Buying a house is a central component of most people’s long-term goals and dreams. At the same time, being a first-time homebuyer can be incredibly intimidating. There’s a lot to learn, and a lot to prepare for – even long before you even start shopping for your dream home. 

The guide below will serve as a step-by-step guide on how to buy a house for first-time homebuyers. We’ll cover everything from saving for a down payment, finding a lender with a competitive interest rate, connecting with a real estate agent, and making the transition into homeownership! 

1. Evaluate your financial standing

The first step is to take a detailed look at your household’s financial standing, including income, debt, assets, and more. You’ll also want to gather any relevant paperwork to have on file for your mortgage provider. Your future mortgage lender will take a very close look at your entire financial situation, so it’s important to do the prep-work yourself to be an informed, prepared homebuyer. Here’s what to focus on:

Income & employment

Lenders will want to see current income, as well as a history of recent income, before approving you for a loan. Knowing your income level is also important in determining how much house you can actually afford. Gather information and tax forms to show your income and employment status. For employees, gather W-2 tax forms for the last several years, as well as a recent pay stub. For self-employed folks, you’ll want your full tax returns and bank statements for the last several years. 

Takeaway: Current income and income history will affect how large a loan a lender is willing to issue, as well as how large a monthly payment you can afford.

 

Debt

How much existing debt do you have – and what type of debt is it? Make a list of all debts, including car loans, credit cards, personal loans, student loans, etc. Record total balance owed, as well as monthly payments for each debt. You’ll use this information to calculate your debt to income ratio (DTI), an important factor for applying for a mortgage. DTI is calculated by dividing monthly debt payments by your monthly gross income. 

Takeaway: Lenders will look at total debt, including your future mortgage, in calculating your DTI – most require you to stay under 50% or so ($2,000 in total debt payments for $4,000 in gross monthly income).

 

Credit

What is your credit score, and overall credit health? You can request a free credit report at AnnualCreditReport.com once per year – we recommend pulling it now to get a clear picture of your credit health. Credit is vital to buying a home because your credit score will determine what type of interest rates are available to you and if mortgage providers will be willing to work with you at all. Most lenders require a bare-minimum credit score of 580-620, while scores over 720 will generally get you access to the best available rates. Free tools like CreditKarma and CreditSesame do a good job of explaining why your score is what it is, and what you can do to improve it.  

Takeaway: Your credit score and credit health will affect a lender’s willingness to issue you a mortgage, and the interest rates they will extend to you.

 

Assets & down payment

What assets does your household own, and how much do you have set aside for a down payment? You may be able to purchase a home with as little as 3% down ($9,000 on a $300,000 mortgage), however, the minimum might be as high as 10%, depending on your credit health and the lender you go with. Most experts recommend saving until you can put at least 5-10% down. A 20% down-payment is the gold-standard, as this amount lets you bypass paying for private mortgage insurance (PMI), which can add to monthly payment costs.

Takeaway: You’ll need to set aside 3-10% of your home cost as a down payment. 20% is even better and can lower your costs. The more you put down, the better interest rates you’ll get, and the lower your monthly payments will be.

 

2. Calculate how much house you can afford

Before home shopping, or even looking for a lender, it’s wise to determine how much of a mortgage you can actually afford. There are several metrics to look at here, but here’s a good rule of thumb: You should aim to spend less than 28% of your gross monthly income on house-related expenses (including mortgage, property tax, home insurance, etc). Additionally, you should aim to spend less than 36% of your gross monthly income on total debt payments, including mortgage, credit cards, student loans, etc. 

This 28/36% rule is useful for determining how much of a monthly payment you can afford. The affordability of a home goes beyond its purchase price and has much more to do with your own financial health and income. 

Beyond that, you’ll also want to compare your liquid savings and down payment to the total cost of your future home. If you have $30,000 saved for a down payment, you can get a $300,000 mortgage with a respectable 10% down payment. Opt for a 20% down payment, however, and those same savings will only cover a $150,000 loan. 

