Financial tips for first-time homebuyers
Buying your first home can feel overwhelming, but having the right financial strategies in place makes a big difference. Learn practical tips to help first-time buyers navigate the process with confidence.
Key takeaways
Start saving early to build your down payment. Automate transfers and reduce nonessentials to consistently grow your home savings fund.
Keep your credit in good shape. On-time payments, low balances, and a long credit history can help you qualify for better mortgage rates.
Plan for closing costs and extra fees. Budgeting for the full cost of buying, such as inspections, insurance, and moving costs, helps avoid last-minute surprises.
Buying your first home is an exciting milestone, but it comes many challenges and unknowns, from understanding financial requirements to managing your credit score. Knowing a few tips for first-time homebuyers can make the process easier.
A challenging real estate market, including higher interest rates, increasing home prices, and tight inventories, often makes the home-buying journey even more overwhelming. In 2023, first-time homebuyers made up only 32% of the market in the U.S. – the fourth lowest share seen in more than 40 years.
If you’re a first-time homebuyer, don’t let these statistics discourage you. With proper planning and preparation, you can make your dream of homeownership a reality. Taking a few steps now to organize your finances, set your goals, and do a little research can make the process easier and more attainable. Here are a few financial tips for first-time homebuyers to keep in mind.
Start saving early for a down payment
One of the first and most difficult steps in the home buying process is saving for a down payment. How much will you need for a down payment? Aim for 20% of the home’s purchase price to avoid private mortgage insurance (PMI) on a conventional mortgage. If you’re buying a home for $300,000, for example, that would be a $60,000 down payment. If a 20% down payment isn’t possible for your financial situation, a smaller down payment of 5% to 10% may be approved by your lender.
The more you put down, the lower your mortgage – and your monthly mortgage payment – will be. To make saving for a down payment easier and more consistent, set up a dedicated savings account. Consider using a high-yield savings account for higher earning potential compared to a standard savings account.
If your employer offers direct deposits, you can have your employer automatically transfer a percentage of your paycheck to your down payment account every payday. Or you can schedule automated transfers from your checking to your savings account every payday.
Every little bit counts when you’re saving for a down payment. Cut back on nonessential expenses such as dining out or subscriptions, negotiate recurring bills if possible, and look into ways to increase your income. It might not work for you, but a recent survey found 29% of people who planned to buy a home in the next 12 months had already moved in with their parents to save money, and another 22% said they’d consider doing so.
Maintain your credit
Your credit score plays a significant role in the home buying process. A higher credit score can get you a better interest rate on your mortgage, which can save you thousands over the life of the loan.
Your credit score is based on the information in your credit report, including your payment history, the amount of debt you owe, how long you’ve been using credit, new or recent credit, and the types of credit used. FICO® is the most widely used score, but there are other credit scoring companies. Scores may vary slightly from one company to the next.
Building a better credit score starts with understanding what makes a score go up and down.
Payment history. How promptly you pay your bills affects your score the most. Even a single missed payment can have a negative impact.
Amounts owed. How much of your available credit are you using? The lower the percentage, the better for your score.
Length of credit history. The longer you’ve been using credit responsibly, the more it boosts your score.
Credit mix. A healthy mix of different types of credit, such as credit cards and auto loans, can positively affect your score.
New credit. Frequently applying for new credit can temporarily lower your score.
Mortgage calculators and other tools can help you understand how different credit scores can affect your monthly payment and overall mortgage costs.
Building your credit requires a commitment to responsible financial behavior – spending within your budget, making on-time payments, and keeping the amount you owe as low as possible. Start small, make your payments on time, and you’ll see your credit score start to rise.
Decide how much you can afford
How much you can reasonably spend on a home without straining your finances, from upfront costs and moving to a long-term mortgage commitment? A general rule of thumb is that your housing expenses should not exceed 28% of your gross monthly income. Keep in mind that your lender may approve you for a much larger mortgage, but that doesn’t always mean you can afford it.
Use a home affordability calculator or mortgage calculator to estimate a price range based on your income, debt, down payment, credit score, and where you plan to buy. Consider all the monthly expenses that go along with owning a home, including property taxes, insurance, maintenance costs, and possibly HOA fees. If your down payment is less than 20%, remember to factor in PMI, which can vary from $30 to $75 a month for every $100,000 you borrow. The term of your loan, typically from 15 years to 30 years, will also affect your monthly mortgage payment.
If your monthly mortgage payment is too large for your budget, your home can become a constant source of stress, and the responsibility of maintaining a home, property taxes, and utilities may become overwhelming. And if the unexpected happens – a job loss or medical emergency – you may struggle to keep up with an outsized mortgage payment, increasing the risk of foreclosure. Stretching your home-buying budget too far can turn the dream of homeownership into a source of long-term financial hardship.
