who represents buyers or sellers in a real estate transaction. Most potential home buyers work with a real estate agent since it’s free (the seller of the home pays the agent) and the agent can advise you from start to finish.
Most agents represent a licensed brokerage office that’s responsible for handling home purchase and sale transactions. Do some research to find an experienced real estate agent with a proven track record who also knows your area well and can advise you on your home search and purchase.
9. Be confident when you submit an offer
Don’t submit an offer on a home unless you are 100% committed to the purchase. You must feel confident in your offer and comfortable with buying the home given the cost and long-term commitment.
If your offer’s approved, the home will go under contract and your lender will start to work on securing your loan funds. Most serious buyers also offer up earnest money, which is a good-faith deposit to secure the contract. Earnest money goes toward the purchase price.
10. Hire an inspector
Here’s a key first-time home buyer tip: Once your offer is accepted, you have the right to hire a professional home inspector to examine the property in depth. The home inspector will often test many aspects of the home from the foundation and structure to mechanical systems like electrical, plumbing, and air conditioning.
A home inspection is a great way to assess the overall condition of the home and uncover any issues so you can negotiate repairs with the seller. An earnest money deposit also typically includes a home inspection contingency, meaning you could get your deposit returned if the inspector finds that extensive repairs are needed for the home.
Research home inspectors online or ask for recommendations, perhaps via your real estate agent. Just make sure you check their reviews from other buyers.
11. Stick to your budget
It’s easy to get emotionally invested when buying a home, but this can backfire if you don’t receive the proper funding. It’s important to be mindful of the amount you were pre-approved for. In addition, look at your expenses and existing debts to determine how much you can realistically afford each month.
Avoid looking at homes that are over your budget and remember that homeowners need money set aside for maintenance and repairs. Even if a house seems perfect and checks all the boxes on your wishlist, if it doesn’t fit your budget, it could cause you more stress than enjoyment.
12. Save physical copies of your paperwork
When buying a new house, you’ll fill out a lot of paperwork. Most of these documents will be stored digitally — especially if you’re working with a realtor — but it’s still a good idea to print out physical copies and file them in a safe or fireproof cabinet.
That way, you stay organized and have a back-up in case you ever need to refer back to these documents.
13. Don’t stop learning
Investing time in homeownership education is well worth the time and effort. As you continue to learn, you’ll avoid costly mistakes that some homeowners make. Learning new things can also help you prioritize smart investments in your home or even equip you with the skills to build sweat equity and fix up your home for less over time.