Buying your first home is exciting, but it can also be stressful. You might not be sure if you’re ready to make such a big commitment. You might have some fear of the unknown since you’ve never gone through the process of buying a home before.
It’s normal to feel this way. Buying a home can be thrilling one minute and overwhelming the next. This guide will arm you with all the information you need to avoid any unpleasant surprises.
How to know when you’re ready to buy a home
Buying a home can give you a sense of stability and community if you’re planning to stay in the same area for several years. You won’t have to worry about a landlord raising your rent or not renewing your lease. You’ll also get the opportunity to develop long-term friendships with other locals and put down roots.
You’ll have a chance to accumulate equity as you pay down your mortgage and, possibly, as real estate values rise over time — but you’ll also risk losing equity. You may also find yourself caring more about local politics and community development because leaders’ decisions will affect your everyday life and the value of your investment.
It’s smart to approach the home-buying process from a position of financial strength. That means having a good credit score and plenty of money saved up. You’ll need the latter for a down payment, closing costs, moving expenses, home repairs, and your emergency fund.
When it suits your lifestyle as well as your budget, you may be ready to buy a home.
Step-by-step guide for first-time homebuyers
Buying your first home is like searching for a job or taking on an extra project at work. It’s a major endeavor that can feel overwhelming when you don’t know where to start. But when you break it down into digestible steps, you can identify what you need to do and where you need help.
You can turn your homebuying goal into a plan you can accomplish.
1. Set a home-buying budget
Make a very detailed list of your income and expenses, both regular and irregular. Include retirement contributions, rainy day funds, and all the new expenses that will come with homeownership. New expenses might include water bills, higher electric bills, home maintenance and repairs, homeowners insurance, life insurance, property taxes, private mortgage insurance (PMI), and homeowners association (HOA) dues. Calculate a monthly principal and interest payment you can comfortably afford.
2. Save for a down payment
Depending on what type of mortgage you qualify for, your down payment could be anywhere from 0% to 20%. If you’re not sure how much to save, aim for at least 5%, which is the minimum amount that most lenders require.
You’ve probably already thought about where you want to live and researched how much homes cost in that area. If you are planning to purchase a $400,000 home, you might want to save at least $20,000.
3. Get a clear understanding of closing costs
Many first-time homebuyers are surprised to learn that, in addition to a down payment and homeowners insurance, they will have to pay about 2% to 5% of the loan amount for closing costs. These costs are not hidden; lenders have to disclose them in a loan estimate when you apply for a mortgage.
It may be possible to add these costs to your loan amount, but your safest bet is to plan to pay them out of pocket. If your down payment will be less than 20%, you’ll also want to budget for PMI.
4. Look for first-time homebuyer programs
First-time homebuyer assistance can provide a grant, low-interest loan, no-interest loan, or forgivable loan to help you become a homeowner if you meet income and credit score requirements.
You could be leaving money on the table if you don’t investigate whether down payment and closing cost assistance programs are available through your state housing agency or certain lenders.
Not only could these programs save you money; they could help you become a homeowner sooner.
5. Get pre-approved for a loan
While it’s not possible to get a full loan approval until you’ve identified the home you want to buy, it is possible to get lenders to evaluate your finances and decide how much they might lend you. Taking this step will help you shop for a home with confidence and make purchase offers that sellers take seriously.
Pre-approval will also show you how the homebuying budget you created compares with what lenders say you can afford. If the lender’s calculation is higher, don’t let it tempt you: No one knows your finances better than you do. If it’s lower, ask for an explanation. It could have to do with which types of income count for mortgage qualification or how lenders calculate your debt-to-income ratio (DTI).
Learn More: First-Time Homebuyer Qualifications: Do You Qualify?
6. Compare rates from different lenders
Getting your first loan pre-approval will feel amazing, but don’t stop there. Apply with multiple lenders until you have three to five competing offers. You might be surprised to find that interest rates and closing costs can vary significantly.
