What do I need to know as a first time home buyer?
Key points
- Check your finances and credit score before buying a home, as both affect mortgage options and affordability.
- Choose a home that fits your budget, lifestyle, location preferences, and long-term plans.
- Compare mortgage types, assistance programs, and rates to find the best financing option.
- Get preapproved, prepare documents, use a real estate agent, and budget for insurance, taxes, and other ongoing costs.
Buying your first home is exciting, but financial preparation is key. Understanding loan options, payment requirements, and affordability tools like our mortgage calculator can help you make confident, informed decisions and choose the mortgage that best fits your budget and goals.
What is a credit score?
A credit score is a three-digit number that helps lenders assess how likely you are to repay a loan, according to Equifax. In general, higher scores can improve your chances of qualifying for a mortgage and securing better rates.
There are different scoring models, so yours might vary slightly from company to company, but generally speaking, they’ll look at your complete credit history to see if you’ve been a dependable borrower. Credit score ranges vary depending on the scoring model, but Equifax’s are a good example to look at.
- Poor credit: 300-579
- Fair credit: 580-669
- Good credit: 670-739
- Very good credit: 740-799
- Excellent credit: 800-850
Your score is influenced by factors such as payment history, credit utilization and length of credit history. To improve your score, make payments on time, keep credit card balances low, avoid applying for too much new credit and maintain a long, positive credit history. These habits can help demonstrate reliability to lenders over time.
How do I know what home is right for me?
Choosing the right home comes down to your lifestyle, location preferences and budget. Consider factors like schools, commute time and long-term plans. Single-family homes typically cost more upfront and require more maintenance, while condos often have lower purchase prices but include HOA fees. Other considerations include energy efficiency, age, design and size. Most importantly, choose a home that fits both your current needs and where you see yourself in the years ahead.
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get a quoteHow much house can I afford?
It goes without saying, budgetary considerations are paramount when it comes to buying a house. You need to know how much you can afford before the house search begins, and luckily our mortgage affordability calculator can be a great place to start getting an idea of what you can comfortably afford.
Knowing what you can afford can help begin to narrow down your search and focus in on the type of home that suits you best.
Compare mortgage options and rates
Once you’ve zeroed in on a price range, you can begin comparing mortgage options and rates. You’ll want to familiarize yourself with different loan types and the pros and cons of each.
What types of housing loans are there?
Every individual or family has a unique financial situation, so there are plenty of housing loan options available. Here are five types of mortgage loans for homebuyers to consider, according to The Balance.
- Fixed-rate mortgages (FRM): If you enjoy budgeting and having consistent monthly payments, a fixed-rate mortgage could be for you. Your interest rate is locked in for the duration of your mortgage even if there is inflation or a recession. However, if interest rates are high when you purchase your dream home, you may be stuck with that rate unless you can refinance.
- Adjustable-rate mortgages (ARM): If you don’t mind a fluctuating interest rate and monthly payment amounts, an adjustable-rate mortgage could be an option for you. Adjustable-rate mortgages often have lower initial interest rates than fixed-rate mortgages, but they can move up and down to certain limits at different points in time as agreed upon in your loan.
- Conventional mortgages: This is the name given to mortgages that aren’t part of a special, government-backed program, making it the most common mortgage type.
- Government-backed mortgages: Certain government agencies, like the Federal Housing Administration (FHA) and the U.S. Department of Veteran Affairs, have special mortgage programs to help qualifying individuals get better deals or secure a mortgage when they couldn’t through traditional means. Read more on these special mortgage options below.
- Jumbo mortgages: This term is used to describe mortgages that are larger than the traditional limits. It is often used to finance expensive, extravagant properties.
The Balance notes mortgages typically fall under multiple of the above categories. For example, you can have a fixed-rate conventional mortgage or an adjustable-rate conventional mortgage.
What is an FHA Loan?
