First-time homebuyer guide
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So, you’re in the market to buy a new home. Whether it’s your very first foray into homeownership or you’ve been through it before but forgotten the details, this guide provides some handy tips to prepare you for what’s ahead: the benefits, the challenges and an overall look at the process, step by step, of acquiring a residence.
- A first-time homebuyer is someone who has either never owned a home or who has not owned a home in the last several years.
- Various public and private first-time homebuyer programs can help you get a loan with little money down or on other generous terms.
- Buying a new house requires a lot of involved steps, from sorting out the financing to negotiating with the seller. A reputable real estate agent can serve as a valuable resource for new homebuyers, serving as a guide to navigate through the process.
- The homebuying journey doesn’t end with the closing: As a homeowner, you should periodically review your mortgage, especially as economic conditions change, and maintain an upkeep/repairs budget.
What is a first-time homebuyer?
A first-time homebuyer often refers to someone who has never purchased a residence before (obviously). But in some contexts, the definition is actually much broader, referring to someone who simply has not owned a home for at least the previous three years. That’s how it’s often defined by a variety of first-time homebuyer grants and loan programs (see “Benefits” below). The IRS, for some tax purposes, qualifies someone who hasn’t owned a home in two years as a first-timer.
Benefits of being a first-time homebuyer
Being a novice often feels like a nuisance. However, there are actually perks to being a first-time homebuyer.
The chief one is first-time homebuyer programs, which are designed to make purchasing a home more affordable. Some lenders offer slightly discounted mortgage rates for qualifying novices. In autumn 2022, the Federal Housing Finance Agency (FHFA) has eliminated upfront fees on certain conventional (that is, Fannie Mae- or Freddie Mac-backed) loans to first-timers, which could lower their overall cost of financing. Other lenders offer no-down-payment or exceedingly low down-payment (3 percent) mortgages to first-time homebuyers and, contrary to usual practice, don’t charge private mortgage insurance on these loans.
Many states and local governments have programs that offer down payment or closing cost assistance — either low-interest-rate loans, deferred loans or even forgivable loans (aka grants) — to people looking to buy their first house (even if it isn’t actually their first purchase).
This can be especially helpful if a large down payment is the biggest obstacle in your first home purchase. For example, all of these down payment assistance programs require just you to put up just 3 percent of the home’s purchase price:
- Conventional 97 mortgages
- HomeReady mortgages through Fannie Mae
- Home Possible mortgages through Freddie Mac
- HomeOne mortgages through Freddie Mac
Many programs count you as a first-timer if you or your spouse hasn’t owned a home in the past three years. However, some of these programs have other requirements, such as income limits or purchase price maximums. Check out the housing authority in your local state or municipality for first-time homebuyer opportunities you might be eligible for; Bankrate offers a state-by-state list.
In certain states, first-time homebuyers might also qualify for a mortgage credit certificate (MCC), essentially a dollar-for-dollar federal tax refund of a percentage of their annual loan interest.
Challenges of being a first-time homebuyer
All of that said, buying a new house can come with challenges. Be ready to:
- Have lots of liquidity — While people who already own a home can use the proceeds from selling their existing place to cover their down payment and closing costs, figuring out how to buy a house for the first time requires you to have a big chunk of cash on hand. Down payments these days easily run into the five figures. Closing costs can run into the thousands, too — as much as 6 percent of your mortgage.
- Prepare the paperwork — If you’re financing your home purchase, you’ll have to provide your lender with lots of documentation: your financial life in a nutshell. The underwriters can’t discriminate against you for being a novice, but they might look harder at you, since you probably have less of a credit history. And you might need to provide some extra information. For example, if relatives are generously donating money towards the down payment, they’ll need to document it in a letter, indicating it’s a gift.
- Pay for ongoing costs — Property maintenance is one of the biggest transitions from renting to owning, so make sure you budget accordingly. Also be prepared for some other ongoing expenses that are part of the joys of homeownership, like property taxes, homeowners insurance and HOA fees. These are required by law or your lender.
