FAQ for First-Time Homebuyers
Before jumping into the homebuying process, here are the answers to frequently asked questions from first-time homebuyers.
While it may be obvious that a first-time homebuyer is someone who has never purchased a home before, you also meet the criteria if you’ve owned a home in the past but not in the last three years. Being classified as a first-time homebuyer could mean you’re eligible for certain programs that make it easier to buy a home.
You need to weigh many factors when deciding if you’re ready to transition from renting to buying a house. Owning a home can be rewarding, but it’s also more complicated than renting.
Renters are required to pay the monthly rent, but they aren’t responsible for costs related to maintaining or repairing the property.
Homeowners, on the other hand, have responsibilities beyond just the monthly mortgage payment. They need to cover the cost of maintenance and repairs, as well as property taxes, homeowners insurance, and any homeowners association fees. Some of these expenses are tax deductible, which makes them less expensive. Still, costs can vary widely depending on location and other factors.
The upfront cost of purchasing a home is also higher compared with renting. In general, homebuyers must make a significant down payment and pay additional closing costs.
If you’re thinking about buying a house, consider how long you plan to own it, the property’s long-term value, and how important homeownership is to you. It’s also crucial to evaluate whether your financial situation is secure enough to comfortably cover all the costs of homeownership, as well as any unexpected bills or emergencies.
Your loan term is how much time you have to repay your mortgage, with 30-year and 15-year terms being the most common options.
A 30-year mortgage offers monthly payments that are more manageable, but you’ll pay more interest in the end. A 15-year mortgage requires higher monthly payments, but you’ll pay less interest overall and own your home in full sooner.
Interest rates also vary between loan terms. Rates for a 30-year mortgage are usually higher than rates for a 15-year mortgage.
Saving up for a down payment can take a long time, which might make you wonder if there are ways to hit your goal faster. One option is to borrow money for your down payment — but you’ll need to be prepared for the additional debt, since you’ll be repaying another loan at the same time as your mortgage.
Here are different ways to potentially get a loan for your down payment:
– Personal loan. Certain types of loans won’t allow you to use a personal loan for a down payment, but others could. You may find it difficult to get approved for a mortgage if taking out a personal loan will overextend your finances.
– “Piggyback” second mortgage. This option allows people without much savings to borrow extra money — also secured by the home — to reach a 20% down payment and avoid paying for private mortgage insurance. Just keep in mind that piggyback loans are less common today.
– Family or friends. A family member or good friend may be willing to lend money to you for a down payment. This arrangement requires you to set clear expectations for repayment, and disclose the deal to your mortgage lender.
Instead of borrowing money, you could look into down payment assistance programs in your state.
How To Buy a House in 8 Steps
If you’re ready to become a homeowner, here are eight basic steps to buying a house.
1. Assess your finances
Evaluate your current income and spending to determine how much home you can afford and still cover your other monthly expenses. The goal is to understand what you can reasonably pay without running into difficulties in covering necessary expenses, like food and health care.
Can I afford a down payment?
To find out how much you can put toward a down payment, start by adding up what you need for other savings goals, emergencies, moving costs, and initial home renovations, as well as closing costs, which typically range from 2% to 5% of the purchase price. Subtract the sum from your available savings, and you’ll get the total amount you can put down on a house.
What credit score do I need?
Your credit score helps lenders evaluate your creditworthiness. A higher credit score suggests that you’re more likely to repay a loan on time, which can help improve your odds of getting approved for a mortgage and a lower interest rate.
Though your credit score can be calculated in different ways depending on the lender, it’s usually based on these factors:
- Your payment history.
- How much debt you have relative to your available credit.
- The length of your credit history.
- How many new credit accounts you’ve opened.
- Your credit mix, or the different types of debt that you have.
The minimum credit score to get a mortgage varies by loan type and lender:
Minimum Credit Score Requirements by Mortgage Type
|Type of mortgage||Minimum credit score required|
|Conventional loan||620 for conforming loans|
|VA loan||No minimum credit score required by the VA, though lenders can set their own requirements|
|USDA loan||No minimum credit score set by the USDA, though a score of 640 or higher is recommended|
What’s my debt-to-income ratio?
