12 Essential Tips for First-Time Homebuyers

Buying your first home is a significant milestone that can be overwhelming. As one of the biggest financial commitments you’re likely to make, it’s essential to navigate the process strategically.

This guide will provide you with practical advice, expert insights, and step-by-step instructions to help you navigate the complexities of the homebuying process. We’ll break down the process into 12 essential steps, from determining your budget to closing the deal.

1. Determine Your Affordability

Determine what you can afford before you begin looking at homes. Knowing your income, expenses and debt can help you create a budget to narrow down your options.

Calculate how much money you have coming in each month and how much is going out. 

• What is your income? 
• What are your household expenses and debts? 

Mortgage lenders will use this information to determine your debt-to-income (DTI) ratio. 

Your DTI ratio is a measure of your debt relative to your income. Lenders use it to assess your risk as a borrower. 

A lower DTI generally indicates better financial health. Meanwhile, a high DTI shows that you have too much debt relative to your income. The exact DTI you’ll need varies by lender and loan type, but most prefer to see it below 43%.

How to Calculate Your DTI

• Add up all your monthly debts. These could include payments for your rent or mortgage, credit card balances, car loans and student loans.
• Divide the total by your gross monthly income.

For example, if your monthly payments include $2,000 for your mortgage, $500 for a car loan, and $750 for other debts. Your monthly debt payments are $3,250. 

• $2,000 (mortgage) + $500 (car loan) + $750 (other debts) = $3,250 
• If your gross monthly income is $8,000, your debt-to-income ratio is 41%. 

2. Save for a Down Payment and Closing Costs

Most home loans require borrowers to make a down payment and pay a portion of the closing costs. 

• A down payment is an upfront cash payment that a buyer must provide to qualify for a mortgage. 
• Closing costs are an additional expense and comprise the fees paid when a real estate transaction closes.

The minimum down payment depends on the type of mortgage and the lender’s requirements. In general, closing costs can range from 3% to 6% of the loan amount. Here are the minimum down payment requirements for different types of home loans:

• Conventional loan: 3%
• FHA loan: 3.5% for a credit score of 580 or higher and 10% for a credit score below 580
• VA loan: No down payment requirement
• USDA loan: No down payment requirement

“Depending on what market the buyer is in, down payments and closing costs can vary,” says Bill Kowalczuk, real estate broker at Coldwell Banker Warburg in New York, New York. He advises that buyers should save at least 15% of the sale price to cover their down payment and closing costs. “In some markets, like NYC, a buyer would need closer to 30% or more depending on what building they are looking to purchase in.”

Another option is down payment assistance programs (DPA), which are grants or loans that help buyers with their down payment and closing costs. These programs are available through state and local housing authorities, government agencies, lenders and nonprofit organizations.

Many DPAs focus on low- and moderate-income families buying their first home. According to the Consumer Financial Protection Bureau, many programs offer down payment assistance that can be used with regular FHA or conventional loans, and some programs lend money through subsidized loans.

3. Improve Your Credit Score

Lenders also require buyers to meet minimum credit score requirements. While it varies by lender, here is the minimum credit score to qualify for different types of home loans:

• Conventional loan: 620
• FHA loan: 500 with a 10% down payment and 580 with a 3.5% down payment
• VA loan: No minimum credit score, but most lenders require a score of at least 620
• USDA loan: No minimum credit score, but most lenders require a score of at least 580 to 620

You can take steps to improve your credit score if it doesn’t meet the minimum requirements. Raising your score can also result in a lower interest rate because it shows lenders that you are a lower-risk borrower.

Your credit score is influenced by factors like payment history, debt levels, length of credit history, and new credit inquiries. Paying down debt will impact your credit score the most, followed by paying your bills on time. 

As you prepare to buy a home, avoid taking out new credit. It’s also wise to check your credit report for errors through the three major credit bureaus: Equifax, Experian and TransUnion.