Remember that mortgage rates change daily, so the best way to compare offers is to submit all of your pre-approval applications on the same day. If you can’t, ask the lenders you’re most interested in working with to update their offers on the same day.
7. Find a real estate agent
Finding a real estate agent is usually the first thing people think of when they’re ready to buy a home. But agents only get paid when a real estate deal closes, and just like you, they can’t afford to work for free.
When you’ve already established a homebuying budget and been pre-approved, potential agents will know you’re serious and will want to work with you. Plus, you’ll be able to choose people who specialize in the areas you know you can afford.
Ask friends and coworkers for recommendations and check online profiles. Talk to a few agents and choose one you have a good rapport with.
8. Determine which neighborhoods you want to target
With a budget and an agent, you can narrow down the precise areas where you’d like to live. And even though you can do so much research yourself online, take advantage of your agent’s experience in choosing a location. They might have some insider knowledge, like how close that beautiful new development is to train tracks or how crowded certain streets become when school lets out.
9. Create a list of non-negotiables and nice-to-haves
Determining what you want versus what you need in a house is an important exercise to help you understand your priorities and set realistic goals.
Your non-negotiables might be things like these:
- Low crime rate
- Proximity to work
- Quiet
- Walkable
- Easy freeway access
- Good school district
- At least two bathrooms
- At least 1,400 square feet
Your nice-to-haves might include:
- Close to protected bike paths
- Not part of an HOA
- New roof
- Energy efficient
- Backyard deck
- 2,000 square feet
- At least three bathrooms
- Low-maintenance yard
Both lists will consist of your personal preferences and will be influenced by factors like your budget, household size, and how long you plan to live in your home.
10. Shop for homes
You’ll be so well-prepared at this point that you can use your in-person shopping time efficiently. You won’t waste time visiting listings you can’t afford or that don’t meet all your non-negotiables. You might even fall in love with the first home you tour, but it’s a good idea to visit a handful of houses before making a decision, to ensure you find the perfect fit.
11. Make an offer on a home
When you do find a home that feels right, you’ll be well-equipped to make an offer. Acting quickly is essential when housing inventory is limited; when it’s more plentiful, you may have more time. Your agent can advise you on how much to offer based on local market conditions and what contingencies to include. Ultimately, these are your decisions. Your agent will complete the paperwork, ask you to sign it, then submit your offer to the seller’s agent.
12. Get a mortgage
Once a seller has accepted your offer, you can go back to your preferred lender with your purchase agreement. The lender can then begin the process of underwriting the property and making sure you’re still financially qualified for the loan you were pre-approved for.
13. Get a home appraisal
Your lender will order an appraisal, and you should schedule it as soon as possible. If the home appraises for less than the purchase price, you will have to negotiate with the seller, dispute the appraisal, pay the difference in cash, or walk away from the deal.
14. Secure homeowners insurance
Affordable homeowners insurance is not a given. Some homes are shockingly expensive to insure because they have high-risk attributes related to their claims history, location, or age. Ideally, your agent would learn this information from the seller’s agent before you even made an offer. At any rate, you need to make sure the property is insurable and that you can afford the premiums well before your scheduled closing date.
The national average homeowners insurance premium in 2024 is $2,230 per year. However, prices vary considerably by state.
15. Schedule a home inspection
While your lender won’t require a home inspection, you shouldn’t skip this step. A general home inspection can identify problems that might cost you lots of money or cause you to second-guess the purchase. Expect to spend $300 to $1,000 for this service, according to the American Society of Home Inspectors.
You might decide to order specialized inspections, such as an electrical inspection, to get a more qualified opinion about issues of extra concern.
16. Discuss inspection findings with the seller and schedule repairs
Inspection findings might be grounds for negotiating a closing cost credit or price reduction from the seller. Some may be required as a condition of getting a mortgage or getting homeowners insurance. Your agent may be able to feel out the seller’s agent to get a sense of how receptive the seller is to working with you. Keep in mind that the seller may not want to negotiate or may not have room to negotiate because they need a certain sum to pay off their loan and move.
