First Time Home Buying 101: A Guide to Homeownership
... you had enough money to not only pay your debt and enjoy life?
... you could feel good about your money for once?
... you could see your savings growing in a more regular, consistent way?
... the dream of buying a home or starting a family could become a reality for you in less time than you could have imagined?
... you had a gameplan to increase your income, stop feeling underpaid, and feel financially secure?
It has arguably never been harder to become a first-time home buyer than it is in today's real estate and financial environment. With inflation taking a bite out of most of our budgets over the past few years, coupled with the crazy sellers' real estate market, the odds are currently stacked against renters looking to buy.
However, those looking to buy homes for the first time can take advantage of a number of home loan and other programs designed to help make the progress a little bit easier.
This is my guide to buying a home for the first time.
Benefits of being a first-time home buyer
Though inexperience is typically not something that can be considered an advantage, it absolutely can be if you're buying a home for the first time. This is because of the plethora of programs out there designed to make the process more affordable for you.
For example, you may opt to consider:
Taking a government sponsored home loan mortgage
Using a state specific first-time home buyer program to help you out with closing costs and your down payment
Who qualifies as a first-time home buyer?
To take advantage of these programs, you'll likely need to meet a number of qualifications. Now, certain programs may carry slightly different requirements, but I will use definitions as provided by the United States Department of Housing and Urban Development:
Have not owned a house in the previous 36 months, depending on the program. This applies to only individuals if you are now buying a home together. For example, if your wife has previously owned a home and you have not, you still qualify for first-time home buyer programs together.
Single parents who have only owned a home with a former spouse
Displaced homemakers who have only owned a home with a spouse
Those that have only owned mobile homes not affixed to a permanent foundation
A lot of Americans don't realize that they can qualify as a first-time home buyer after owning a home previously, so long as they fit into one of the above descriptions. You don't want to leave potentially free money on the table!
The home buying timeline
I was eager to buy my home and move in as quickly as I could. But I quickly realized that the home buying process is more of a marathon than a sprint, particularly for first-time home buyers.
All in, I think of the process as taking 45-60 days once you've found a house you love, made an offer, and had it accepted, which is obviously a large feat in and of itself. If you include this part of the home buying process, you can generally expect it to take 3-6 months or so.
Here are the steps you'll likely follow, along with how long you can expect it to take.
1. Decide on your budget
Budgeting to buy a home is probably the hardest part of the process. We always recommend that our readers and clients start by using an online budgeting tool of some sort. Our current favorite is Rocket Money, because of the way their tool can help you to:
Identify and cancel unused subscriptions
Track your monthly expenses
Link your financial accounts to receive live time analysis
Follow this link and connect a financial account to get started.
We also have a couple of budgeting tips to help make homeownership more attainable for Americans nationwide:
Break your budget down into major categories, such as needs, wants, and savings
Subdivide further into categories (for example, breaking your wants down into buckets such as eating out, entertainment, travel, etc.)
Finally, if you have student loan debt, you may consider whether refinancing may help you to open up some cash flow. We typically recommend you start the process by checking your rate with Splash Financial since they'll be able to quote you a new rate in less than three minutes without impacting your credit score.
Visit our student loan refinancing guide for a full list of our bonuses and cashback offers.
2. Complete a mortgage pre-approval
As you get closer to making your home-buying goals a reality, you'll want to consider whether or not you should get prequalified for a mortgage. A preapproval, as it is also known, can be a sign to a seller that you are serious about the process and likely will be able to close more quickly than other buyers.
My wife and I completed the preapproval process before we ultimately bought our home in May 2022, but whether or not you do will likely depend on the state of your finances and other variables. Whether or not to complete a preapproval is one of the most popular questions we get, and our answer is usually consistent: it depends on the state of your finances.
If you already have enough money saved up for a nice down payment and closing costs, and your credit score is in a good place, then it can be a good idea. Otherwise, you'll likely want to wait a while until your metrics improve. This goes back to watching your debt-to-income ratio and monitoring your account balances and credit.
