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First-Time Homebuyers Guide: How To Buy a House

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Front of a home with lawn.

Buying a house has been a rite of passage for generations of Americans, but it’s also a major financial commitment. How major? Well, the median home price in the United States is $359,900 as of July 2021, a nearly 18% increase from the year before, according to the National Association of Realtors.

With so much money at stake, it’s important to fully understand the steps to buying a house as a first-time homebuyer.

Learn how to buy a house with this comprehensive guide:

FAQ for First-Time Homebuyers

Before jumping into the process of buying a house, here are answers to a few common questions that first-time homebuyers ask.

Am I ready to buy a house?

There are many factors to weigh when deciding if you’re ready to transition from renting to buying a house. After all, there’s a big difference.

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. In addition to maintenance and repairs, they must pay property taxes, homeowners insurance premiums, and any homeowners association fees. Some of these expenses are tax deductible, which makes them less expensive than they may appear upfront. Still, costs can vary widely depending on location and other factors.

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. Owning a home can be rewarding, but it’s also more complicated than renting.

What’s the difference between 15-year and 30-year mortgages?

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.

What are the other costs of owning a home?

In addition to the down payment and monthly mortgage payment, homeowners typically cover closing costs and pay ongoing expenses, such as maintenance, repairs, property taxes, and homeowners insurance. Check out the other costs to consider when buying a house.

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Getting a Mortgage

Few first-time homebuyers can afford to pay the full price of a house upfront. That makes getting a mortgage an essential part of the process of buying a house.

Mortgage preapproval

A mortgage preapproval letter indicates how much a particular lender is willing to let you borrow, and is typically valid for 30 to 90 days. Preapproval is based on the lender’s assessment of your ability to repay the loan, which comes from examining your credit history, income, assets, and debts.

Though it isn’t a guaranteed loan offer, a preapproval can be crucial in helping you find a good real estate agent and making an offer that sellers will consider seriously.

Credit score

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.
  • 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 required credit score to get approved for a mortgage varies by loan type and lender. Learn more about the different types of home loans.

Minimum Credit Score Requirements by Mortgage Type

Mortgage TypeMinimum Credit Score
Conventional loan620 for conforming loans, though lenders can set higher requirements
FHA loan500, though lenders can set higher requirements
VA loanNo minimum credit score set by the program, though lenders can have their own requirements
USDA loanNo minimum credit score set by the program, though a minimum score of 640 is recommended

Debt-to-income ratio

Mortgage lenders evaluate your debt-to-income ratio when reviewing your loan application. This ratio helps predict if you can afford your mortgage payments and still have enough money left over each month to pay your other expenses.

Your DTI ratio is calculated by adding up your monthly debt payments and dividing the sum by your gross monthly income. Generally, a DTI ratio of 43% or less is needed to get a mortgage.

Related: How To Buy a House With No Credit

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Types of Home Loans

One of the first steps to buying a house is deciding which type of home loan is best for your situation. Below are common mortgage options to consider.

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, may 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, you’ll pay more interest. If they drop, you could save a significant amount.

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.

Conventional mortgages

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-controlled companies 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:

  • Conventional loans can be used for your primary home, as well as a second home or investment property.
  • The minimum down payment for conforming loans is 3%.
  • Costs for conventional mortgages are typically lower compared with FHA loans, another mortgage type backed by the Federal Housing Administration.

Cons:

  • The credit score requirements for conventional mortgages are usually higher compared with FHA loans.
  • Conforming loans have limits that can affect your ability to buy a more expensive home.
  • Private mortgage insurance is typically required for down payments of less than 20%.

Who it’s good for: Buyers with good credit who can afford a down payment of at least 20%.

Jumbo mortgages

Conforming jumbo mortgages raise the limit to how much homebuyers can borrow and are only available in specific counties. Nonconforming jumbo loans allow buyers to borrow even more — up to $1 million or $2 million — but eligibility requirements vary by lender.

Pros:

  • Jumbo mortgages exceed the maximum limits on conforming loans, which are $548,250 in most counties, or $822,375 in high-cost areas.
  • Taking out a jumbo mortgage means you can buy a more expensive home.

Cons:

  • Jumbo mortgages typically require a larger down payment and good credit score.
  • Overall costs for a jumbo mortgage may be more expensive compared with conforming loans.

Who it’s good for: Buyers who need to borrow more money to purchase a larger house or a home in an expensive area.

Government-insured mortgages

The federal government offers several programs that can help eligible first-time homebuyers get a mortgage.

FHA loans

The Federal Housing Administration offers a home loan program through private lenders. It requires a minimum down payment of 3.5% and a minimum credit score of 500.

Pros:

  • With an FHA loan, you can put less than 20% down.
  • Closing costs are low.
  • Credit score requirements for FHA loans are typically more lenient compared with conventional loans.