The Federal Housing Administration backs a unique mortgage option, called an FHA loan, that is available to individuals with lower credit scores and down payment amounts than many other loans, explains Bankrate. It can make it easier for younger individuals or first-time homebuyers to purchase a home. However, Bankrate notes there is a tradeoff, because FHA loans mean borrowers are forced to pay FHA mortgage insurance to help protect the lender from defaults.
What is a VA Loan?
Eligible active duty, reserve and retired service members (and their spouses in certain cases) can take advantage of this special mortgage option. VA loans allow members of the armed forces to buy or build a home with no money down, quality interest rates and financing without a mandated cap, according to Military.com. VA loans are issued by private lenders, but they’re backed by the U.S. Department of Veteran Affairs, allowing low down payments and eliminating PMI in many cases. The VA’s commitment has reportedly helped make housing more affordable for more than 25 million military members since 1944.
Consult assistance programs
Many counties, cities and towns offer home-buying assistance programs, says Freddie Mac, often in the form of helping out with the down payment. Eligibility may depend on different factors, and many programs are specific to veterans, health care workers, Native Americans, fire fighters and law enforcement.
Types of assistance programs include grants that you don’t have to pay back, tax credits and second mortgage loans – which are down payment assistance programs that have low or no interest rates.
Get your paperwork ready
Now it’s time to arrange your loan application paperwork. This typically includes the last 30 days of paystubs, the last two years of W-2s, federal and state tax returns, all sources of income, two months of bank statements, driver’s licenses and Social Security numbers, according to the CFPB>.
Some lenders may have an automated system to collect your documents from the banks directly, which makes the process easier. Still, being more organized will likely hasten the approval process, adds the CFPB.
Apply for a preapproval letter
Preapproval letters give you better footing when it comes time to make an offer on a house, according to Bankrate. It’s an official letter from the lender which tells you how much it will loan you. Preapprovals are great because they can help you determine what you can afford and show sellers that you’re ready to buy a home, adds CNBC.
Note that when you’re obtaining a preapproval, your lender will likely do a hard credit check which could affect your credit score. Luckily, the preapproval process online may be completed in just minutes.
Use a real estate agent
It’s important to get professional help when buying a home. Real estate agents’ specialty is guiding you through the home-buying process and helping you find a home that works with your lifestyle, personal needs, long-term goals, budget, etc., according to Bankrate.
Buyers agents also help set up home visits, review inspection reports, negotiate price, organize timelines and handle most of the paperwork, explains US News.
Ask for a home inspection
As mentioned above, your real estate agent will help you review the home inspection report. Home inspections are a crucial part of buying a home as they’re designed to protect you and help you negotiate a better price, according to Forbes.
If, for example, an inspector flags issues in the home, you may be able to compel the seller to cover repairs or re-negotiate the price. If extensive damage is found, you may be able to forego your offer altogether.
Get home insurance
Most lenders require home buyers to purchase homeowners insurance. This is to help protect their investment in case something happens – it can also serve as a critical way to help protect your finances.
A standard homeowners insurance policy offers an extensive amount of protection. It can help protect the house itself, other structures on your property (gazebos, detached garages, or sheds) and your personal belongings, at or away from home against an array of hazards, including:
- Theft or vandalism
- Fire and smoke
- Windstorms
- Hailstorms
- Falling objects
- Frozen plumbing
- Water damage from plumbing or appliances
Not only that, home insurance can cover your personal liability, too, in case a guest is injured on your property and decides to sue.
Taxes and homeowners association (HOA) fees
You’re paying for more than four walls and a roof when you purchase a home. In addition to paying back your loan and interest, you’re responsible for paying taxes and fees.
Property tax is a number assessed by local government based on the value of your home and the land it resides on. Property taxes and homeowners insurance are often lumped together into your monthly payment depending on the type of loan you have and how much you put down, according to Experian. HOA fees are paid separately. When you finish paying off your mortgage, you’ll be responsible for property taxes and homeowners coverage on your own if you aren’t already. It’s worth noting that any of these expenses are subject to change, so your monthly payment could go up or down.