4. Explore Your Mortgage Options

There are a variety of mortgages available, including:

• Conventional loans are the most common type of home loan. They are not guaranteed by the government.
• FHA loans are insured by the Federal Housing Administration.
• The Department of Veterans Affairs guarantees VA loans, which help service members, veterans and eligible surviving spouses become homeowners.
• USDA loans are guaranteed by the U.S. Department of Agriculture. They are for low- and moderate-income households purchasing a home in an eligible rural area as defined by the USDA.

Two additional considerations are the mortgage term and whether the loan has a fixed or adjustable rate. The most popular home loan is the 30-year fixed-rate mortgage, which takes 30 years to pay off and has an interest rate that remains the same for the length of the loan. A 15-year mortgage has a lower interest rate but larger monthly payments.

There’s also the adjustable-rate mortgage (ARM). ARMs start with a lower fixed introductory rate and may be a good option if you only plan to stay in the home for a few years. After the introductory rate ends the ARM interest rate can increase or decrease over time, depending on market conditions.

5. Get Pre-Approved for a Mortgage

Shop around for mortgage lenders, compare quotes and apply for pre-approval.

Some buyers may hesitate to shop around for rates, but it won’t significantly impact your credit score. “Credit checks from different mortgage lenders are treated as a single inquiry on your credit report as long as all the inquiries are made within the same 45-day window,” says Felton Ellington, lending manager at Chase Home Lending. “This means five different lenders could pull your credit within a week or two of each other, and the impact would be the same as one lender pulling your credit.”

A mortgage preapproval shows how much the lender will let you borrow based on personal and financial information. During the preapproval process, you complete a mortgage application and the lender verifies your credit history and score, DTI, employment history and income.

When you’re pre-approved, it allows you to shop based on what you can afford, speed up the homebuying process and make stronger offers. A preapproval letter shows sellers that you’re a serious buyer and can likely secure a mortgage.

“A mortgage preapproval or prequalification letter is crucial. It establishes a price ceiling for the buyer and demonstrates to sellers that they are qualified, making their offers more credible,” says Jeremy Smith, a real estate advisor with Engel & Völker. ”Most sellers require this letter and lender contact details to consider an offer.”

6. Choose a Real Estate Agent

If you’re buying a home, your real estate agent, also called a buyer’s agent, will act in your best interest to get you the best purchase price possible and walk you through the buying process. “My top tip for finding a Realtor is to choose someone who specializes in the area you’re interested in,” Smith says. “A local expert who knows the neighborhoods and community details will be invaluable.”

You should also find a real estate agent who negotiates on your behalf. “Find an experienced agent who is effective at negotiating concessions for buyers including seller assist, repair credits and who has good working relationships with other Realtors so that your offer will have a higher chance of being accepted,” says Jake Washburn, Realtor, investor and founder of Independence Home Buyers in Philadelphia, Pennsylvania.

You can contact a real estate agent through referrals, which is the most common way people find agents, or by doing your own research, attending open houses or reaching out directly to a brokerage.

Carefully evaluate the agents. Look up their websites and online profiles and read about their specialties, number of transactions completed, professional affiliations and experience in the local market. Read through their client testimonials and reviews to learn more about what previous clients experienced.

After you’ve narrowed down your list of potential agents, it’s a good idea to interview them to get a better sense of who they are, both on a business and personal level.

7. Define Your Needs and Wants

Before you can start looking at homes, you must define your needs and wants. Your real estate agent will also sit down with you to discuss your ideal type of house and neighborhood.

“I always ask my buyers to measure the sizes of the rooms they are currently living in. This way, we know the minimum space they need, especially if upgrading,” Kowalczuk says. “I also ask them to list their top 10 needs and wants, with the most important at the top.”

8. Find the Right Home and Neighborhood

As you search for homes online and in person, consider their location, size, amenities, safety, property taxes and price range. If you have children or plan to have children attending the neighborhood school, research the school district.