Once you decide to move forward, you'll need to come up with a lot of financial documents to complete the process. Among the many documents you should be able to access include:
At least two years of W-2 information
Two or more recent paystubs
Account statements from all of your major financial accounts
More information as requested
Picking a mortgage lender
Ultimately, you don't need to finance your home with the lender that you get qualified with, but Americans tend to in most instances. To help you pick the right mortgage lender for you, I encourage you to shop around for the lowest interest rate you can find, even as you try to get pre-approved.
Of course, when it comes to be time to actually finance your home, I encourage you to do the same. As I see it, loyalty does not exist here.
I always recommend that you pick the lowest interest rate you can find, as even a 0.25% difference on a 30-year mortgage can lead to a $10,000 or more difference over the life of a 30-year mortgage loan.
3. Go house hunting
After you know how much home you'll be able to finance with your bank, it is time to ratchet up your home search. While you want to enter the search with a sense of urgency, you don't want to rush. Depending on how long your home search takes, you may need to renew your prequalification, as it may only be active for 30-90 days at a time.
This shouldn't be a big deal to do, though.
When you search for your first home, it can be a good idea for you to make a list with three columns:
Those features that are "must haves"
Those features that are "nice to haves"
Those features that you absolutely do not want (swimming pools are a popular example)
4. Make an offer
Once you find a home you're interested in, your next step will be to make an offer. It is always a good idea to leave room for negotiation, so you'll want to make sure your first offer is not too high. At the same time, you don't want to insult a seller with an offer that is too low.
It can be a bit of a balancing act for sure. But in a sellers' market like we've seen over the past couple of years in particular, there may come a time when you need to make an aggressive offer near or even over asking price.
At the end of the day, it all depends on your comfort level and interest in making a home your first home.
5. Negotiate and sign a contract
You'll need to agree to a sales price with the seller, which can be easier said than done. Typically, this will require multiple rounds of negotiation. A good rule of thumb is to leave enough wiggle room for three or four rounds of negotiation or so. For instance, if a home is listed at $400,000, you may ultimately end up with a negotiation like this:
An initial offer of $370,000
A seller counteroffer of $390,000
You offer $382,000
A seller counteroffer of $386,000
Remember - this all depends on the competitiveness of your local real estate market at the time you're looking to buy. Your goal in this step is to "get the house" and agree to a purchase price that is fair for the seller, while still in your price range.
6. Formally apply for your mortgage
Even if you're prequalified, you'll still need to formally apply for a mortgage. Your mortgage application is the next step in your home buyer 101 journey. Work with a loan officer with your bank or lender to help navigate the process. When my wife and I bought our house, we worked with Washington Trust, a local bank, and our loan officer was always just a phone call away.
After you apply, your loan will be approved or denied, and then if approved, will be sent to the underwriting stage.
While we decided to work with a local mortgage lender, we didn't necessarily go into the process with this mind. Like I said when I mentioned the mortgage prequalification process, good customer service is important, but generally, it pales in comparison to securing a competitive interest rate.
After you close, you're unlikely to really need customer service anyway. In most all instances, you'll just pay your monthly mortgage payment online.
7. Get your new home inspected
Though not a mandatory step of the home buying process, I highly recommend that you have a home inspection completed. Once contacted, a home inspector will come out to the property and test your home's systems and features.
When I had my home inspected, the inspector evaluated the following:
Hot water tank
We also opted to have our home tested for radon and our well tested for water quality in order to get a more holistic view of our home. After the inspection, we were sent a lengthy review, complete with estimated useful life remaining in each system or part of the home.
If you're nervous about the idea of costly home repairs, like I am, this report can be very helpful in helping you to understand when you may need to put some money back into your home.
8. Complete all title requirements prior to closing
At this point, you'll only have one real step left before you're ready to close. Your mortgage lender will make you hire either a title company or real estate attorney to perform some title services for you. Specifically, your lender wants to make sure that they're not lending you money to buy a home that somebody else has a legal claim on.