Cons:

  • FHA loans are only available when purchasing a primary home.
  • Loan amounts are capped at $356,362, or $822,375 in high-cost areas.
  • FHA loans require mortgage insurance.

Who it’s good for: Buyers who don’t meet the credit score requirements for a conventional mortgage.

VA loans

The Department of Veterans Affairs offers the VA Home Purchase Loan Program, which is available to service members, veterans, and their surviving spouses, if eligible. The program doesn’t require a down payment, but buyers get a discount on the VA funding fee if they put at least 5% down.

Pros:

  • Neither a down payment nor mortgage insurance is required for VA loans.
  • There’s no minimum credit score set by the program (but lenders may create their own requirements).

Cons:

  • To take out a VA loan, you must meet minimum military service requirements.
  • Buyers pay a mandatory VA funding fee, which is typically 1.25% to 3.3% of the loan amount.

Who it’s good for: Eligible service members, veterans, or their surviving spouses.

USDA loans

The Department of Agriculture offers a mortgage program for low-income homebuyers in rural areas. Eligibility is based on income and other factors like location and property type.

Pros:

  • This program considers rural applicants who don’t have access to safe and sanitary housing, or other loan options.
  • USDA loans may be used to build, buy, relocate, renovate, or repair a home.
  • No down payment is usually required.

Cons:

  • The home must be in an eligible location, which generally means a rural area with a population under 35,000.
  • Borrowers must meet different requirements concerning citizenship, income limits, property size and value, and more.
  • Mortgage insurance is required for USDA loans.

Who it’s good for: Buyers who live in an eligible rural area and would otherwise be unable to get a mortgage.

First-time homebuyer programs

As a first-time homebuyer, you may be eligible for financial assistance. State programs can offer help with down payments, closing costs, and more. Check out local programs in your state to find out what types of assistance are available.

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How To Buy a House in 9 Steps

If you’re ready to become a homeowner, here are nine basic steps to buying a house.

1. Assess your finances

Evaluate your current income and spending to determine how much money you can afford to put toward a home and still meet your other monthly expenses. The goal is to see how much 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 money 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 toward a down payment. Putting at least 20% down allows you to avoid private mortgage insurance.

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 can likely secure financing. Sellers often require proof of a preapproval before accepting your offer on their home.

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

Explore the different types of homes that fit into your budget. Also, think about how long you plan on owning your home and what kind of place you want to live in. There are many different factors to consider.

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 with a small outdoor space, like a yard. 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.
  • 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 a purchase agreement that outlines the terms of the sale, as well as any contingencies required for the transaction to go through.

6. Apply for a mortgage

After you submit a mortgage application with the required documentation, 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, and you have 10 business days thereafter to decide if you want to accept the loan. It’s smart to shop around and get estimates from different lenders.

When you finally choose an offer, your lender may request additional paperwork for underwriting. The lender will review your information, order a home appraisal, and check the title for any claims against the property, such as unpaid taxes. Then, your mortgage application will be approved, denied, or — in cases where information is missing — suspended.

7. Get the home inspected by a professional

After your offer is accepted, schedule a home inspection ASAP so you can find out if the home has any major problems — and calculate how much any necessary repairs may cost. Depending on what the home inspection finds and the terms of your purchase agreement, you can ask your real estate agent to renegotiate your offer or rescind it.

8. Buy homeowners insurance

Mortgage lenders typically require borrowers to have homeowners insurance, which covers losses and damage from unexpected events like fire or theft. You also may need additional coverage, such as flood insurance, depending on your location. Make sure to shop around for the best deal on an appropriate policy, and show proof of coverage to your lender before closing.  

9. Close on the home

Before signing anything, do a final walk-through of the home 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 take your time and 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.

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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.

Mortgage closing costs

Closing costs pay for the process of buying a house, which includes appraisal fees, tax service provider fees, and title insurance. Closing costs run about 2% to 5% of the loan amount.  

Private mortgage insurance

If you put down less than 20% on a home, 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. In general, you can cancel PMI once the principal balance on your mortgage drops to 80% of your home’s appraised value.

Homeowners insurance

Lenders require borrowers to carry homeowners insurance as a condition of their mortgage. 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 its location.

Home maintenance and repairs

As a homeowner, you’re responsible for paying to maintain or repair your home. Costs can vary widely depending on the condition of your home and the type of repairs or maintenance it needs.

Homeowners association fees

Homeowners association fees cover common areas and shared amenities such as fitness centers, security services, or parking lots. They typically apply to condos and townhouses but also may be required of some single-family homes. HOA fees generally range from a few hundred dollars to over $1,000, and can vary depending on the location, what type of home you have, and the amenities offered.

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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.

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The Bottom Line on Buying a Home for the First Time

Being a first-time homebuyer may feel overwhelming and intimidating. By understanding the steps to a home purchase, your mortgage options, and the true cost of owning a home, you can approach the process of buying a house with confidence.

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