Your debt-to-income ratio is used to predict if you’ll be able to afford your mortgage payments and still have enough money left over each month to pay your other expenses. Limits on DTI ratios will vary depending on the loan type and lender.
You calculate your DTI ratio by adding up your monthly debt payments and dividing the sum by your gross monthly income.
2. Get preapproved for a mortgage
When you’re serious about buying a house, you should get preapproved for a mortgage to make the process easier. While a preapproval letter isn’t a guarantee that you’ll get a loan, it shows real estate agents and sellers that you’ll likely secure financing. Sellers often require proof of a preapproval before accepting your offer on their home.
A mortgage preapproval letter indicates how much a particular lender is willing to let you borrow, and is typically valid for 30 to 60 days. Preapproval is based on the lender’s assessment of your ability to repay the loan, which comes from examining your credit history, income, and assets.
Preapproval doesn’t mean that you’re committed to working with the lender, so it’s a good idea to collect quotes from other lenders and compare any differences in mortgage costs.
3. Find a real estate agent or Realtor
A real estate agent is a licensed professional who’s knowledgeable about buying and selling homes. Realtors are real estate agents who have gone a step further and joined the National Association of Realtors, and are committed to following its standards and code of ethics.
Having a professional help you through the process of buying a house could make it less overwhelming. You can ask friends and family members to refer real estate agents they’ve worked with, or use NAR’s directory to find a Realtor in your area.
4. Shop for a home
As you’re shopping around, explore the different types of homes that fit into your budget. There are many different factors to consider, such as what kind of neighborhood you want to live in and which home features are essential to you.
If you’re planning to move far away, you should also look into how to buy a home remotely.
Types of homes
Common home types include:
- Single-family homes. These homes stand alone from other houses, which means they offer more privacy. You’re responsible for all maintenance and repairs.
- Condominiums. You own one of multiple units in a building or other housing complex. Condos typically come with a homeowners association that sets community rules and charges regular dues for shared amenities.
- Townhouses. These homes often have multiple stories and a small outdoor space. Similar to condos, townhouses have one or two shared walls and can be part of an HOA.
So, is a single-family home, condo, or townhouse the right choice for you? It ultimately depends on your budget, location, and preferred lifestyle.
Size, location, and features
For each home, imagine what it would be like to live in the area, and ask yourself a few questions:
- Do you want a home that’s move-in ready, or are you seeking a fixer-upper?
- Which features are essential to you? For example, think about the number of bedrooms and bathrooms, and whether you want a garage, large backyard, or pool.
- Do you want a place with plenty of space, or would you consider a tiny home in a great location?
- How long would your commute to work be?
- Is there convenient access to public transportation?
- What markets, restaurants, retail stores, and parks are in the neighborhood?
- If you have children or are planning to have kids, how are the local schools?
5. Make an offer — and negotiate
Your real estate agent can help you put together an offer on the house you want. In addition to the purchase price, you can negotiate with the seller over who will pay for certain closing costs or any repairs. Once the deal is finalized, both parties sign an agreement that outlines the terms of the sale and any contingencies required for the transaction to go through.
Some buyers with deep pockets may decide to make a cash offer. Generally speaking, it doesn’t matter to the seller whether the money is coming from a loan or your bank account. However, paying in cash can provide a competitive edge in a situation with multiple offers on the table. That’s because a cash offer indicates the buyer already has the funds to purchase the home and can close quickly.
While it may seem intimidating to compete with a cash offer, keep in mind that these buyers tend to back out of a potential deal first because they can compete more easily for other houses.
6. Apply for a mortgage
After you submit a mortgage application, the lender will give you a form called a loan estimate. This document provides estimates for important costs like your interest rate, monthly payment, closing costs, taxes, and insurance. Lenders must send the loan estimate within three business days of your mortgage application.
It’s smart to shop around and get estimates from different lenders. But before you can apply for a mortgage, you need to explore the different types of home loans to determine which is the right fit for your financial situation.
