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Personal Finance > Mortgages

Mortgages

How to Buy Your First Home

By Aly J. Yale MONEY RESEARCH COLLECTIVE

September 14, 2022

Buying your first house is an important milestone, but the process can be confusing. It takes time, and you’ll need to start planning months or even years ahead to make sure everything is in order.

Are you hoping to become a homeowner? This step-by-step guide will walk you through the process to make sure you set yourself up for success.

Table of contents

Tips for buying a house for the first time
How to buy your first home FAQ
How to buy your first home bottom line

Tips for Buying a House for the First Time

Before your home search

To prepare for your house search, there are some things you should do before you even start looking at houses.

Start saving early

First, you need to start saving money as soon as possible. There are quite a few upfront costs to buying a home, so saving up is critical.

You’ll need funds for:

Closing costs: These vary based on your loan amount, location and lender, but according to closing technology provider ClosingCorp, the average was just under $7,000 in 2021.
Down payment: Every loan has different down payment requirements. Some loans require no down payment, while others have a minimum of 3% to 10%, depending on your credit score. Just remember: Making a low down payment may mean you’ll need PMI (private mortgage insurance), which adds an extra cost to your monthly mortgage.
Moving expenses: You will also need money to cover moving costs. These might include truck rentals, movers, packing supplies and more.

Finally, make sure you’re building an emergency fund, too. If you were to lose your job, you’d need this to cover sudden repairs or pay your mortgage and other household bills.

Check your credit

Lenders look at your credit history and credit score when you apply for a mortgage. Those help determine your eligibility and your interest rate.

Lenders will want to see a clean credit report with a history of on-time bill payments and a low debt-to-income ratio (DTI) — meaning your credit cards and debt payments don’t take up too much of your monthly income. With a conventional loan, you’ll need at least a 45% DTI or lower to qualify. FHA loans require no more than a 43% DTI — though there may be some exceptions.

Credit score requirements vary by loan program. Some loans technically allow for credit scores in the 500s, but you can expect a much higher interest rate/APR with scores in this range. Lenders typically reserve the best mortgage rates for borrowers with 740 scores or higher.

To see where you stand, pull your credit report and credit score. If you see several late payments, contact your creditors and service providers, and set up autopay. If your score is low, take steps to improve it. Pay down your debts, dispute any errors on your credit report and ask your landlord to begin reporting your rent payments to credit bureaus. As long as you pay it on time each month, this can be a great way to increase your score.

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Settle on a budget

Next, you need to determine how much home you can afford. To start, get a good handle on your monthly expenses and take-home pay. You should also have an idea of how much you can put down.

From there, you can use a home affordability calculator or mortgage calculator to zero in on what sort of monthly mortgage payment and home price you can afford. Keep in mind that this is just the maximum you can afford based on your debts and income. You’ll likely want to shop well below this number to avoid stretching yourself too thin.

Don’t forget: You’ll also have monthly escrow costs, which cover your property taxes and home insurance premiums. Make sure you factor these into your budget calculations as well.

Scout neighborhoods early in the process

Once you have a price range in mind, you can start vetting neighborhoods and communities you might want to shop in. Be sure to consider things like amenities, school district, accessibility, commute to work, walkability and crime/safety.

If you have an idea of what you’re looking for, a local real estate agent can typically point you in the right direction. When you have a short list of neighborhoods, you can set up listing alerts that notify you when a new home is listed in the area.

Season your assets

The money you plan to use for your home purchase needs to be what lenders call “seasoned” — meaning placed in your account at least a few months before you apply for your mortgage.

Any funds deposited after that point would be subject to closer inspection and could delay your loan closing. If you added funds to your account right before you applied for a mortgage, lenders might want to check the source of the money to make sure you didn’t take out a loan to get it. It’s one of the checks lenders make to ensure you would be a financially responsible borrower.

If you’re planning to use a gift from a family member for your down payment, put the money into your account now — before you get too far into the process.