In this process, be sure to account for closing costs. Ideally, closing costs should be paid in full at the time of house purchase, but some lenders allow the costs to be rolled into the mortgage loan. This category of closing costs includes things like:

  • Appraisal fees
  • Home inspection fees
  • Mortgage fees (application fee, origination fee, prepaid interest, etc.)
  • Mortgage insurance
  • Homeowners insurance
  • Property taxes
  • Title fees 
  • Mortgage closing documents
  • And more

In total, you should expect closing costs to run between 2% and 5% of the total loan cost. If you are borrowing $300,000, that’s $6,000 to $15,000 in closing costs that you’ll need to account for.

Takeaway: Your financial standing and goals impact the amount you can afford to borrow for your first home. There are many mortgage calculators available online to help determine a comfortable figure.

 

3. Save & improve your financial standing

Once you have a clear picture of your current financial health, and an estimate of how much house you can afford right now, it’s time to decide if you’re ready to buy. If you already have a substantial down payment saved, and your income and debt allow you to afford a mortgage on the home you want, then you can move on to begin the house-hunting process. 

On the other hand, if your savings are a little light, or you determine that you really can’t afford the house you want, then it’s time to make a plan. 

For example, let’s assume that you’ve determined that you’ll need to spend roughly $300,000 to get the house you want, and: 

  • You have $25,000 saved for a down payment
  • Your monthly gross household income is $5,000
  • Your current monthly debt payments total $1,500
  • Your credit score is around 700
  • Your desired house size and style is in the ~$300,000 range

In this example, you have:

  • An 8.3% down payment saved
  • A current debt-to-income ratio of 30%
  • An expected debt-to-income ratio of 56% (including a ~$1,300 monthly mortgage payment, if you were to take out a $275,000, 30-year loan today)
  • A good credit score

In this scenario, you are in a reasonable financial standing, but there is certainly room for improvement: 

  1. 8.3% is a reasonable down payment, but you may wish to save for 10% or even 15%
  2. Your current debt-to-income ratio is fine, but once you add a mortgage, your debt payments will exceed 50% of your income. Most lenders will find this too high
  3. Paying down existing debts before taking out a mortgage will help to lower your monthly debt payments, improve your financial health, and potentially qualify you for a lower interest rate
  4. Saving more for a down payment will lower your monthly payments (and potentially your interest rate), and signal to lenders that you are a trustworthy borrower
  5. Paying off some existing debts may improve your credit score, potentially giving you access to more competitive interest rates

Basically, you need to take a close and honest look at your financial health. You want to determine whether you’re actually ready to buy, or whether you’re better off waiting (and saving) before moving on. 

Takeaway: It’s important to be ready – both financially and mentally – for homeownership. Sometimes, it makes sense to wait.

 

4. Explore first-time homebuyer programs

Many states, and even city/county governments, offer first-time homebuyer programs. These programs are targeted at those who have never owned property. Generally, they provide financial assistance, usually in the form of down payment assistance with delayed repayment. There are also housing counseling agencies that can help you navigate the buying process. 

Details vary by program, but one of the most common programs in place is down payment assistance. If you meet the income limits and other requirements, you may be able to get an interest-free loan to help cover a down-payment on your first house. There may also be programs available for closing cost assistance.

Search online for first time home buyer programs in your area. Alternatively, NerdWallet has a good round-up of available programs. 

5. Explore loan options

Next, it’s time to learn about the different types of mortgages available to borrowers, and the pros and cons of each. There are a few categories to consider: Mortgage type (conventional, FHA, etc.), mortgage length (30-year, 15-year, etc.), and interest type (fixed vs adjustable). 

