Real estate15 min read

First-time homebuyer guide and checklist

19 first time homebuyers guideBuying a home ranks as one of the hardest life decisions one can make. To help navigate the process, consider this helpful first-time homebuyer guide before embarking on the journey to home ownership.

How to buy a house: questions to ask before you start

One of the best ways to plan your process of buying a house is to ask yourself four key questions to determine:

  • How to prepare your finances before purchasing a home

  • Whether you’re financially ready to purchase a home

  • If you’re not quite ready, what you can do to get ready

Here's the four-question exercise and necessary steps for buying your first home.

1. Do you have high-interest debt?

Before making any investment — including buying a home for the first time — it’s important to pay off any high-interest debt first. High-interest debt can be classified as any debt with an APR of 6% or above. It’s important to prioritize debt repayment, because incurring high-interest expenses every month will strain your budget.

By paying off high-interest debt, you’ll free up monthly cash flow that can eventually be allocated to managing the repairs and upkeep of your new home.

Debt can also be damaging to your credit score, which is a prized commodity when homebuying. Your credit score is one of the key factors that determines two things:

  • Your approval for a home loan

  • The interest rate you’ll pay

Paying off debt is also one of the easiest and quickest ways to boost your credit score. First, it improves your credit utilization ratio, which is how much credit you’re using versus your total credit limits. This ratio makes up 30% of your score and it’s best to get that ratio to 30% or lower. For example, if you have $25,000 in available credit across all your credit cards, you’ll want to maintain the cumulative balance on all of those cards at $7,500 or lower.

2. How's your credit score?

For most borrowers, mortgage approval hinges on their credit score. Credit scores range from 300 to 850. The higher your score, the more favorable the loan terms — notably, the interest rate you’ll pay. A score of 760 or higher will get you the lowest rate. Here are the scores you’ll need to have for the major home loan types:

  • Conventional — 620 or higher. Most home loans are conventional mortgages. They aren't government-backed or guaranteed. These loans generally require a credit score of 620 or greater. You can still get approved with a lower credit score, but you may have a higher interest rate or need a higher down payment.

  • FHA — 580 or higher. FHA loans are backed by the Federal Housing Administration (FHA). A score of 580 will allow you to get an FHA loan with 3.5% down.

  • USDA — 640 or higher. The U.S. Department of Agriculture (USDA) guarantees these loans, which are for homes in certain rural or suburban areas that are below income thresholds. They generally don’t require a down payment.

  • VA — 580 or higher. The VA loans are backed by the Veterans Affairs (VA) and you have to be a veteran, qualified service member, or spouse to participate. VA loans generally don't require a down payment as long as the home loan is less than the appraised value.

  • Jumbo — 680 or higher. A jumbo loan is a mortgage that exceeds the conforming limits set by Fannie Mae and Freddie Mac. The current limit for most single-family homes is $726,200. There’s no set credit limit for jumbo loans, but most lenders will require a credit score of at least 680.

You can get an idea of where your credit stands by getting a free report from all three credit reporting agencies: Experian, Equifax, and TransUnion. Be sure to look for any inaccuracies or past-due accounts and square those away before applying for a mortgage.

3. How does your savings look?

Just as important as paying down high-interest debt is having an emergency fund. Don’t buy a house without one! Emergency funds should cover three to six months of living expenses, allowing you enough cash to weather short-term crises. Buying a home for the first time means you’ll need to earmark a sizable amount of your savings to fund the endeavor.

The down payment won’t be your only upfront cost. When buying a home, here are common upfront costs that you should save up for:

  • Down payment. This will vary based on your credit, loan amount, and mortgage type. You may have an opportunity to take advantage of a first-time homebuyer program that allows as little as 3% down. For a $283,500 home price, that’s roughly $8,500. But you’ll also need private mortgage insurance (PMI) if you have a down payment of less than 20%, which can be an additional payment of roughly $100 per month. Putting 20% down on a $275,000 loan would require $56,700.

  • Closing costs. These costs include any additional fees such as origination charges, appraisal and recording fees, prepaid expenses, and escrow funds. The closing costs will vary, but can range between 3% and 6% of the loan amount. For example, if you have a $275,000 home loan, expect to pay between $8,250 and $16,500 in closing costs.

