First-time homebuyers on their porch

First-Time Homebuyer Tips

A successful home purchase starts long before you sign the dotted line, especially for first-time homebuyers. Preparations should start months or even years before you buy your first home. The more prepared you are, the more likely you’ll meet your long-term financial goals.

Before you buy a home, know the steps you can take to improve your chances of getting a mortgage approval and smoother experience. Check out our top tips below to help you buy your first home.

Know How Much You Can Afford

You don’t have to borrow the amount a lender pre-approves you for; usually, that’s the maximum amount you can borrow.

Before you buy a home, look at the payment (including property taxes, property insurance, and, if applicable, HOA dues). Make sure you can afford the total amount due each month. If you can, take that amount out of your checking account for a few months, deposit it into a savings account, and see how it feels. Can you comfortably afford it? If not, consider borrowing less than the pre-approval states.

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Save Early For A Down Payment

It’s also important how much money you put down on the home. You don’t need 20% down, but a healthy down payment provides a better chance of securing the best loan at the terms.

As a first-time homebuyer, you’ll need a 3.00% down payment for Conforming and a 3.50% down for FHA financing. That means for every $100,000 you borrow, you need $3,000, or for an FHA loan, you’ll need $3,500 down. You may be eligible to use gift funds, but don’t rely on it – save for a down payment as early as possible to increase your chance of approval.

Exception To The Rule

In some cases, and it’s rare, a first-time homebuyer might be able to put zero down. That means you would only need to cover the closing costs. There are a few options for this including the VA home loan program.

Improve Your Credit Score

Before a first-time homebuyer talks to a lender, check your credit report. Everyone gets free access to all three credit reports annually. Pull your credit reports and look at your history. Here is what you’ll want to look for:

  • Previous late payments
  • Accounts that are not current
  • Collections or judgments
  • Credit card balances that exceed 30% of your credit line

Bringing late payments current, paying credit card balances down, and settling collections and judgments ensure your credit score increases before you look at homes.

High credit scores give you the best chance of securing the best terms and the lowest mortgage rate. Credit scores don’t change overnight, so work on your credit score as early as possible. We recommend working on your credit report before you apply for a mortgage. If you have some issues with your credit report, talk with your loan officer first, as they might be able to provide suggestions to improve your score.

Don’t Focus On The Interest Rate Alone

It’s easy to get caught up in the interest rate – everyone does it, but it’s not the only factor. The interest rate affects your mortgage payment, as do the term and closing costs.

Look at the big picture. How much will the loan cost you over the entire term? Your Loan Estimate, which you must receive three business days after you apply, will show the total loan cost. Compare the bottom line before choosing a loan.

Closing Costs And Fees

A common question from first-time homebuyers is, “What are closing costs?”

All loans have standard costs, such as appraisal, credit report, and title costs. Some loans also have origination fees or discount points – which are fees paid to the lender to underwrite and process the loan or lower the interest rate.

The average borrower pays 2.00% to 5.00% of their loan amount in closing costs and fees, which are separate from their down payment. If you borrow $200,000, you’d owe $4,000 – $10,000 in closing costs and fees.

The closing costs vary by lender and depend on your credit score, down payment, and the complexity of your loan. Shop around to find the lender with the lowest fees and interest rates to save the most money on your mortgage.

Make Sure You Have A Reserve Fund

This is a must for first-time homebuyers – have a reserve fund.

Once you own a home, you are responsible for all its expenses. You don’t have a landlord to call if a pipe bursts or the A/C stops working. Everything is on your shoulders and comes out of your wallet.

A reserve fund helps you cover those unexpected expenses. It should also have a few months’ worth of mortgage payments if you lose your job or fall ill. Not paying your mortgage payment puts you at risk of foreclosure – something no homeowner wants to experience.

Having a reserve fund with around three to six months of mortgage payments in it gives you peace of mind. It may even increase your chance of approval (if cash reserves are needed).

Learn About Conforming And FHA Loan Limits

Every first-time homebuyer should learn about Conforming and FHA loan limits.

Why? Because nearly all first-time homebuyers obtain either an FHA or Conforming loan when they purchase a home. Conforming loan limits refer to the maximum amount Fannie Mae and Freddie Mac will loan based on the county in which you are buying the home and what you are qualified for.

FHA loan limits are set by Housing and Urban Development (HUD) each year.

These loan limits are updated yearly.

When applying for a loan, remember to ask the loan officer about the current FHA and Conforming loan limits for your county.

Before You Make An Offer

Before you make an offer, do your homework. Research the neighborhood and surrounding community. What’s it like? Do you like the atmosphere? What are the values of the homes in the area? Do you like what’s around it?

Get Pre-Approved

Get pre-approved before you make an offer. You can even compare offers from multiple lenders to find the best one.

A pre-approval does a few things for you:

  • You’ll know how much you can afford
  • Tells the seller/real estate agent that you’re a serious and capable buyer
  • It tells you the conditions you need to satisfy to get a new loan

You’ll need to complete a loan application and turn in your supporting documentation before a loan officer can complete a pre-approval. To ensure a smooth process, talk with your loan officer about what exactly is needed.

Once the loan officer has a complete file, the pre-approval process is usually completed within twenty-four to forty-eight hours. Every first-time homebuyer should get pre-approved before they make an offer on a home.

Make An Offer And Negotiate The Price

When you’re ready to look at homes, don’t assume you have to pay full price. When you make an offer, get ready to negotiate the price.

Sellers expect you to negotiate the sales price, so they often price the home higher than the amount they need to make it worth it. If they have wiggle room, they’ll negotiate with you. If they don’t like your offer, they’ll turn it down, and that’s okay. There are plenty of other houses to look at.

Home Inspection

If you are making an offer on a home, consider including a home inspection contingency in the contract. This gives you an ‘out’ should the home need extensive repairs. The last thing you want is to buy a money pit and put yourself in financial trouble.

Do You have a question or need a quote?

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Bottom Line For First-Time Homebuyers

First-time homebuyers have many loan options available. Whether you have a 20% down payment or just 3%, there is a loan for you. Focus on your qualifying factors, including your credit score, debt load, and employment, to get the loan with the best rate and term to make buying your first home a successful experience.

Before you make your first offer, do some planning to ensure a smooth transaction. Determine how much you can afford and review your credit before you talk with a lender. Work towards setting up your reserve fund, and do some research on the neighborhood and surrounding community before you make an offer on a home.

Loan Officer Kevin O'Connor

About The Author

Loan Officer Kevin O'Connor has over 17 years of experience as a Mortgage Loan Originator and is a trusted resource for mortgage education and information. He's the content creator of K.O. Home Loan Solutions and is licensed by the state of California and the Nationwide Mortgage Licensing System. He has a top rating with the Better Business Bureau, Google, Yelp, and Zillow. You can contact him at 1-800-550-5538. CA DRE #01499872 / NMLS #247447