If you’re able to reach an agreement with the seller about who will pay for repairs, and if the repairs must be made before the deal can close, then it’s time to hire a reputable, licensed, and bonded contractor to do the work.
17. Close on the home
Once your lender says you’re clear to close, you’ll get all your mortgage paperwork to review and sign. Take your time to read it and have your real estate attorney review it, too. Make sure you understand everything and there aren’t any mistakes.
Don’t rely on a notary, real estate agent, or loan officer who tells you not to worry if you raise a concern. Everyone wants the loan to close on time, but if you’re signing a bunch of legal documents that will impact your finances for years to come, you deserve to understand what you’re agreeing to.
Tips for first-time homebuyers
When you’ve never bought a home before, it’s smart to rely on the wisdom of people who have. Here are three tips that will help you remain financially stable and keep your stress levels down as a first-time homebuyer:
- Work on your credit score: As soon as you start toying with the idea of buying your first home, you can request a free credit report online to find out where you stand. If your score is below 760, you may not be eligible for the most competitive mortgage rates. It may take at least a few months to improve your score, but you can do it yourself for free by learning what factors have the biggest impact on your score.
It can save you thousands of dollars. In August 2023, homebuyers with a FICO score above 740 and a loan-to-value ratio greater than 80 paid an average interest rate of 7.19% on a conventional 30-year mortgage, according to data from Optimal Blue. Those with a score below 680 paid 7.48%. - Don’t waive contingencies: Appraisal, financing, and inspection contingencies can protect you from losing your earnest money deposit if the appraisal is too low, you can’t secure a mortgage, or the inspection uncovers major problems. First-time homebuyers usually include clauses in the purchase agreement that allow them to walk away without penalty under certain conditions. You might be tempted to waive them to make your offer more competitive, but that’s a big risk.
- Don’t use all your savings: Even if your mortgage lender doesn’t require you to have extra savings in the bank as a condition of closing, you should. Sooner or later, your water heater will fail or your air conditioner will stop working. When you have savings, these things are inconveniences, but they’re not catastrophes — and you’ll still be able to pay your mortgage.
First-time homebuyer FAQs
How much do I need for a down payment as a first-time homebuyer?
The minimum down payment you’ll need to buy a home depends on what type of loan you qualify for. Here is a look at different loan types:
- VA: 0%
- USDA: 0%
- Conventional: 3% or 5%
- FHA: 3.5% or 10%, depending on credit score
To avoid PMI on a conventional loan, you’ll need to put down 20%. First-time homebuyer down payment assistance may be an option if you qualify.
What are the advantages of using a real estate agent when buying a home?
Buyers rarely represent themselves when buying a home. First-time buyers in particular can benefit from an agent’s familiarity with the process, ability to negotiate on their behalf, and expertise in the local housing market.
Are there any government programs or grants available for first-time homebuyers?
Government-sponsored first-time homebuyer assistance typically comes from state housing agencies. Just do an online search for the name of your state and “first-time homebuyer program” to see what’s available and how to qualify. Your real estate agent or mortgage lender may also be able to help you find grants, low-interest loans, no-interest loans, and forgivable loans for your down payment and closing costs.
What should I look for during a home inspection?
Ideally, you won’t be looking for anything — your home inspector will. If you’ve never owned a home or worked as a contractor, you may not notice any problems that aren’t staring you in the face. But a few things to be aware of are missing shingles, stained ceilings, flickering lights, and drains that don’t flow freely. Try to accompany the inspector as they go through their checklist. Ask them to explain what they’re looking for and what they’re finding.
How can I estimate my monthly mortgage payments?
You can estimate your monthly mortgage payments using our mortgage calculator if you know the loan amount, interest rate, and loan term. You can get the loan amount by subtracting your down payment from the purchase price. Plug in a variety of interest rates to see how much changes in market rates or your credit score could affect your monthly payment. Play with different loan amounts and terms to see how much you can comfortably borrow.