- Manage the stress — Buying a new house and moving into it is one of the biggest stressors in life. Don’t be surprised if it takes over your life — certainly, it might require some behavioral changes (like forgoing other big purchases or paying down debts). There’s a fair amount of hurry up and wait, too: wait for a response to your offer, wait for the bank to approve your mortgage. It all gets extra anxiety-inducing when you don’t know how the process typically goes — which is why the next section lays it out for you.
Steps to buying a house: a first-time homebuyer guide
Here’s a rundown of the typical stages that you go through in a home purchase — bearing in mind there are always individual twists and turns on the driveway to your dream house.
Step 1: Assess your finances
A home is the biggest single item most people ever purchase. Unless you’re in a position to pay cash, you’ll have to finance it. To make sure you’re in a good position to get a mortgage and handle the upfront costs of a new house, crack open your books.
Specifically, check your credit reports and score, examine your budget and assess your ability to make a down payment and pay closing costs.
With a higher credit score, you can get favorable loan terms that will save you lots of money over the life of your mortgage — although you can still get a loan with a score as low as 500 (for an FHA loan) or 620 (for a conventional loan). Generally, a score of 760 or higher is enough to qualify you for the lowest rates and most favorable terms.
Look at how much in regular outgoing expenses you have relative to your incoming funds, or your debt-to-income (DTI) ratio.
According to conventional wisdom, the ideal spend for housing costs — including the mortgage payment, property taxes, homeowners insurance and homeowners association dues — is 28 percent of your gross monthly income. For all of your monthly debt payments, including housing costs, the ideal spend is 36 percent.
Many mortgage lenders look for a DTI ratio of no more than 43 percent, but some go higher, up to 50 percent. The higher your DTI ratio, however, the more likely you are to pay a higher interest rate for your mortgage because you’re considered a riskier borrower. A higher DTI ratio can also make managing your mortgage payments an even bigger a strain on your finances.
Next is the down payment. If you’re interested in a conventional loan and can put 20 percent down, you’ll avoid paying private mortgage insurance (PMI), an extra monthly fee that covers the lender should you default on the loan.
You don’t have to put down 20 percent, though — you can pay as little as 3 percent or 5 percent, depending on the type of conventional loan you get, with PMI. If you’re getting a VA loan or a USDA loan, you don’t have to make a down payment at all. FHA loans, meanwhile, require a minimum of 3.5 percent down.
Then, assess your ability to pay closing costs, which can range from 2 percent to 6 percent of the home’s purchase price. Depending on how much your lender charges in fees, you could be paying a significant sum on closing day, so you’ll need to have these funds set aside.
There’s also the earnest money deposit, which is a smaller deposit submitted with your initial offer to buy a home. Some states require a deposit of 10 percent of a home’s purchase price from a buyer, while other states might allow earnest money of just a few hundred dollars.
Don’t forget: You’ll also want some cash set aside for moving expenses and furniture, or possible repairs or updates you’d like to make before moving in. This is all in addition to the funds you’d ideally have reserved for emergencies.
Having considered these factors and what you can afford, gather your pay stubs and bank statements from at least the past two months, your W-2 forms and federal tax returns from the past two years and any other information related to other assets and debt you have. This information will help your lender determine what you qualify for.
Step 2: Decide which type of mortgage to get
There are a lot of different types of mortgages. Your first consideration is whether you want a fixed-rate or adjustable-rate mortgage (ARM).
Fixed or adjustable rate
Fixed-rate loans tend to have slightly higher rates, but the rate never changes, so you know what your monthly payment will be for the length of your mortgage. An ARM typically starts with a lower rate for a period of time (such as five or seven years), then adjusts up or down at a predetermined interval (such as once a year). If the rate goes up — which it almost always does — your monthly payment will increase with it.
Also consider the term of your loan, such as 15 years or 30 years. Shorter-term loans have lower rates, but larger monthly payments, so while you’ll have less flexibility in your budget each month, you’ll pay less over the life of the loan in interest. It’s up to you whether a lower monthly cost or overall savings is more important.
