In this Post: Buying your first home for dummies is a comprehensive guide for future homeowners. We take the complicated, multi-step process of home buying and make it as easy as possible to understand!
Let’s talk about buying your first home (for dummies). Because, let’s face it: When it comes to buying a first home, that’s what most of us are. Dummies. (And that’s ok.)
Maybe you’ve recently landed your first real job, or you’re newly married and ready to put down some roots in a place of your own. Whatever the case, at some point, you’ll find yourself in the same position as every other future homeowner: Wide-eyed and eager but generally clueless on how to go about making one of the biggest purchases of your life. Yikes!
True, It can be intimidating, but with the Internet and all its vastness at your fingertips, it’s possible to find your perfect starter home on any budget. And, chances are, it’s not as hard (or scary!) as you think it will be.
Buying your First Home for Dummies: Pre-Work
Planning Ahead (Saving + Taking Charge of Your Credit)
In a perfect world, you’ll have some time to plan before starting your search. Setting a savings goal and getting your credit score and debt under control are both crucial first steps to kick off your home buying journey.
What are the costs?
Before diving in headfirst, prepare for a few upfront expenses coming your way. As it turns out, there’s more expense to buying a house than a down payment. Who would have thought?
This extra expense usually comes in the form of closing costs, which include fees accumulated while going through the buying process. In general, they amount to an average of 3 percent of a home’s total value.
As far as down payments go, experts typically advise homebuyers to put down 20 percent to avoid paying private mortgage insurance (PMI). Unfortunately, this 20 percent payment will likely amount to tens of thousands of dollars. It is far and away from the biggest expense you’ll face when buying a home, and it deters some from even considering becoming a homeowner.
Worried about saving and paying this large sum? Take note: on average, a first-time homeowner puts down only 6 percent. Many conventional loans allow you to put down as little as 3 percent.
(Still, if you have the opportunity and time to put aside money, you should do so.)
Sometimes, first-time homebuyers can benefit from special programs that help with down payments, taxes, and closing costs. Find your state on this list and take advantage of any available programs. If you qualify, make sure to look for a cooperating lender.
Don’t forget to check your credit score
Another important to-do when buying your first home for dummies: taking the pulse of your financial stability. This means checking and managing your credit score as well as evaluating your debt-to-income (DTI) ratio.
Several factors, such as your debt payment history and your total number of existing accounts, dictate your credit score. (It’s mostly used as a tool to determine your reliability in paying what you owe and doing so on time).
Many mortgage types require a credit score of 620 or higher. You can begin to improve your credit by paying your bills on time for at least six months. Check your credit for free once a year here. Keep in mind– it’s not impossible to buy a home with a score lower than 620.
As for the DTI ratio, the Consumer Financial Protection Bureau states it’s easiest to get a qualified mortgage if yours is 43 percent or lower. Learn how to calculate this number here.
Remember: any potential lender will use these numbers to decide whether or not to approve you for a loan, so understanding the state of your credit and DTI is important. In addition, you want to prove to a lender you are responsible and able to take on housing payments.
Taking action to improve your credit score and DTI as soon as possible means that when the time comes, you’ll be in a better position to snag a lower mortgage rate.
Budgeting When Buying Your First Home (For Dummies)
Once you’ve done some research, the time will come to determine how much house you can afford.
You can create a budget for your starter home by examining your monthly income and expenses and discovering what’s left to put toward a house. In addition to the mortgage payment itself, you will also have to pay home insurance, utilities, and property taxes.
As a rule, you shouldn’t spend more than around 28 percent of your monthly income on a housing payment (your mortgage payment + those additional ongoing expenses).
Keep in mind the cost of living (if you’re moving to a new location) and any income fluctuations that may happen in the near future.
The end goal is to nail down what you can realistically afford. Taking the maximum pre-approval number as your house budget is usually not a good idea. After all, only you can decide the budget that’s right for you, and your pre-approval budget may not match what you can comfortably afford.
Here’s a good resource for calculating a budget.
Understanding Your Mortgage Options
Before choosing a lender, you need to consider the type of mortgage and payment structure that will work best for you.
ARM vs. fixed-rate
When it comes to payment structure, the most common are ARMs (adjustable-rate mortgages) that start low, then shift as time goes on, and fixed-rate mortgages that stay the same for the duration of the loan.
First-time homebuyers who know they won’t be in a house for very long may benefit from the ARM. Typically, there’s a set period of time (sometimes three or five years) that the rate is fixed before it is subject to annual fluctuations.
Fixed-rate mortgages are usually a better fit for homebuyers who want the predictability of consistent payments or who plan to stay in a home for the long haul.
