Your Updated First-Time Homebuyers Guide: 9 Tips To Get Started
As a first-time homebuyer, you’re about to learn that the home buying process is never quite like you expect. No matter how many times you browse through Zillow photos, you just don’t know what the house will look like until you see it in person.
And you just can’t anticipate what kind of hang ups you’ll run into with mortgage lenders and home inspections. For some people, the unpredictability of this experience makes it all the more exciting.
Others prefer to go into the process as informed as possible, armed with research and knowledge. If you fall into the second camp, you’re in luck — this guide will help you prepare for your first time buying a house.
Programs for First-Time Homebuyers
One of the advantages of being a first-time homebuyer is that there are several programs designed to help you through this process. Whether you need help coming up with a down payment or you have a spotty credit history, there is likely a local, state, or government-sponsored program that can help you.
Good Neighbor Next Door
The Good Neighbor Next Door program is sponsored by the U.S. Department of Housing and Urban Development. This program provides aid to employees in one of the following professions:
- Law enforcement officer
- K-12 teacher
- Emergency medical technician
Qualifying participants will receive 50% off one of the homes listed in the HUD’s directory. But first, you have to agree to stay in the home for at least three years and use it as your primary residence.
If you’re interested in seeing what’s available in your state, you can check out the HUD’s website for more information.
Neighborhood Assistance Corporation of American
NACA is a nonprofit that works to remove the barriers to homeownership for low and moderate income borrowers. The NACA does this through its Best in American Mortgage program.
This program provides home counseling and access to great rates on a mortgage. To be eligible, you must be purchasing a home in a low to moderate income community. If you’re interested in learning more, here are the six steps you’ll take to get started:
- Attend a NACA Homebuyer Virtual Workshop
- Meet with a NACA counselor
- Work with your counselor to fulfill your qualification requirements
- Attend a NACA Purchase Workshop and choose your home
- Undergo a credit check and submit your application
- Receive lender approval and close on your home
The Best in America Mortgage comes with no down payment requirements, no closing costs, no private mortgage insurance and low affordable rates.
Fannie Mae and Freddie Mac
If you have excellent credit but limited funds to put toward a down payment, then you may qualify for a conventional mortgage backed by Fannie Mae or Freddie Mac. You’ll need a minimum credit score of 620, and at least a 3% down payment.
You will have to take out PMI if your down payment is less than 20%. But you can cancel it once your loan-to-value ratio reaches 80%.
Government-backed loans are ideal for anyone who is looking to buy a house but has a small down payment or struggles with bad credit. The following programs are designed to help borrowers who may have trouble qualifying for a conventional mortgage:
Types of Government-Backed Loans
- FHA loans: FHA loans are backed by the Federal Housing Administration, and they come with small down payments and credit requirements. If you’re a first-time homebuyer with a credit score of at least 580 or higher, you’ll qualify with a down payment as low as 3.5%. If you have a credit score between 500 and 579, you’ll qualify with a down payment of 10%.
- USDA loans: USDA loans are ideal for low to moderate income borrowers who are looking to buy a home in a rural area. And the USDA provides 100% financing, so there are no down payment requirements. However, you must meet the income eligibility requirements for your state.
- VA loans: VA loans are backed by the U.S. Department of Veteran Affairs, and are eligible to current service members and veterans. VA loans come with low interest rates and no down payment requirements. And VA loans don’t come with any minimum credit score requirements.
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How To Prepare For Buying a House
If you’re ready to start the homebuying process, here are the nine steps you’ll take.
1. Figure Out If Buying Is a Good Idea for You
The truth is, homeownership isn’t the right choice for everyone. According to certified financial planner and virtual fee-only financial planner, Katie Brewer, renting may be a better option in the following scenarios:
- You plan to move to a new area in the next few years: The costs associated with buying a home can come to between 5-8% of the purchase price of a new home. It can take at least four years — or more in a down market — to recoup that cost in increased market value.
- You like having location flexibility: If you’re in a bustling part of town but think you might want something quieter when you settle down, then homeownership might cramp your style — for now.
- You don’t want to deal with home maintenance: When the toilet breaks and you’re renting, the landlord sends someone to repair it. If you’re the owner, you have to be prepared to make your own repairs — and to pay for them, too.
2. Check Your Credit
Even the most diligent bill payers can be surprised to find dings on their credit reports. Bills get sent to old addresses, and creditors sometimes make mistakes.
You might even be surprised to find someone else’s credit mistakes on your credit report if that person has the same name as you. Worse yet, you might unwittingly be the victim of credit fraud or identity theft.
“Make sure you don’t encounter any surprises when you’re applying for loans,” said Brewer. She suggested pulling your credit reports from AnnualCreditReport.com or directly from each of the three major credit bureaus to check for errors or other problems.
3. Fix Any Errors and Improve Your Credit Score
“Improving your credit score, even by just a few points, can help you get better financing terms when shopping for a mortgage,” said Ross Anthony, a realtor with Willis Allen Real Estate in San Diego. “Interest rates, points and even city-funded first-time homebuyer assistance programs can all be influenced by your credit rating.”
Here are four ways to improve your credit score:
- Contact each of the three credit bureaus and report any errors.
- Pay down your credit card debt.
- Pay off any small balances.
- Make sure to pay all of your bills on time.
Your lender might have more ideas and options for enhancing your credit score, said Anthony. “Give yourself at least six months to see results,” he said.