If this part of this first-time homeowners’ guide has you scratching your head, know that most first-time homebuyers get a 30-year, fixed-rate mortgage. Fixed-rate loans offer more stability for those who plan to stay in one place. That said, if you don’t plan to live in a home for a long time, an ARM can be a good way to save some money.
As we mentioned before, there are also many first-time homebuyer programs to choose from; sometimes a state housing authority teams up with a lender to offer mortgages on highly generous terms. You might not qualify for some programs unless you meet specific requirements, though, related to income and location.
Step 3: Get quotes from at least three mortgage lenders
Comparing mortgage loan offers is one of the essential steps to buying a house. Because mortgage interest rates change regularly and can vary considerably from lender to lender, aim to get rate quotes from at least three lenders.
You don’t have to actually apply for a loan to get an offer. Often, you can get a quote for free through the lender’s website if you provide some basic information, like the loan amount you’re looking for, your down payment and credit score range. In general, you’ll want to pay the lowest interest rate, but do weigh all the fees that come with a loan — sometimes a loan with a lower rate actually ends up having a higher actual percentage rate (APR).
If it’s your first home purchase, you might also want to get a sense of how rates fluctuate and the current rate environment so you know what to expect when you seek a quote. You can sign up for a Bankrate account to determine the right time to strike on your mortgage with our daily rate trends.
You might also consider working with a mortgage broker who can do the comparison shopping for you. Brokers typically don’t charge borrowers a fee for their services.
Keep in mind that while quotes can be a valuable means for comparison, your rate won’t be finalized until you lock it in with the lender.
Step 4: Get preapproved for a mortgage
After you’ve gotten quotes from a few lenders, you’re ready to get preapproved for a mortgage. As you navigate figuring out how to buy a house, this gives you a number to work with.
A preapproval is a written, preliminary commitment from a lender to loan you a certain amount of money, not a finalized offer (that only happens once you have a specific property to buy). Getting one is necessary before you start searching for a home because sellers generally won’t consider your offer unless they know you have the financing lined up. The preapproval letter typically spells out how much you’re qualified to borrow, what loan program you’re using and the expected down payment you can make.
When you request a preapproval, be prepared for your mortgage lender to dig into all aspects of your financial life. This is where the paperwork you organized ahead of time comes in handy.
Be sure you’re actually getting a preapproval, not a prequalification. A prequalification could indicate that you might be approved for a mortgage, but is better used to help you determine how much you might be able to afford. It will not pass muster when you make an offer for a home.
Step 5: Find a real estate agent
Clearly, the first-time homebuyer guide comes with lots of steps. Now, it’s time to loop in someone who can come alongside you during this process.
A real estate agent can help enormously in the homebuying process because the agent knows the area and the local housing market well, and can provide valuable insights about neighborhoods, school districts and more.
If you’re not sure how to find an agent, start by asking around for recommendations for a buyer’s agent. Many agents work by referral. You can also research online for highly-rated agents and review testimonials from past clients.
Aim to interview at least three buyer’s agents. Ask them about their experience and track record, and whether they specialize in any particular type of residence, such as condos. Ask for references, as well.
In today’s market, you could be competing against many offers, so you’ll also want an agent who’ll be able move quickly on a home you’re interested in and help you navigate a bidding war, if that happens. Talk to your agent about their communication style and how they’ve helped guide other buyers through the current market.
When you’re ready to look at homes, enlist an agent to help you find the right one and negotiate the best price. You’ll likely need to sign an agreement with the agent, but you won’t have to pay the agent’s commission — this is paid by the seller, who also pays the agent representing them in the transaction.
Step 6: Shop for your home
This is the fun part. Talk to your agent about your budget and top requirements so that you don’t waste time looking at homes that don’t meet your needs. If possible, visit homes in person, and avoid buying a home sight unseen, even if it seems like the perfect fit based on an online description and photos.
During showings, tour the home and the neighborhood. How would you feel if you discovered the neighborhood was too congested with traffic, is near an airport or the nearby schools are underperforming? The location is often just as important as the home itself.
For a home in a homeowners association, get a copy of the HOA documents so you know what the rules and fees are, too.