Types of mortgage loans

  • Conventional – Conventional loans, sometimes called conforming loans, are the standard commercial mortgage that’s available from the majority of commercial lenders and banks. These loans are not backed by the federal government and therefore tend to have a bit higher requirements in terms of creditworthiness. Conventional mortgages may be available with as little as 3% down, although this depends on the lender and your credit health. 
  • FHA – FHA loans are backed by the Federal Housing Administration (FHA), a government agency. The FHA insures these loans, signaling to lenders that the government will take over the loan should you stop making payments. This makes FHA loans less of a risk for mortgage lenders, which also means they are willing to lend to people with lower credit scores. 3.5% down is typically the bare minimum for an FHA loan, but credit score requirements are less strict. 
  • VA – VA loans are available exclusively for current and former members of the American Armed Forces. They are insured by the Department of Veterans Affairs. VA loans offer competitive rates and can be applied for 0% down in some cases. If you’re eligible for one, they will typically be your best option. 
  • USDA – USDA loans are available for homebuyers in rural and certain suburban areas. They are available with as little as 0% down, if you meet the loan program’s income and eligibility rules. 

Mortgage loan lengths

  • 30 year – A 30-year mortgage is the standard in the industry. According to a 2016 report by Freddie Mac, approximately 90% of homebuyers in the USA opted for a 30-year, fixed-rate mortgage. The 30-year term helps to keep monthly payments approachable, but obviously, you will end up paying far more in interest in the long run.
  • 15 year – 15-year mortgages are a popular choice for those who want to aggressively pay down their debts. Only about 6% of homebuyers chose this option, based on the same 2016 report referenced above. Monthly payment for a 15-year mortgage will be 60-70% more than payment on a comparable 30-year, but you will end up paying far less in interest in the long run. On a $300,000 loan, a 15-year mortgage may save you $100,000 or more in interest payments, compared to a 30-year mortgage. 
  • Other – Other lengths of home loans are available, but they are not very common. Some lenders offer 10, 25, and even 40-year mortgage terms. 

Mortgage interest type

  • Fixed – A fixed-rate mortgage means that the interest rate on your loan will stay the same, regardless of what happens in the economy or mortgage market. If you sign a 30-year mortgage at an interest rate of 4%, you will pay 4% for the life of the loan – even if rates skyrocket to 7%, or fall to 2%. Fixed mortgages are the most popular option, by far, and are usually the best route to take. Keep in mind that should the rate drop significantly, you can always refinance at a later date. And if rates rise, you’ll have the lower rate locked in for the life of the loan.
  • Adjustable – Adjustable-rate mortgages, or ARMs, are less popular, but still widely available from many lenders. ARMs start off with a fixed rate for a predetermined amount of time (usually a few years). Then, the rate “resets”, based on the current market conditions. The mortgage interest rate will continue to adjust on a regular basis, typically yearly, for the life of the loan. 

6. Get pre-approved for a mortgage

Next, it’s time to actually begin the application process. Because the home buying process can move quickly, mortgage providers issue what is called a pre-approval letter to prospective buyers. Basically, a mortgage issuer will approve you to borrow up to a certain amount, at a certain interest rate, before you’ve actually found a home (or even a real estate agent). 

You can use an online comparison tool to shop for mortgage lenders in your area. You can also ask your existing bank or credit union for their terms and interest rates. You could also use a mortgage broker to help guide you, but this will incur extra costs. Be sure to shop around – mortgage rates can vary substantially from lender to lender. 

Once you’ve found a lender that suits your needs and budget, it’s time to apply for a mortgage. This will typically involve answering questions and providing documentation relating to your income, debts, creditworthiness, and other factors. 

At the end of the application process, if approved, the lender will send you a preapproval letter. This will state how much they are willing to loan you, and under what terms. Mortgage pre-approval is essential for moving on to the actual home search, and the process will give you a clearer idea of what you can afford. 

7. Find the right real estate agent

A real estate agent can help you navigate the market, find homes in your budget, schedule showings, negotiate pricing, issue offers, and more. While it’s technically possible to purchase a home without a real estate agent, we don’t recommend it for first-time homebuyers. 

Finding the right agent for you can be tricky. Asking friends and family for recommendations is a good place to start, as it gives you first-hand, honest reports of their experiences. You can look online, ask your mortgage provider, or pick a trusted real estate firm to assign you an agent. 

Keep in mind that there usually aren’t any upfront costs to work with a real estate agent. When you do close on a house, your agent and the seller’s agent will split the commission (typically 5-6% of the closing price). Technically, the seller pays all the commission, so you won’t have any out-of-pocket expenses. That said, most sellers will pad their listing price in order to account for the commission, so buyers do end up paying agents’ commission in one way or another. 