Title companies/real estate attorneys typically:
Complete title searches
Offering title insurance policies, which most lenders mandate that you buy
Offer escrow services, where they will hold your down payment and closing costs until you officially close
Just because this is the eighth step listed out here does not mean that you should wait long until you find a title company. To find a title company or real estate attorney, you can ask for word-of-mouth referrals in your area or conduct your own online research.
9. Close on your new home
After a few weeks have passed and your new home's title comes back clean, you're going to get the good news you've been waiting for: you are cleared to close. Your lender/title company will give you the dollar figure regarding the amount of money you'll need to bring to your closing.
In the meantime, you'll want to prepare for this multi-thousand-dollar expenditure, which will consist of your down payment and closing costs. Transfer the money you're going to use into an account where you can get a certified bank check, which you likely will need to bring to your closing.
But soon, it will be your closing day! You'll head to your real estate attorney's office, where you'll sign a bunch of legal stuff, and officially receive your keys, garage door openers, and any other access items to your new home, which is now officially yours!
Don't forget to check out our whole depth of first-time home-buying content.
What's the average age of a first-time home buyer?
The average age of a first-time home buyer in the United States is now thirty-six years old, according to the National Association of Realtors (NAR). Given the general increase in home prices and interest rates, in conjunction with inflation over the past couple of years, this age has increased from 33 years old in 2021.
Unfortunately, nobody can be sure when this unfortunate trend may begin to reverse itself. But at least for now, you'll need to be extra diligent in your savings strategy as you attempt to join the ranks of first-time home buyers nationwide.
Here are some financial tips to help you get into your first home more quickly.
Tips to buy your first home sooner
You want the entire process to go off without a hitch and proceed as quickly as possible. Here are a number of tips designed to help you get into your first home as quickly as possible.
1. Consider buying a home out of state
Oftentimes, shifting your target location for a home can save you thousands, and potentially tens of thousands, of dollars. I am from Rhode Island originally, and my wife is from interior Connecticut. We ended up buying a home in the same town where she grew up, about 50 miles from where I grew up.
The home prices in our town are tens of thousands of dollars cheaper than where I grew up, and we live in a much more rural environment, which was something that was important to me.
It turned into a true win-win.
2. Consider a government backed home loan
Like I mentioned earlier, there are a number of government backed mortgage options specifically for first-time buyers. They offer a variety of benefits for borrowers, including lower down payment requirements, flexible credit score approvals, and more!
Among your special loan options include:
Federal Housing Administration (FHA): FHA loans, which are backed by the United States government, carry a low 3.5% down payment and a 580-credit score requirement. As such, they can be a good fit for first-time buyers, as well as those that have subpar credit histories. To compensate for this risk, you will be on the hook to pay costly and recurring mortgage insurance premiums.
USDA: Another federally backed option, the USDA loan program is reserved for low and moderate-income home buyers purchasing homes in rural areas across the country. As an added incentive, there are no down payment requirements.
State/lender-specific programs: Another option you may consider is participating in a state or lender-specific program. Many state agencies offer their own mortgage programs, as well as closing costs and down payment assistance to those that qualify. Lenders oftentimes have their own programs as well, like TD Bank's Right Step mortgage that we discussed earlier.
You may also consider the Fannie Mae Home Ready, Home Possible, and HomePath programs.
If you don't qualify for a government backed loan, you may still opt for a Conventional or Conventional 97 loan:
Conventional: Conventional mortgage loans come in both fixed and adjustable interest rate varieties, and may carry the lowest monthly payments of any mortgage program on this list. The flip side of this is that Conventional loans typically carry the highest down payment requirements. And with down payments lower than 20% of the home's purchase price, you will pay for private mortgage insurance.
Conventional 97: Conventional 97 loans carry many of the perks of the Conventional loan program, but only require down payments of 3%, making them a great option for buyers looking to get into a home more quickly. They also carry fewer fees than FHA home loans.
3. Know your financial metrics
An integral part of the home budgeting process is understanding all your financial metrics at any given point in time. More specifically, you need to take a look at your debt-to-income ratio, credit score, and household income to help you track your progress toward homeownership. Then, you'll want to rerun these numbers with your prospective mortgage built in.