Step 7: Be prepared to make an offer — fast
If you tour a home in your desired location and price range and like what you see, be ready to make an offer fast. Your agent can run an analysis of comparable listings (“comps”) that have recently sold in the area to help you make a competitive offer.
The offer should include an offer price, a deadline for the seller to respond (usually within 24 to 48 hours) and any contingencies you want to request. At a minimum, the offer should include appraisal and home inspection contingencies. That means that if the home appraises lower than the price you offered or an inspection turns up significant issues, you can walk away from the deal without losing your deposit. If a bidding war seems likely, the offer should also include an escalation clause with your top offer limit.
While some buyers waive contingencies to get their offer accepted, avoid doing this if possible — you won’t want to buy a home and later find out it has issues way beyond what your budget can accommodate to repair. However, some very hot markets make it hard to buy a home with certain contingencies, so talk to your Realtor about what’s realistic.
Get ready to negotiate on price
Once a purchase agreement is presented to the seller, your offer can be accepted, rejected or countered with a different price. Tap your agent’s experience to negotiate with the seller for the best possible outcome on your first home purchase.
If you do find yourself in a bidding war with multiple offers, it could help to write a letter to the seller describing why you love the home, but don’t get discouraged if you lose out to another buyer. While the market is cooling, it’s not uncommon for homes to sell quickly and for above list price, so don’t panic if you don’t get the first home you place an offer on.
Step 8: Secure your mortgage
If your offer has been accepted, it’s time to apply for your mortgage. This can be one of the most rigorous steps to buying a house.
Within three days of your application, you’ll get a loan estimate that details the loan terms and estimated closing costs, along with other information. Some closing costs are negotiable; your lender might charge an origination and underwriting fee that could be waived or discounted if you ask, or offer a no-closing-cost option that rolls these fees into your loan. (You’ll typically pay a higher interest rate to go this route, however.) Ask your lender to clarify any fees you don’t understand.
If you need help with closing costs, you could also look to your state’s housing finance agency or local housing organizations for down payment and closing cost assistance programs. If you meet program requirements, you could get a few thousand dollars to help cover expenses. You can explore first-time homebuyer programs by state on Bankrate.
Paying for mortgage points
Another consideration to make is whether you should pay for points to reduce your mortgage rate. Effectively, by paying points, you’re prepaying some of the interest on your loan. Generally, each point costs 1 percent of the total value of your loan, so buying one point on a $350,000 mortgage will cost $3,500. Each point you pay usually reduces the rate by 0.25 percent.
In general, the longer you plan to stay in a home, the better it is to pay for points as you’ll recoup the cost of the points by way of the lower monthly payment on your loan. To calculate the breakeven point, divide the amount you pay for a point by the amount you’ll reduce your mortgage payment by each month.
For example, if you were to pay $3,500 for one point and that will drop your monthly payment by $30, you’d need to stay in the home for about 116 months ($3,500/$30), or just shy of a decade, to break even.
Step 9: Hire a home inspector
After your offer is accepted, hire a home inspector to evaluate the property. This might feel like an optional step in a new homebuyers’ guide, but it really isn’t. It can make or break your homeownership experience.
Your agent can recommend a home inspector, or you can locate one through the American Society of Home Inspectors, International Association of Certified Home Inspectors and the National Academy of Building Inspection Engineers. As you did when researching agents, consult the Better Business Bureau, HomeAdvisor, Yelp or other online resources to check for complaints and read testimonials.
An inspector will check the home’s foundation, roof, HVAC, plumbing and electrical systems, but typically won’t check for the presence of lead paint or mold. The inspection can take about two or three hours and range from $300 to $1,000, depending on the home’s size and the extent of the inspection.
You and your agent should be present during the inspection so you can ask for clarification on any issues.
Once you have the inspection report, review it with your agent and decide how to move forward. If the inspection uncovers major problems, you could try to ask the seller to fix them, but the seller might not be willing to if there are other offers that won’t require them to pay for repairs. If you have an inspection contingency in your purchase agreement and the seller is unwilling to address the issues, you might choose to walk away instead.