Fixed-rate vs. adjustable-rate mortgages
Fixed-rate mortgages have a set interest rate, which never changes throughout the loan term. With a more stable monthly payment, borrowers can budget reliably for future expenses. Fixed-rate mortgages are ideal for buyers who plan on owning their home for a long time or want to avoid fluctuations in their mortgage payment.
Adjustable-rate mortgages, on the other hand, typically start with a lower interest rate that applies for a set amount of time. Afterward, it can change at certain intervals according to market rates. If rates increase, borrowers will pay more interest. They may pay less interest if rates drop.
With an ARM, anticipating how much you’ll owe in the long term becomes more challenging. This mortgage option is suitable for buyers who are OK with potential rate increases or plan on owning the property for a short while.
Who it’s good for: Buyers with good credit who can afford a down payment of at least 20%.
Conventional loans are the most common type of mortgage. There are two types: conforming and nonconforming.
Conforming loans adhere to lending rules — like loan limits and down payment requirements — set by Fannie Mae or Freddie Mac, which are government-sponsored enterprises that guarantee conforming loans to reduce risk to lenders and make mortgages more affordable.
Nonconforming loans exceed those limits and may have different requirements, pricing, and features. Eligibility for a nonconforming loan is determined by individual lenders.
Pros and Cons of Conventional Mortgages
|Advantages of a conventional loan||Disadvantages of a conventional loan|
|Costs for conventional mortgages are typically lower compared with FHA loans, which are a different type of mortgage backed by the Federal Housing Administration.||The credit score requirements for conventional mortgages are usually higher compared with FHA loans.|
|Generally, the minimum down payment for conventional mortgages is 5%, though some lenders offer loans with a down payment as low as 3%.||Private mortgage insurance is typically required for down payments of less than 20%.|
|Conventional loans are widely available and offered by many banks, credit unions, and online lenders.||Nonconforming loans can come with higher interest rates and risky features.|
Who it’s good for: Buyers who don’t meet the requirements for a conventional mortgage.
The Federal Housing Administration offers a home loan program through private lenders. FHA loans require a minimum down payment of 3.5% and a minimum credit score of 500.
Pros and Cons of FHA Mortgages
|Advantages of an FHA loan||Disadvantages of an FHA loan|
|Credit score requirements for FHA loans are typically more lenient compared with conventional loans.||FHA loans require mortgage insurance that includes both an upfront premium and an annual premium.|
|Compared to conventional mortgages, FHA loans tend to be cheaper for borrowers with lower credit scores and smaller down payments.||Loan amounts are capped at $420,680, or $970,800 in high-cost areas, for 2022.|
|Borrowers can put less than 20% down on a house.||Rates for FHA loans are usually higher than conventional loan rates when it comes to borrowers with good credit and a 10%-15% down payment.|
Who it’s good for: Eligible service members, veterans, or their surviving spouses.
The Department of Veterans Affairs offers a VA mortgage program that doesn’t require a down payment. However, borrowers get a discount on the mandatory VA funding fee if they put at least 5% down.
Pros and Cons of VA Mortgages
|Advantages of a VA loan||Disadvantages of a VA loan|
|Neither a down payment nor mortgage insurance is required.||Borrowers must meet minimum military service requirements.|
|There’s no minimum credit score set by the program (but lenders may create their own requirements).||Buyers pay a VA funding fee, which ranges from 1.4% to 3.6% of the loan amount.|
|VA loans can offer competitive interest rates and limited closing costs.||Buyers with VA financing may encounter more issues with sellers and agents when it comes to certain types of real estate transactions.|
Who it’s good for: Buyers who live in an eligible rural area and would otherwise be unable to get a mortgage.
The Department of Agriculture has a USDA mortgage program for low-income homebuyers in rural areas. Eligibility is based on income and other factors like location and property type.