When you’re ready to buy

If you’re ready to jump in and buy a house, it’s time to get preapproved for a mortgage and shop around for the best interest rate.

Compare mortgage lenders

Before you can start house hunting, you need to choose a mortgage lender and get preapproved for your mortgage. To do this, you’ll want to consider a few different mortgage companies — your main bank, a credit union, an online lender, and, ideally, at least two others.

Rates, terms and loan products vary widely from one lender to the next, so shopping around ensures you get the best possible deal. (In fact, Freddie Mac found that getting just five quotes can save you $3,000 or more.)

If you’re not comfortable shopping around yourself, you might consider enlisting a mortgage broker. These professionals have access to loan products from many lenders and banks and can help you find the best option for your needs.

Get preapproved

Once you’ve shortlisted a few lenders, apply for a mortgage preapproval with each. The exact process for this depends on the lender, but it usually requires an application, a credit check and various kinds of financial documentation.

After you’ve been preapproved, you’ll get a loan estimate from each lender, which you can use to compare rates, fees and closing costs. You’ll also receive a preapproval letter that states how much you can likely borrow. You should include this letter in any offers you submit to show sellers you’re a qualified and financially capable buyer.

Start home shopping

Next, it’s time to hire a real estate agent (if you haven’t already) and start shopping. Feel free to get agent recommendations from friends and family and interview a few options to see who’s the best fit.

Once you have an agent on your side, they can start sending you listings that fit your budget and, when it’s convenient, set up showings so you can see the homes for yourself. You can also attend open houses if there are any in your area. It can be helpful to bring your agent with you to open houses, but you can visit them on your own.

After you’ve found a house

Once you find the home you want to buy, there are many steps before you get the keys. Your real estate agent will help you with these steps up to closing day. There will be a lot going on in the background that the seller and lender will handle as well.

Make an offer

If you want to make an offer on a house, your agent can draft an offer on your behalf. It should include your offer amount (how much you’re willing to pay for the home), your earnest money deposit and any contingencies you want to include.

Contingencies give you a way to back out of the deal — and get your earnest money deposit back — if certain conditions aren’t met. Here are a few examples:

A financing contingency allows you to exit the transaction if you can’t secure a home loan.
An appraisal contingency lets you back out if the home’s appraised value comes in lower than your purchase price.
An inspection contingency says you can leave the deal if something’s found on the inspection that’s not to your liking.

Contingencies add extra risk for the seller, so in a hot housing market, they could hurt your chances of winning the home. Your Realtor can discuss what contingencies may or may not be advised in your situation.

You may not get the first house for which you submit an offer, and that’s OK. It can be hard to compete in a hot housing market and it may take a few houses before you land one.

Sign the purchase agreement and make a deposit

If your offer is accepted, you may sign a purchase and sale (P&S) agreement that includes the purchase price, planned closing date, contingencies and more. Make sure to review it closely. You will also need to make your earnest money deposit.

The earnest money deposit (also called a good faith deposit) will be a percent of the purchase price, and it’ll be deposited into an escrow account. This money shows that you are serious about buying the home.

Get a home inspection

Next, you will schedule your home inspection. Your agent likely has an inspector they can recommend, but if not, ask friends, family members and neighbors.

During the inspection, the inspector will evaluate the home’s structure, systems, foundation, roof and more, looking for any defects or possible safety hazards. You’ll then get a report detailing these findings.

If your inspector finds items you take issue with, talk to your agent about how to proceed. You may be able to ask the seller to repair the problems or reduce the purchase price to account for the cost of repairing them yourself. If they’re particularly big issues, you may want to back out of the deal entirely (if you have an inspection contingency in place).

Respond to lender requests

As things are moving along, your mortgage lender will ask for documents as part of the process of securing the mortgage. You will need to provide things like bank statements, tax returns, pay stubs, W-2s and more.

There will also be documents that your lender will ask you to review along the way and decisions you will need to make about your loan. Make sure you take care of these requests quickly so you don’t hold up the closing.