  • Moving expenses. This part of your savings should account for the actual cost of a move, such as moving company expenses. The average cost of a local move is upwards of $2,500, while a longer-distance move may be triple that. Don’t forget new furniture, appliances, and any repairs that'll need to be made immediately after moving in.

When analyzing your savings, be sure to add up all those costs and start working toward saving as soon as possible. In the example above, assuming just a 3% down payment, closing costs at 3% of the loan value, and $2,500 in moving costs, you’ll need to save about $20,000 on top of your emergency fund. 

Put that money away somewhere safe — ideally, somewhere you won’t see it daily. But also, put it somewhere that you’ll get some return. For example, if you plan to buy a home in less than a year, keep the money in a high-yield savings account (HYSA) that's insured by the Federal Deposit Insurance Corporation (FDIC). Even if you have one to three years before buying a home for the first time, HYSAs are still generally the best place to start.

4. How's your income?

Having enough income to afford a mortgage payment is very different from having enough income to own a home. You’ll want to make sure you have a steady, reliable source of income.

Your monthly mortgage payment is more than just the principal and interest on your loan. The “all-in” monthly payment can include the following:

  • Principal

  • Interest

  • Property taxes

  • Homeowners insurance

You may also have to pay private mortgage insurance (PMI) if your down payment is less than 20%. With that in mind, you should use the 25% rule to figure out how much you can afford. The 25% rule suggests that you keep your monthly homeownership cost to 25% or less of your after-tax income.

See if you qualify for first-time homebuyer programs

Now that you’ve assessed the state of your credit, income, and savings, you should research any first-time homebuyer programs in your area. When considering how to buy a house, this should be one of the first considerations.

These programs include down payment assistance or help with closing costs. Be sure ‌to research programs in your state and see if you qualify, but also keep in mind that these programs can be found both nationally and locally.

Each program has various requirements such as income maximums, but can include benefits such as:

  • Discounted mortgage rates

  • Down payment assistance

  • Closing cost assistance

  • Tax credits

Example: first-time homebuyers in Oregon

First-time homebuyers in Oregon can tap into various benefits. This includes mortgages with no down payments or assistance with down payments and closing costs. Oregon’s first-time homebuyer program also includes a 0.75 percentage point reduction on mortgage interest rates. 

Additionally, Oregon has first-time homebuyer savings accounts. A state resident can use these accounts to save up to $5,000 a year for 10 years, where the invested amount can be used to reduce the taxpayer’s taxable state income. If you’re wondering, how to buy your first house? These benefits are a great start.

Explore mortgage options

Before getting too emotionally invested in the home-buying process, first, find a lender and make sure you can get pre-approved. If you qualify for a first-time homebuyer program, the program you choose will determine your mortgage choice and lender.

Understand your budget

Have a strong grasp of your current budget before reaching out to lenders, as well as what your budget will look like as a homebuyer. Many people wonder if they should rent or buy a house. It's important to note that oftentimes, owning a house can be more expensive than renting. 

Even if you meet the 25% rule from above, it’s helpful to dig deeper into your budget to make sure you can afford a home. Beyond the monthly mortgage payment, you’ll also have maintenance, repairs, property insurance, property taxes, and potential homeowners association (HOA) dues.

Budgeting for homeownership

To get a better idea of your budget as a homeowner, think of all the things you’ll have to buy or pay someone to do, such as lawn care, snow removal, tree trimming, or general plumbing. A rough estimate of how much to budget for home upkeep is 2.5% of the home's value each year. That'll likely go up if you’re buying an older home, a larger home, or one that has expensive amenities like pools.

If you buy a home valued at $250,000, you may think there’s no way I’ll spend $6,250 ($250,000 x 2.5%) a year on maintenance. Most years you may only pay $2,500, but you can’t forget the major expenses that may come up over the long-term, including:

  • HVAC, roof, water heater, or appliance replacements

  • Repairs for water damage or termites

  • Mold remediation or electrical work

  • Major plumbing repairs

Just one of those costs could be upwards of $10,000, which is where the importance of budgeting and saving comes in. It’s best to settle on a monthly amount for home upkeep and put that money away in an HYSA. 