More often than not, mortgage lenders want to see a debt-to-income ratio below 45% at most, and ideally much lower than that. To figure out your debt-to-income ratio, you'll take all of your household debts and divide them by your household's income.
In other words, if you and your spouse collectively earn $120,000 per year, you'll need to have no more than $54,000 in debt. There is a way around this requirement via physician mortgage programs, but they are reserved for young physicians with student loan debt.
Your credit score
The second number that absolutely will need to keep track of is your credit score. If you are looking to take out a Conventional home loan, you'll likely need a credit score of 620-640 at a minimum. Those with scores as low as 580 may still be able to buy homes via the FHA loan program, but FHA loans generally carry expensive mortgage insurance premiums that you don't want to pay unless absolutely necessary.
The best mortgage interest rates will be reserved for the most credit-worthy borrowers, those with credit scores of 760 or above.
Your credit score is the most important metric used by lenders to evaluate your creditworthiness. Without a history of missed payments, bankruptcies, or delinquencies, you will have a much easier time qualifying for a mortgage. And once you are within 6-12 months of applying for a home loan, you'll likely want to avoid activities such as:
Applying for new credit cards or sources of credit
Avoiding charging large expenses that will mess up your utilization
Not subjecting to hard credit inquiries, which will impact your credit score for a period of time
You likely already know how much your household earns, but you'll want to continue to pay attention to it as you plan to buy a home. We recommend that you keep your eventual mortgage payments to less than 35% of your monthly pre-tax income.
In an ideal world, this ratio will be under 30%.
How to start saving for your first house
Saving for a house can be a lengthy process for some, but it is really important. Before you start saving for a home in your area, you'll want to understand how much it is likely to cost you. Use recent comps in your area or neighborhood that match the number of bedrooms, bathrooms, and amount of land that you want to buy. Sites like Zillow and Redfin can be a great help here.
Decide how much home you can afford
One of the most critical decisions that you'll need to make is to set a budget for your new home. To come up with your home buying budget, I recommend that you look at:
Your existing debt load
Remember - you want your monthly calculated mortgage payments to be under 35% of your monthly pre-tax gross income.
Saving for a down payment
After reviewing comparison sales in your area, your main priority is to understand how much money you will need for a down payment. Most Conventional loans will want 20% down to avoid private mortgage insurance (an additional expense each month until you reach 78-80% LTV), but unless you are selling a home, it can be really difficult to reach this 20% threshold.
If this sounds like you, you have three options:
Take a Conventional mortgage and pay PMI
Take a federally-backed loan with lower down payment requirements
Look for a lender that offers low down payment Conventional mortgages
FHA loans are a great example of a federally backed home loan that requires a down payment of just 3.5%, but lenders like TD Bank offer their own programs, such as TD's Right Step Mortgage, which also carry low down payments (3% in this case), but also have lower ongoing fees than some federally backed mortgage loans do.
Saving for closing costs
You'll also need to begin thinking about your closing costs. Your closing costs can vary widely depending on where in the country you are, how much your title costs are, when in the month you close, and other variables.
Generally, you can expect to pay about 2-6% of your home's purchase price in closing costs, including:
Loan origination fees
Loan application and underwriting
Prepaid property taxes and homeowners insurance
Title search and fees
Other miscellaneous fees
We've also written some state-specific closing cost guides for prospective buyers in Connecticut, Oklahoma, Utah, Massachusetts, Wisconsin, Illinois, Oregon, Ohio, Louisiana, Pennsylvania, North Carolina, New Jersey, Virginia, and Minnesota.
Now that you have a rough idea of how much money you'll need to save to buy a home, it is time to turn your planning into execution. I recommend that you establish a new checking or savings account to save up for your home-buying expenses. You should make contributions via direct deposit right from your paycheck. Other tips that you may consider to save up some money a little more quickly include:
Helpful content for first-time home buyers
I've written a bunch of other content designed to be helpful for those trying to navigate the home buying process for the first time. Here are links to the other content designed to help you out!
First-time home buyer state guides
Mortgage lender reviews
Closing cost state guides