You can attend open houses or schedule private showings with your real estate agent. You can also view homes on house-hunting websites, read more information about the property, look at photos and take a 3D tour of the home.

Visit the home and neighborhood at different times of the day, and don’t be afraid to talk to neighbors. You can also check out community groups on social media, where people may be more willing to share what living in the area is like.

9. Make an Offer

When you find a home that you like within your budget, it’s time to make an offer. When you submit an offer on a home, you’re creating a legally binding document that is submitted by the prospective buyer to the seller. The offer outlines the price you’re willing to pay, along with contingencies, closing date and costs, earnest money details and what’s expected of the seller leading up to closing. It should also include the mortgage preapproval letter.

The seller can either accept, reject or make a counteroffer. A counteroffer is an offer from the seller in response to the bid on the home with their preferred changes to the deal. The buyer can also choose to accept, reject or counter the seller’s offer.

If both parties agree, they sign a purchase contract. The contract will outline the steps you, as the buyer, must complete to close the deal by the closing date.

If a home inspection contingency was included in the purchase agreement, you can schedule a home inspection within the contract’s specified time frame. An inspection isn’t required, but it’s often recommended. 

During the home inspection, a professional home inspector will examine the home’s physical structure and mechanical systems, inside and out. After the inspection, the inspector will compile a report with their findings. Depending on the findings, you can negotiate repairs or walk away from the sale if you have a contingency in place.

The lender will schedule a home appraisal if you’re purchasing the property with a mortgage. This is an unbiased, professional opinion of the home’s value by an appraiser. According to the Federal Deposit Insurance Corporation (FDIC), lenders require an appraisal to assess the property’s value and determine your interest rate, required down payment and whether you will be approved for the loan.

In some cases, the appraisal may come in lower than the offer. Because the lender won’t allow you to borrow more than the appraised value, you may need to pay the difference yourself, withdraw your purchase offer if the contract included an appraisal contingency, or negotiate with the seller.

10. Understand Closing Costs

As a buyer, you’ll likely be responsible for some of the closing costs. The amount you pay will be outlined in your mortgage loan estimate, which is a document that includes your mortgage terms and expenses. You’ll also receive this information in the closing disclosure three business days before the closing.

In addition to the down payment, the National Association of Realtors (NAR) says common closing costs for buyers include:

• Loan origination fees
• Mortgage points
• Home Appraisal fee
• Private mortgage insurance (PMI) premium
• Insurance escrow for homeowners insurance
• Property tax escrow
• Deed recording
• Title insurance policy premiums
• Notary fees
• Land survey fees
• Prorations for your share of costs, including utility bills and property taxes

11. Be Prepared for Homeownership Responsibilities

You’re officially a homeowner after you sign documents, pay closing costs, and receive your keys. Although you’ve completed the transaction, your responsibilities don’t stop there.

As a homeowner, you’re responsible for making timely mortgage payments and paying homeowners insurance and property tax. It’s also important to set money aside for hidden costs, such as maintenance and repairs.

“I tell my buyers, now that they are homeowners, they need to protect their home by having a separate savings account and plan for home repairs, unexpected emergencies and other housing-related expenses,” Kowalczuk says. “You’ll need to save and budget for property taxes and homeowners’ insurance. If you have that separate savings account, anything unexpected won’t come as an unexpected financial burden.”

12. Build Equity

One of the biggest advantages of homeownership is avoiding rent payments and building equity in your property.

“Paying down your own mortgage, rather than someone else’s, and watching your property’s value appreciate over time is incredibly rewarding,” Smith explains, “Homeownership also brings tax benefits, opportunities to build wealth, and the emotional satisfaction of creating a lasting home and becoming part of a community.”

The Bottom Line: Tips for First-Time Homebuyers

Buying a home is a big financial investment, so it’s important to consult with a real estate agent, mortgage lender and attorney before making any decisions. Professionals can help guide you through the process, answer questions and solve any issues that may arise. Don’t hesitate to ask questions or seek clarification.