Feeling overwhelmed? Many first-time homebuyers need help figuring out their budgets and how to think through what they need to have saved, as well as what they’ll need monthly to cover home ownership. Working with a FinanceHQ financial advisor can help you understand your budget and the potential tax implications of owning a house.

Explore your mortgage lender options

If you’ve already qualified for a first-time homebuyer program, your mortgage choice will depend on the program you choose. If not, you have a few options when it comes to the type of loan you choose. Three things you’ll need to decide on are:

  • Length of loan

  • Fixed vs adjustable rate

  • Which lender to use

Loan terms

The two most common lengths of mortgages are 15 and 30 years. Short-term mortgages tend to have lower interest rates, but the monthly payments will be higher. The shorter the length of the mortgage, the less you’ll pay in interest over the life of the loan.

Fixed vs. adjustable-rate

Fixed-rate mortgages have an interest rate that stays the same for the length of the loan. In the case of a 30-year fixed-rate mortgage, the interest rate will remain the same for all 30 years. Adjustable-rate mortgages (ARMs) have an interest rate that can change after a set period, such as five or seven years. The appeal of ARMs is that the initial rate is usually lower than fixed-rate mortgages. The rate on ARMs could then change after the initial period. They can rise or fall, based on a benchmark rate. For example, a 5/1 ARM has an initial fixed-rate period of five years, and then the rate can adjust up or down once per year. If the rate increases, the monthly payment will also increase.

Buyers typically use ARMs if they don't plan to live in a home beyond the initial fixed-rate period. They take advantage of the lower rates that ARMs offer, relative to fixed-rate mortgages.

Choosing a lender

Once you've decided on the loan term and type, you’re ready to shop for mortgage lenders. It's recommended to get quotes from a minimum of three lenders. Compare their rates and fees, but also their customer service and communication style. If you are working with a financial advisor, ask them for a referral to a mortgage lender — they usually have a great network you can choose from.

Compare rates and fees

When assessing mortgage lenders, look for the type of mortgages they offer as well as rates, but focus on more than just the interest rate. Ask about their closing costs and origination fees.

Another key consideration when it comes to rates and fees is whether you'll pay for points, also known as a buydown. Paying for points — sometimes referred to as discount points — allows you to pay an upfront fee in the closing costs to get a lower interest rate.

One point generally costs 1% of the loan value and reduces the rate by 0.25 percentage points. Therefore, each point on a $275,000 home loan would be $2,750. Paying for points is usually beneficial for homeowners that plan to live in the home for a while. For example, if you pay for two points on your $275,000 loan — which would be $5,500 — and it reduces your monthly mortgage payment by $90, you’d need to remain in the home for at least five years to break even ($5,500 / $90 = 61.1 months).

Get pre-approved

How to buy a house? Get a mortgage — that’s how nearly everyone will need to buy their first home. Thus, you’ll want to get pre-approved by your lender of choice. Mortgage pre-approval is an official letter from the lender specifying the amount and terms of the mortgage they’re willing to offer you. A pre-approval letter shows the real estate agent and seller that you’re a serious buyer, which can give you an edge over homebuyers that don’t have one. 

During the pre-approval process, the lender will verify all your financial information and pull your credit. Note that pre-approval is different from pre-qualification. Make sure you’re pre-approved and not just pre-qualified. Pre-qualification only shows that you might be approved for a home loan and will show a projection of the potential loan amount you might get. Pre-approval gives the exact amount.

Figure out your wants and needs

Take a personal inventory of the things you like about where you live and the things you’d improve. Here is where you’ll lay out all your must-haves, as well as the pros and cons of different homes and locations. Some things to consider include:

  • Commutes

  • Proximity to grocery stores and dining

  • Noise levels, such as closeness to railroad tracks or airports

  • Schools

  • Local entertainment

  • Home amenities like an attached garage or fenced-in background

  • Neighborhood safety

Nail down the types of homes you’ll be looking for, such as single-family homes, starter homes, condominiums, townhomes, fixer-uppers, or a home you can grow into. As well as the general area and neighborhood you want to live in.