Check out our roundup of Best Registered Agent Services

 

8. Start house hunting

We’re finally to the fun part! Now, it’s time to start actually shopping around for your dream home. Sit down with your real estate agent, and discuss your wants and needs in your next home. Consider:

  • Your price range (and what you’re pre-approved for)
  • Price
  • Number of bedrooms
  • Size (square footage)
  • Land/yard size
  • Proximity to your place of work/schools/etc.
  • Local school district ratings
  • Proximity to dining, entertainment, shopping, etc.
  • Property value trends in the city or neighborhood

Work with your real estate agent to list all your needs, wants, and priorities. You want to be comprehensive – but also, it’s important to realize that you’re unlikely to find the perfect property. Prioritize your needs in a list, so you can eliminate properties right off the bat that don’t fit your top priorities. 

Begin touring open houses frequently, even if they aren’t exactly what you want. This will help you get a broader sense of what’s available, and help you refine your list of priorities. 

9. Learn the local market

Through your house hunt, and discussions with your real estate agent, you’ll begin to learn how the market in your area works. Some questions to ask yourself include:

  • How quickly do homes sell? 
  • Do properties go for an above-asking price?
  • What is the available inventory like?
  • How many prospective buyers are competing for your desired properties?
  • Is it overall a “buyer’s market” or a “seller’s market?

This step is important, particularly in hot markets where things move quickly. During this process, recognize that it may take a long time to find your desired property – but you can be actively learning the market the whole time!

10. Make an offer

Once you find a property that you would like to purchase, it’s time to make an offer. Your agent can walk you through this process.

Your real estate agent will draft an offer letter that includes your offer price, your contact information, and the deadline by which the seller needs to respond to your offer. 

From there, the seller will reply – they can accept the offer, reject it, or send a counter-offer. In some cases, negotiations can drag on from here – work with your agent to ensure you’re getting the best deal. 

11. Get an appraisal and home inspection

Once an offer you have made is accepted, the next step is to get a full appraisal on the home, as well as a home inspection. 

An appraisal is a detailed assessment of the home’s monetary value. This information is used by your mortgage lender to ensure that they aren’t issuing a mortgage for more than the property is worth. Your mortgage provider or realtor can typically recommend a home appraiser to utilize.

A home inspection is a detailed assessment of the home’s condition. It is done independently from an appraisal and is extremely important for buyers. The results of a home inspection will tell you the current condition of the home, any issues that need to be addressed, and any potential issues that will likely come up in the near future (a new roof, an outdated HVAC system, etc.). It’s very important to choose a reputable home inspector for this process. 

The offer you make on a home will be dependent on the results of the home inspection, and potentially the appraisal, as well. What this means is that if a major issue comes to light after the home inspection, you can usually back out of the offer without penalty. Alternatively, issues also give you more bargaining power with the seller. 

If issues come to light in the home inspection, you can:

  1. Ask the seller to accept a lower offer
  2. Ask the seller to fix the issues before the sale goes through
  3. Ask the seller for credits to cover some of your closing costs

Your agent can walk you through this step of the process. Be sure to ask any questions you may have, and use your agent as a resource. 

12. Close on your new home

If both parties agree to the terms of the offer, the process will move on to escrow and closing the home purchase. You’ll do a final walkthrough of the home, and your agent will guide you through the closing process. You will finalize the purchase price, closing date, and other key details. 

The closing process can seem to drag on, but it’s a vital part of the home buying process. You’ll work with your loan officer to finalize loan terms, and your agent will work with the seller’s agent to finalize the deal. You’ll contract with a title company (often arranged by the mortgage provider or agent) to transfer the title to your name. You’ll connect with an insurance company to purchase homeowner’s insurance. And, of course, you’ll work with your bank and/or an escrow firm to transfer funds and finalize financial details. 

There’s a lot of paperwork in the closing process. Again, use your realtor or agent as a resource during this time. 

After closing finishes, you are officially a homeowner! Congratulations!