Pros and Cons of USDA Mortgages
|Advantages of a USDA loan||Disadvantages of a USDA loan|
|USDA loans can help eligible borrowers who don’t have access to safe and sanitary housing, or other loan options.||The home must be in an eligible location , which generally means a rural area with a population under 35,000.|
|No down payment is usually required.||Borrowers must meet additional requirements concerning citizenship, income limits, property size and value, and more.|
|No mortgage insurance is required.||Upfront and annual guarantee fees are charged.|
7. Get the home inspected and appraised
The appraisal is important because it determines the home’s fair market value. Getting the property appraised helps protect the buyer from overpaying, and allows the lender to verify that the loan amount is appropriate relative to what the home is worth.
It’s also important to schedule a home inspection ASAP so you can find out if the home has any major problems. Depending on what the inspection uncovers and the terms of your purchase agreement, you can ask your real estate agent to renegotiate your offer or rescind it.
8. Close on the home
Before signing anything, do a final walk-through of the house to confirm that all negotiated repairs or changes have been made. On closing day, thoroughly read each document and check for any issues. Make sure to ask questions if needed. Once you’ve confirmed that all the details are correct, you can sign the final paperwork. You should leave the closing with a closing disclosure, a promissory note, a mortgage agreement, a deed to the property — and the keys to your new home.
Other Costs To Consider
For a realistic idea of the total cost to buy a home, here are some expenses beyond the down payment and mortgage that a first-time homeowner might need to pay.
Closing costs pay for the process of buying a house, which includes appraisal fees, tax service provider fees, and title insurance. It’s important not to underestimate them. Both the buyer and seller pay some closing costs, but the buyer typically covers the lion’s share.
If you put down less than 20% with a conventional loan, you must pay for private mortgage insurance. It protects the lender if you can’t repay the loan. The cost of PMI varies, but you can expect to spend $30 to $70 per month for each $100,000 you’ve borrowed. PMI can be canceled once the principal balance on your mortgage drops to 80% of your home’s appraised value.
All loans backed by the Federal Housing Administration require borrowers to pay for mortgage insurance. Loans insured by the Veterans Affairs and the Department of Agriculture don’t require mortgage insurance, but they charge other fees.
Mortgage lenders typically require borrowers to carry homeowners insurance as a condition of the loan. It protects the borrower from loss and damage due to accidents, theft, and more. The cost depends on factors like the insurance company, the property, and your location, so make sure to shop around for the best deal on an appropriate policy.
Additional coverage, such as flood or earthquake insurance, may be needed depending on your location.
Home maintenance and repairs
As a homeowner, you’re responsible for maintaining and repairing your home. About 45% of homeowners said they underestimated the cost of home maintenance, according to a 2021 survey. Costs can vary widely depending on the condition of your home and the types of repairs or maintenance it needs.
There are different rules of thumb when it comes to budgeting for home maintenance, including:
- Setting aside 1% of the home purchase price every year.
- Budgeting approximately $1 for every square foot of livable space each year.
- Putting away 10% of your monthly mortgage, tax, and insurance payments.
Homeowners association fees
Homeowners association fees cover common areas and shared amenities such as fitness centers, security services, or parking lots. They generally apply to condos and townhouses but also may be required of some single-family homes. HOA fees typically range from $200 to $300 but can vary depending on the location, what type of home you have, and the amenities offered.
Tips for Buying a New Home
Now that you’re familiar with the steps to buying a home and the costs involved, here are several tips that can make the process smoother:
- Compare mortgage offers. Always shop around to find a competitive offer and examine the interest rates and fees, as well as the terms, before accepting a home loan.
- Keep saving. Whether you’re saving for a down payment, closing costs, or emergency home repairs, you can stay prepared by making regular contributions to your savings accounts.
- Perform regular maintenance. Address home maintenance needs on a routine basis to help minimize costly repairs later.
- Get properly insured. Make sure your property is adequately insured to financially cover you in the event of property damage, theft, or accidents. This includes insurance for floods, earthquakes, or other natural disasters if you live in an area prone to those events.
- Strengthen your credit. Having strong credit can help you in many ways when buying a house, and it’s also helpful if you want to refinance your mortgage later. Keep working to improve your credit score by paying debts on time and in full each month.