Find a great real estate agent

Once you have a general idea of the home you want, it’s time to find a real estate agent. A real estate agent can make all the difference in your home-buying adventure — they’ll be your guide and advocate through the process. It’s one of the key steps for buying your first home that shouldn’t be overlooked.

Ask your financial advisor for a referral to reputable agents in your area. Look at reviews online and get referrals within your network of people who have recently bought a home in the area. Once you have a list of potential agents, interview each real estate agent and ask for references. Ask about their experience working with first-time homebuyers and knowledge of the part of town you’re considering. Consider their communication style and responsiveness. Ask for their best advice for first-time homebuyers.

A good real estate agent can help with navigating current market conditions, find potential issues with a home, and handle the negotiation process. Plus, it should cost you nothing, since their commission is typically paid by the seller.

Start house hunting

Here’s where the fun begins. You’ll want to move quickly and be financially savvy here to ensure you land your dream home.

Don’t mess with your credit

First, don’t do anything that would hurt your credit, even after getting pre-approved. Avoid making large purchases and don’t apply for any new loans or credit cards while in the process of buying a house. This could lower your credit score and affect your loan approval.

Instead, stick to your budget, continue to pay bills on time, and don’t increase your credit card balances drastically. You’ll want as much flexibility in your monthly budget to allow for mishaps or needed maintenance after buying the home. 

A good ‌financial advisor can help you build and stick to a budget and guide you through the process of buying a house — ensuring you can afford the home after you buy it. Our experts often provide advice for first-time homebuyers.

Find the house

It can take time to find the right home, so be patient. Most people have to look at several houses. Once you’ve decided on the home, don’t forget to vet the neighborhood. Visit establishments that are important to you, including local schools, grocery stores, and entertainment spots.

Test out your commute during the same hours that you’d normally be traveling to and from work. If you’ll be commuting to local schools, map out that commute as well.

Drive through the neighborhood you’re considering on different days and at different times. Take note of the traffic and the noise level. Home condition and size are important, but you’ll find that neighborhood quality and location can make or break your quality of living.

Don’t skip the inspection

Never skip getting a home inspection. It is an extra cost, but it could save you from buying a home that'll eventually need thousands in repairs. Look at home inspections as a small investment for long-term peace of mind. Inspections will identify problem areas by assessing the home’s structure and electrical, plumping, and heating or cooling systems.

You can then use the inspection to negotiate a lower home price if things need addressing. Alternatively, if you find major problems, you can use a home inspection contingency to walk away.

Make an offer

If everything looks good on the home inspection, then it’s time to make an offer. Your real estate agent will help put together a competitive offer.

Your offer should include a one-year homeowner’s warranty coverage provided by the seller, and a request for the seller to pay for any necessary repairs. Be sure to have a home appraisal and home inspection contingency. These will allow you to walk away without losing any deposit money if the home's appraised value comes in lower than the offer price, or if the home inspection reveals major issues.

There'll generally be a deadline on the offer, such as 48 hours. If your offer is accepted, it’s time to get ready for closing. If not, you can either move on to other homes or negotiate.

Close on your home

The last leg of homebuying is the official closing. Do a final walk-through of the home within 24 hours of closing to make sure everything still looks good and all requested repairs were made. At the official closing, you’ll sign all the paperwork — which includes your promise to repay your lender — and pay any closing costs. That’s how to buy your first house!

Let FinanceHQ help you through life’s biggest decisions

Buying a home for the first time is a major life decision. For the majority, it’s the hardest decision they’ve made up until that point in life. It can be an emotional rollercoaster. 

Real estate agents are great at helping mitigate the ups and downs, but they can’t support you when it comes to budgeting, saving, or the other major life decisions to follow, such as mortgage refinancing and when to get life insurance. A financial advisor can help with preparing for and navigating these and other major life events.

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Marshall Hargrave
Written byMarshall HargraveContributing writer

Marshall Hargrave is a former SEC-registered investment adviser who is now a strategy consultant for fintech companies.