Conventional vs. government-backed
You’ll also need to choose between government-backed and conventional loans. These are some of the most common loans among first-time homebuyers.
While conventional loans are available through private lenders, the government makes other forms of loans possible. In these situations, it’s not the government itself lending you the money. Instead, it acts as support by standing by to help pay if you can’t (removing extra risk for the lender). These are often good options for those with low credit scores or those who can’t afford to make a down payment.
USDA and VA loans are the only two mortgage types that do not require a down payment. These are sometimes hard to qualify for due to strict guidelines but are worth looking into if you think you meet the requirements.
USDA loans are designated for those in rural or certain suburban areas with low to moderate-income levels. On the other hand, VA loans are reserved for active-duty service members, veterans, and their spouses.
With FHA and conventional loans, you still have the option to make low down payments of 3.5 percent and 3, respectively. In addition, if credit is an issue for you, you may qualify for an FHA loan which accommodates lower credit scores in the 500s.
15-year vs. 30-year
Another mortgage consideration is the lifespan of the loan. While durations can vary, the most common are the 15- and 30-year mortgages.
Fifteen-year mortgages build equity faster and usually come with a lower interest rate. They are best for homeowners who know they will be in a home for a long time.
The 30-year fixed-rate mortgage is the most popular, mostly due to its lower mortgage payments. A disadvantage of this loan is the slightly higher interest rate. If building equity quickly is not a priority to you, this loan may be best.
In the end, it all depends on what you can afford and how quickly you’re hoping to pay off your loan.
Finding a lender
Once you’ve decided on the type of mortgage that works best for you, you can begin researching lenders that offer what you’re looking for.
When researching lenders, do some digging to determine any extra fees they may charge. Most importantly, pay attention to the interest rates they offer.
Here’s a good tool from NerdWallet that lets you plug in your information and compare lenders.
When you’ve found several that look promising, you can start the pre-approval process. Getting pre-approved is an important step to take before moving forward. It allows things to move much more quickly once you find a house. Real estate agents may even request to see your pre-approval letter to ensure you’re a serious buyer.
It’s a good idea to work with at least four or five lenders to get a more realistic idea of the rates available to you. Then, compare the offers and services and decide which lender you’d like to proceed with when the time comes.
Buying your First Home: Beginning the Hunt
To find the right home, you must first define what you need and want in a house. So, what are you looking for?
Write down your “must-haves” and “nice-to-haves” and decide your non-negotiables early on. Your agent will need all of this information to get an idea of the types of homes to show you.
Some questions to consider:
- Are you looking for a newer or older home?
- Is there a certain architectural style you prefer?
- How many bedrooms and bathrooms?
- What size yard do you need?
- Do you have a minimum or maximum for square footage?
- Do you want to live in the city or a more rural area?
You should also research the crime rate, look into the quality of the school district and consider the time you’ll spend commuting to and from work.
Get an idea of what’s on the market and any homes you may be interested in by downloading apps like Zillow or Redfin.
When you do finally start touring homes, remember that cosmetic things like ugly wallpaper, light fixtures, and cabinet hardware are easily changed! Focus on the bones of the house and keep an open mind.
Finding a real estate agent
Once armed with your pre-approval letters and a responsible budget, you can begin searching for a real estate agent.
It’s recommended to interview and meet with at least two agents. When searching, be on the lookout for someone who has:
- Experience working with first-time homebuyers.
- At least two years of experience.
- Great communication skills and gets back to you quickly.
- The ability to search out houses that aren’t yet on the market.
- Multiple references.
Equally important is finding someone you get along well with, will listen to you, and understand your needs. The right agent makes all the difference!
Sealing the Deal
Sooner or later, your real estate agent will show you a house that checks most of your boxes, and, deep down, you’ll know it’s the one.
At this point, you will secure financing with your lender and shop for home insurance. Your agent will guide you through making an offer, which will include contingency details like home inspection (which will find any problems with the house) and appraisal. If the seller accepts, professionals will inspect and appraise the house.
If any major issues arise during the home inspection, you can attempt to negotiate with the seller to bring the price down. Alternatively, you could ask them to make the necessary repairs or to pay for closing costs.
If you decide to move forward with purchasing after the home inspection and subsequent appraisal, you close! Closing means creating and signing the sales contract (and a hefty amount of other paperwork) and paying earnest money into an escrow account to sure things up.
Now, all that’s left is to wait for your closing date (the day the house is legally yours) and, congratulations– you are officially a new homeowner!
Embrace your new role by checking our guide to homeowner success and create the starter home of your dreams.
We hope that our guide to buying your first home for dummies was helpful for you! We would love to hear your feedback. What questions do you still have? What information was the most helpful? Comment below and share your thoughts!