Step 10: Get homeowners insurance, finalize your move and (finally!) close
You’ve made it to the home stretch of your new home acquisition — congrats! There are just a few more hurdles to jump.
Insure the house
For starters, mortgage lenders require homeowners insurance, which helps protect your (and their) investment. Insurance premiums vary, so get quotes from several companies or work with an insurance broker who can shop rates for you. Assess your needs and ensure you buy adequate coverage to completely rebuild your home if it’s destroyed or seriously damaged. If your home is located in a federally-designated flood zone, you’ll need to buy flood insurance, too.
Plan your move
Depending on how quickly you plan to move, you’ll likely want to start planning for the move before the closing. As you prepare for move-in day, contact your utility, cable and internet providers to arrange new service for your move-in date. Then hire a reputable mover and start packing.
Go to your closing
Finally, it’s time to put pen to paper and seal the deal on your new house. The closing is when you finalize the purchase contract and officially become a homeowner.
Just before the closing, get updated pay stubs and other financial paperwork to prove your employment status hasn’t changed and that you’ll be able to make your mortgage payments. If you’re paying closing costs on closing day, obtain a cashier’s or certified check made out to the escrow company for the funds ahead of time. Don’t forget to bring a photo ID, too.
Within 24 hours of closing, you’ll do a final walkthrough of the property to make sure repairs, if any, were made and that the home is vacant. At the closing table, you’ll sign a lot of paperwork to finalize the loan and transfer ownership of the home from the seller’s name to yours.
What’s next for homeowners with a new house
Buying a home can be a long process — especially as a first-time homebuyer — but once you move in, there’s still some work to do.
First, assess your home and think about what you might want to change or fix. (The inspection report will be a big help here.) If you haven’t already, start building a home improvement fund for these projects, and set aside separate funds to cover unexpected repairs, too.
As time goes on, keep an eye on the housing market, and especially mortgage rates. If home values are rising, you might consider tapping your home’s equity in a cash-out refinance or with a home equity line of credit (HELOC) or home equity loan. If interest rates have fallen, refinancing to a lower rate could save you money. Of course, weigh the pros and cons of each of these options. Even in a lower-rate environment, the math on a refinance doesn’t always work out positively.
Depending on the terms of your loan and how your finances change, you might also want to reevaluate your mortgage payment schedule and explore making extra payments or paying off your mortgage early. Consider your goals and whether there are other financial moves you could be making before focusing on a payoff. If you do decide to prepay, talk to your lender beforehand to ensure the extra payments are going to the loan principal, not interest, and you won’t come up against any early payment fees.
You generally pay these costs at the same time you pay closing costs, but they’re in their own category. Prepaids might include your homeowners insurance premium, property taxes for the coming year or mortgage interest that accrued during the closing process, for example.
To ensure you’re ready for these upfront expenses on your first home purchase, look closely at your loan estimate. These prepaid costs should be clearly laid out and separated from your closing costs.
Generally, aim to stick with the 28/36 rule when buying a new house. That means not more than 28 of your gross monthly income should go to your mortgage, and with the mortgage in play, 36 percent of your gross monthly income or less goes to your overall debt.
Managing your debt and ensuring your finances can handle your mortgage get extra important as a first-time homebuyer, so do your due diligence here.
This first-time homeowners’ guide probably left you wondering about some key details. Never be afraid to ask the pros.
When it comes to your home loan, ask your mortgage lender to clearly explain the terms of the loan. You might ask them to walk through your loan estimate with you. Ask about the likelihood of your interest rate changing before closing, and if there’s a charge to extend your rate lock.
When it comes to the home, you should also ask your real estate agent for their opinion on the house and neighborhood you’re considering — and how much negotiation they think the seller might be open to. It’s getting to be more of a buyer’s market in some areas.
When it comes to the purchase and sale agreement, nail down what fixtures there are — features and furnishings that are included with the house. You might also ask your Realtor or a real estate attorney what contingencies your contract should include — grounds for canceling the sale, should something not work out.