Comparison shop for mortgage lenders
Different mortgage lenders offer different interest rates and terms, so it’s essential to compare. Mortgage terms include origination fees, late fees, estimated closing costs, prepayment penalties, and more. The term of your loan is how long you have to repay the loan, such as 15 years or 30 years. Don’t hesitate to negotiate for better terms and look for lenders with good reputations and customer reviews. The lender offering the lowest interest rate may not be the best choice for you.
Depending on your situation, you may qualify for one of four main types of mortgages:
Conventional loans are the most common mortgage type and are not guaranteed by the government.
FHA loans are insured by the Federal Housing Administration and allow down payments as low as 3.5%.
USDA loans are guaranteed by the U.S. Department of Agriculture and are for suburban and rural homebuyers. They usually require no down payment.
VA loans, guaranteed by the Department of Veterans Affairs, are for current military service members and veterans and usually require no down payment.
Get preapproved before you look for houses
Getting preapproved for a mortgage gives you a clearer idea of how much you can borrow for your first home. It also shows sellers that you’re a serious buyer, which can give you competitive edge if there are multiple offers.
To get preapproved, you’ll need to submit your financial documents to a lender for review. Your lender may need pay stubs and contact information for your employers, tax returns and W-2s from the past two years, bank statements from the past two to three months, business records if you’re self-employed, and other documents. Having financial documents ready can speed up the loan approval process.
Mortgage lenders will evaluate your credit score, income, and other factors to determine your eligibility. Once preapproved, you’ll receive a letter stating how much you can borrow, which can be very helpful when making offers on homes. Preapprovals usually expire after 90 days.
Research first-time homebuyer assistance programs
Many state and local governments and housing authorities offer first-time homebuyer assistance programs, which combine down payment or closing cost assistance with low-interest mortgages. Some states offer tax credits and other incentives to encourage buyers to own homes in certain areas. Programs may set a limit on the home’s price.
Even if this isn’t your first home, you may qualify for one of these programs, and eligibility is often, but not always, based on income. Check homebuying programs in your state to learn about requirements and available assistance. Your loan officer may also be able to provide information about programs that may be available to you.
Work with a real estate agent
Professional real estate agents know your local market, neighborhoods, trends, and property values. A good agent can help you identify properties that meet your needs, negotiate offers, and guide you through the ins and outs of the final contract. They’ll help you understand contingencies, disclosures, and closing procedures, which can be intimidating for first-time buyers. In addition, real estate agents have an extensive network of mortgage lenders, home inspectors, and contractors, and can provide recommendations to streamline your home buying process.
Who pays for a real estate agent? The seller typically pays the commission fees for their agent and the buyer’s agent. This fee is often a percentage of the home’s sale price, so most buyers don’t have to pay anything upfront. However, it’s good to know that this commission is included in the overall home price, which can affect how much the seller asks for. Before you work with a real estate agent, ask about fees and commissions to better understand the costs involved with their services.
Stick to your budget and negotiate
Once you start looking at homes, it can be tempting to stretch your budget for a house you love. However, sticking to your budget is crucial for your long-term financial stability. In addition to your mortgage, other costs, including property taxes, insurance, and maintenance, can quickly add up.
Buying more house than you can afford has long-term consequences and can lead to financial pressure. By sticking to your budget, you can help ensure you have room for living your life and taking care of unexpected expenses. If your real estate agent routinely shows you homes far outside your budget, it may be time to find a new agent.
And when you find a home you like, don’t be afraid to negotiate. As the housing market cools, you likely have more room to offer less than the asking price or write concessions into your offer, compared to buyers during the red-hot seller’s market of just a few years ago. Your real estate agent can help you make a competitive offer and negotiate terms with the seller.
Don’t forget about closing costs
Closing costs can add another 2% to 6% to the purchase price. These costs can include lender fees, appraisal fees, and title search and insurance, and they often catch first-time homebuyers off guard. Preparing now for these expenses can avoid stretching your budget too thin.
When you apply for a mortgage, ask your lender for a Good Faith Estimate (GFE) of all closing costs. This document will outline the anticipated fees so you can budget accordingly. And just as you should compare mortgage rates, you can shop around for services, such as title insurance and home inspections.
In a cooler real estate market, you may have more leverage to negotiate certain closing costs with the seller. Consider asking them to cover some expenses or reduce the purchase price to offset your costs.
Making informed decisions
Buying a home can be a dream come true, but it’s also a major financial decision that requires careful planning and consideration. By following a few financial tips for first-time homebuyers, you can navigate the home buying process and make more informed decisions. Happy house hunting!
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