Your lender will also order a home appraisal to determine the home’s fair market value. The value should be on par with the purchase price. If the home’s value is lower than the purchase price, your financing could be affected. If that happens, you may need to pay extra towards your down payment or the loan could be denied.

Secure homeowners insurance

Your lender will require you to have a home insurance policy before you can close on your loan. Feel free to shop around when choosing your insurer, as premiums can differ quite a bit across companies.

Make sure to ask about discounts, too. Many insurance companies offer discounts for setting up autopay, enrolling in paperless billing or bundling your services (if you have another policy with them, for example).

After you’ve secured your insurance policy, be sure to send proof of coverage to your loan officer. This may be in the form of an insurance binder. They’ll need it before you head to closing.

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Attend your closing appointment

Finally, once everything has gone through, it’s time to attend your closing appointment. This is when you’ll sign your paperwork and pay your down payment and closing costs — usually via cashier’s check — and the house is transferred to your name. Once all is said and done, you’ll get your keys and can begin moving into your new house.

How to Buy Your First Home FAQ

How long does it take to buy a house?

It usually takes at least a few months to buy a house — and that's only after you've saved up and prepared your finances. Shopping for a home can take anywhere from a few days to a few months, while the mortgage process averages around 57 days, according to ICE Mortgage Technology, loan origination platform provider.

What are the steps to buying a house?

The first steps to buying a house are to prep your finances and determine your budget. Then, you can get preapproved for your mortgage loan, shop for a home, put in an offer, get a home inspection and close on your loan. After your closing is complete, the home is yours.

What is considered a first-time home buyer?

A first-time homebuyer is usually someone who has never bought a house before. For the purpose of many down payment assistance programs, someone who hasn't owned a home in the last three years may be considered a first-time buyer.

When is the first mortgage payment due after closing?

Your first mortgage payment is typically due on the first day of the second month after closing. So, if you closed on your mortgage in September, your first payment would be due November 1.

This is because 1) you pre-pay the remaining month's mortgage at closing and 2) mortgages are paid in arrears — meaning after the month has passed. So in the above example, you would pre-pay your September mortgage as part of your closing costs. Then, October's mortgage would come due on November 1.

What do first-time homebuyers need?

First-time buyers need money for a down payment and closing costs, a decent credit score, an idea of their budget and a mortgage preapproval to get started. Having a good real estate agent on your side can also help make the homebuying process easier.

What is financial health?

Financial health is a broad term referring to your overall financial picture — your credit, debts, income and other details about your personal finances. These can all play a role in your ability to get a mortgage and buy a house.

What mortgage options do I have?

There are many types of mortgages to choose from, each with its own costs and eligibility requirements. The right choice depends on your credit score, the down payment you have available and various other factors.

Some common mortgage programs include:

FHA loans: These are guaranteed by the Federal Housing Administration. They allow for credit scores down to 500 (with a 10% down payment) and 580 (with a 3.5% down payment).
VA loans: These are mortgages for veterans and military members. They don't require a down payment.
USDA loans: These mortgages are for buyers in more rural parts of the country. They also don't require a down payment.
Conventional loans: These are mortgages for higher-credit borrowers. They require as little as 3% down.

You can also choose between fixed-rate and adjustable-rate mortgages. A fixed-rate mortgage gives you a set interest rate for your entire loan term. Adjustable-rate mortgages have low rates to start, but those rates (and your payment) can increase over time. They're typically best for homebuyers who don't plan to stay in their homes long.

How to Buy Your First Home Summary

Buying your first house can feel stressful, but it doesn’t have to. Just break the process into smaller steps, prepare your finances ahead of time and enlist a good lender and agent, and owning a home is well within reach.

Aly J. Yale

Aly J. Yale is an experienced freelance writer and journalist, specializing in mortgage, real estate and housing. Her work has appeared in USA Today, Bankrate, Forbes, and Motley Fool, among other publications.