4. Find a Lender
Most buyers spend several months working closely with their chosen lender. You want to make sure you’ve picked someone who understands your financial vision and won’t push products that aren’t in your best interest.
“Many unprepared homebuyers wait until they find their perfect home before seriously sitting down with someone to work through the numbers,” said Anthony. This can be a huge financial mistake. If you haven’t lined up a lender, and you find the home of your dreams, you might feel rushed into picking a mortgage provider.
“Pick a person you trust after talking on the phone with them,” said Matt Oliver, senior loan consultant with the Lund Mortgage Team in Glendale, Ariz. “You can pick one person to do the prequalification and then shop rates and fees when you get a purchase contract.” It might require a couple of extra steps, but it’s the best way, he added.
Anthony suggested interviewing at least three lenders and getting a prequalification or even preapproval, which holds more weight, before starting your home search. “The more you’ve done upfront, the stronger your offer will be when you get to the negotiating table,” he said.
To get preapproved, you’ll need at least the following:
- Bank statements for the two most recent months
- Verification for the source of your down payment
- Tax returns from the last two years
- A copy of your driver’s license and Social Security card
5. Set Your Homebuying Budget
“Most folks underestimate how much their costs will be until they meet with me,” said Casey Fleming, mortgage advisor with C2 Financial Corporation and author of “The Loan Guide: How to Get the Best Possible Mortgage.”
Think about how much cash you have to pay the upfront costs, which will include your down payment and closing costs, as well as what you can afford to fork over each month in mortgage, tax and insurance payments.
“All of your fixed expenses — including the mortgage, student loans, car loans, utilities, cellphone, daycare, subscriptions and any other fixed expenses — should be no more than 50 percent of your take-home pay,” said Brewer. “The mortgage company only looks at your income and your loan payments, and not at the rest of your expenses, to determine how much they will lend to you.”
In other words, it’s up to you, not your lender, to figure out how much mortgage you can comfortably afford.
6. Make a List of Your New-Home Must-Haves
Decide ahead of time what your ideal house includes, what your deal breakers are and where you’re willing to compromise. “At the risk of sounding pessimistic, it is highly unlikely you will find the perfect home with every feature you want in your ideal price range,” said Anthony. “It just doesn’t happen very often. There will be compromises.”
Anthony suggested each spouse or partner rank his or her top five needs, along with the reasons for each. “If you can establish the ‘why,’ you’ll find it’s often more important than the ‘what,'” he said.
When emotions run high during the home search, as they inevitably do, a prepared list can provide added clarity to your decision-making process.
7. Find a Real Estate Agent
When searching for a real estate agent, consider the agent’s industry expertise, of course, but also how willing he seems to jump in and help you when things get messy. First-time homebuyers can get emotional and make mistakes, some of which can fracture a deal or cost a lot of money to correct.
“Realtors are usually compensated by the seller of a property,” said Brewer. Make sure you’re working with someone who can see past the compensation structure and keep your needs at the forefront of the home search.
Brewer suggested that homebuyers interview several real estate agents. Don’t settle until you find the one who’s a good fit for you.
8. Prepare for Emotional Ups and Downs
Home shopping online can be a blast. The reality of pounding the pavement in search of the perfect house can sometimes be a drag.
“You might not get the first house that you put an offer on,” said Brewer. “You might fall in love with a house online but find out that it doesn’t look as great in person.”
Even after a contract has been signed, there can be problems closing the sale. Your home inspector might find mold in the basement. The home might not appraise for the expected value. Your name could be spelled wrong on the title documents.
All of these glitches could delay your settlement date or even cause your deal to fall through. Get excited about buying your first home, but always remember that it’s not a done deal until you’ve been handed your new keys at the closing table.
9. Get Ready for Settlement
Settlement is when your new home becomes yours officially. You’ll sit down with your title agent or attorney — or possibly both — and sign a mountain of paperwork. Be prepared with a cashier’s check for the down payment, said Oliver. “It will need to match the bank name from the statements you provided to your mortgage lender. It can’t come from an account that’s been undisclosed.”
Finally, settlement is when you’ll be handed the keys to your new house. It’s time to break open a bottle of champagne and celebrate — but probably not in the title agent’s office. Do that in the comfort of your new home, instead.
If you’re a first-time homebuyer, there are many programs available to make buying a home easier. If you can benefit from one of the programs outlined in this article, it’s worth taking the time to apply. Doing this can help you save money on your down payment, closing costs, and even find a more affordable house.
Once you’ve crossed that hurdle, you need to make sure you have all of your bases covered as you’re looking for your dream home. Make sure you know the kind of home you’re looking for and how much house you can afford.
And make sure you work with a qualified real estate agent throughout the process. The right person will keep your best interests in mind and make the process much smoother for you.
Jamie Johnson contributed to the reporting for this article.
Our in-house research team and on-site financial experts work together to create content that’s accurate, impartial, and up to date. We fact-check every single statistic, quote and fact using trusted primary resources to make sure the information we provide is correct. You can learn more about GOBankingRates’ processes and standards in our editorial policy.
- U.S. Department of Housing and Urban Development. "Homes for Sale."
- Federal Financial Institutions Examination Council. "Based on 2011-2015 ACS and Reflects 2020 MSA."
- USDA.gov. "SFH Section 502 GLP Eligibility Check Worksheet."
- Lund Mortgage Team, Inc. "Home Loans & Mortgage Refinance."
- C2 Financial Corporation. "C2 Financial Corporation."