Terms you should be familiar with
As you navigate the home buying process, you may encounter certain terms, such as estimated monthly payment, gross annual income, housing ratio and more. Knowing what they mean can help make your journey less daunting and empower you to make informed decisions. Here is a breakdown of some of them.
What is an estimated monthly payment?
One of the first things you should do is calculate your expected monthly payment. Monthly payments typically consist of the following, says Bankrate:
- The principal is the amount of money you begin paying back to your lender.
- The interest is a percentage of the principal.
- Homeowners insurance is required by most lenders and protects your home, structures on your property, your personal belongings and liability.
- Property tax is charged by your local government to pay for schools, roads and public services.
If you put less than 20% down on a home, your monthly payment will also include private mortgage insurance (PMI) to help protect the lender in case you stop making payments, says Forbes.
What is gross annual income?
Gross annual income is the sum of all your earnings before taxes, according to the IRS. You can typically afford higher monthly payments as your income increases. However, annual gross income is just one factor in home affordability.
What is a housing ratio?
A housing ratio describes what percentage of your income you would be spending on a mortgage payment, according to Rocket Mortgage. Lenders use this figure when they evaluate whether to approve or deny a loan request. Typically, they want a housing ratio to be 28% or lower, which means no more than 28% of your income should go toward house payments. Lenders may think your finances would become too stretched by a mortgage if your housing ratio is above 28%.
What are monthly debt payments?
Monthly debt payments, like credit cards, car loans, student loans, rent or mortgage on other properties, are regular payments you must pay back to a lender, according to Forbes. The more your debt increases, the less house you can typically afford because of something called debt-to-income ratio.
What is a debt-to-income (DTI) ratio?
Debt-to-income ratio is the sum of your monthly payments divided by your monthly gross income, according to the CFPB. Almost everyone has a credit card, car loan, or student loans, so your debt ratio will almost always be a higher percentage than your housing ratio. Lenders typically want your debt-to-income ratio to be 36% or below. Paying off debts and lowering your DTI can help boost your chances of being approved for a mortgage.
What is a down payment?
A down payment is the amount of money you pay upfront for an expensive purchase, like a house, you can’t afford outright. Down payments are typically part of a loan or payment plan where the remaining money you owe is divided into more manageable, regularly scheduled payments. Typically, the more you put down, the lower your loan will be, says the CFPB.
What are the terms of a loan?
Loan terms describe all the details of your loan, explains Forbes. These details include your payment due date, payment amount and annual percentage rate (APR).
What is APR?
APR reveals how costly your loan is by combining your interest rate and related finance charges into one convenient percentage, allowing you to shop around and compare loan choices more easily, Forbes says.
If you’re able to find loan terms that work well for you, purchasing a house can feel more affordable. A convenient payment date could mean your bank accounts feel less stretched when a payment is due. A low monthly payment keeps more money in your pocket each month, and a low APR means your costs for borrowing money are relatively low.
What is an interest rate, and how is it calculated?
Interest is essentially a fee for borrowing money. When a lender allows you to borrow a large sum, you’re responsible for paying that amount of money back plus interest. Interest is typically displayed as a percentage called an interest rate. When it comes to mortgages and interest rates, they’re determined by a number of factors, according to Forbes. These include:
- Credit scores
- Past financial issues (bankruptcy, foreclosure, etc.)
- Income
- Employment history
- Outstanding debts
- Cash on hand and assets
- Down payment
- Loan type
Protect what might be the biggest investment you’ll ever make
Homeowners insurance could help cover everything from tornados, hurricanes, vandalism, lawsuits, theft of personal belongings at or away from home – and more. Your lender will likely require you to purchase home protection, but even when you’ve paid off your mortgage, it’s still worth keeping.