First-Time Homebuyer Tips

Looking to buy your first home but don’t know where to start? There are many steps involved in buying a house and all of them are important. We’ll walk you through some of the things you should consider and prepare for. This isn’t an exhaustive list but it’s a good way to get your feet wet. Remember: the more organized you are, the smoother the process will be. Read on to learn more.

First-time homebuyer tips

1.    Start saving for your home (or down payment) as soon as possible

Buying a home is the biggest purchase most people will make in their lifetime, so it’s important to start saving as soon as you can. Ideally, you’ll have saved enough money to make a 20% down payment on the house you’ve picked out, in which case you should be able to get a lower interest rate, better terms on your mortgage, and avoid having to buy private mortgage insurance, known as PMI.

But don’t fret if you don’t have 20% saved up — you should still be able to get a mortgage! The July 2021 Realtors Confidence Survey showed that 72% of first-time buyers put down less than a 20% down payment^[1] (some lenders will give you a mortgage with as little as 3% down). Be aware that if you don’t have 20%, you’ll probably be paying a higher interest rate and most lenders will require you to purchase PMI to protect themselves in case you’re unable to make your mortgage payments.

Private mortgage insurance is an added cost that you should try to avoid taking on because you’ll have to pay the insurance premiums until you’ve accumulated 20% equity in your house — and that’s money you should be using to pay your mortgage!

2.    Determine how much house you can afford

Before you start looking, determine how much house you can afford. You should factor in the down payment, closing costs, insurance, taxes and all of the other costs involved with home ownership. Determine what you can handle before you start looking. Coming up with a house budget and sticking with it will make your life much easier in the short and long term.

Buying a house is a big step and it’s easy to get swept away by the emotions involved – there’s the excitement of the search, rising hopes when you find a promising prospect, disappointment if your bid isn’t accepted, and more — and it’s easy to lose sight of the basics, like your house budget, in the process. Remember that there are other costs involved in buying a house other than just the price of the house itself and you want to make sure you’re well prepared to handle them. The easiest way to do that is to stay focused and stick to your budget!

Let’s take a look at how your down payment can impact your mortgage. Use our down payment calculator below to estimate your monthly payment as you adjust your expected down payment amount.

3.    Check and repair your credit score

A key step in securing a mortgage is a good credit score. There are a number of different methods for calculating credit scores but FICO is the one used by most financial institutions and lenders.^[2] Your FICO score will play an important role in determining whether you qualify for a mortgage, and what interest rate you’ll be offered. Go to myfico.com and check yours.

When it comes to mortgages, lenders rely on a unique mortgage credit report that draws credit data and scores from each of the three major credit agencies. Lenders often use the middle number of the three agency scores for your mortgage application.^[3] Ideally, you’ll have a score of 670 or higher. You may be able to secure a mortgage with a credit score lower than that, but you’ll probably be offered a higher interest rate and less favorable terms, which will ultimately cost you money in the long run.

If your credit score is weak, paying down high-cost debt such as credit cards could help lower your credit utilization ratio, which is a component of your credit score calculation. Improving a weak credit score is totally possible, but it often takes several months for improvement to register in the factors credit agencies use to calculate your score. Read this to learn more about how your credit score is calculated.

4.    Explore the different types of mortgages

There are two main types of mortgages: those with some sort of government guarantee and those without.

1.     Conventional mortgages do not have a government guarantee and there are two types: conforming and non-conforming.

• A conforming mortgage meets the requirements for down payments and income set by Freddie Mac and Fannie Mae and stays within the loan limits specified by the Federal Housing Finance Administration (FHFA).
• A non-conforming mortgage does not conform to any of those requirements and is usually offered to homebuyers on the extremes — buyers whose house purchases are more expensive than the limits for conforming mortgages, or people with poor credit, high debt, or are buying houses with a high loan-to-value ratio (LTV).

Because conventional mortgages aren’t guaranteed by a federal government agency, these loans are riskier for lenders to offer, which means they generally have tougher requirements for mortgage applicants.

2. The Federal Housing Administration (FHA), Department of Agriculture (USDA) and the Department of Veteran Affairs (VA) all offer government backed loans to certain constituencies. The USDA offers mortgages for buyers in rural areas and the VA offers mortgages to current and former military service members that require no down payments. The FHA offers assistance to buyers with minimal savings and low credit scores, with mortgages requiring a down payment of 3.5% and a credit score of 580 or higher.

If you fit any of the criteria for a government-backed mortgage, it might make sense for you look into pursuing one. Otherwise, a conventional mortgage is the way to go.

Mortgages also come with varying interest rates and terms. There are fixed mortgages where the interest rate stays the same for the term of the mortgage. And there are variable, or adjustable rate, mortgages where the interest rate resets periodically, either monthly, or every three, six or 12 months. Terms or durations for mortgages also vary but are typically 15, 20 or 30 years. The shorter the mortgage, typically the higher the monthly payment.

As you can see, mortgages have a few different working parts. Familiarize yourself with them and see which one makes the most sense for you.

5.    Check to see if you qualify for first-time home buyer assistance programs

Not everyone realizes this but there are government programs in some cities and states designed to assist first-time home buyers. These programs can assist with low interest mortgages, help with down payments and closing costs and sometimes provide tax credits. Look into whether your state or local governments provide any of these programs and see if you qualify. Visit this website for more information. State and federal governments have often made it a priority to assist Americans in their quest to own a home, so you might as well take advantage of a little help from Uncle Sam!

6. Comparison shop mortgage rates and fees

When it comes time to line up a mortgage, make sure to shop and compare the different offers. There are many lenders out there from banks and co-ops, to dedicated mortgage providers, to the federal government. It’s important to shop around and see who’ll provide you with the best interest rate and terms – don’t go with the first offer you receive because there can be great variability between offers. Be aware that the difference of half a percentage point in interest rates can add up to thousands of dollars over the life of your loan, so it’s worth it to take the time to shop around.

Different lenders will also charge different origination fees (various fees such as “application” or “underwriting” fees that lenders tack on to increase their profits). These can often be negotiated but it’s something to be aware of and look for in your mortgage quote.

7.    Get pre-approved for a mortgage

Most mortgage lenders will pre-approve you for a mortgage for a limited time for a set amount of money and with specific conditions. It’s important to get pre-approval, especially in a competitive housing market, because if you’re not armed with a pre-approved mortgage, you might lose the house of your dreams to someone else who is. Having that preapproval lets the seller know you’re serious and ready to move. It should also save you time and hassle. No one wants to lose a house due to lack of preparation.

In summary: First-time homebuyers need to be informed

There are many things to look for and be aware of when you’re shopping for your first home. The more you know and understand about the process, the smoother it should go and the more money you’ll save. Smart shopping should save you money and when it comes to the biggest purchase of your life, it’s well worth it to save as much as possible — after all, you’re going to need some furniture!