First-time homebuyer's guide & FAQ
You’re ready to make the move from renter to homeowner. But where should you start? You’ve probably had people telling you your whole life that buying a home is the single most important purchase you’ll ever make — and guess what? They’re right.
Buying a home enables homeowners to build wealth and helps to secure their financial future. We’ve detailed every step of the process, and have simple advice to help you avoid a few of the common challenges with buying a first home.
Learn more about the process of buying a first home, or contact us to ask specific questions. You can also start a mortgage application if you think you’re ready.
First-Time Homebuyer Definition
According to most federal agencies, including HUD, a “first-time homebuyer” is defined as any individual who has no ownership in a principal residence over the last three years. Have questions about whether you're technically a first-time homebuyer or not? Talk with your loan officer.
What are the steps to buying a first home?
Before you’re a happy homeowner, you’re a prudent house hunter. You'll have to gather information, visit new neighborhoods, check your finances, and explore opportunities to get a good deal on your first mortgage.
How to comparison shop for a house for the first time is a lengthy topic. It's deserving of its own handbook. Whether you’re a single individual or part of a growing family, you’ll want to weigh needs and wants with the full scope of your purchasing power.
Asking yourself questions such as: “Where do I want to live and why do I want to live there?, “How much can I really afford” and “Am I looking for a new home or one I can buy at a discount and fix up myself?” will help you focus on aspects that matter most you.
There are several reasons why people buy homes. A house can also be an investment or vacation home. However, most homeowners use their home as their principal residence. This is especially true for first-time homeowners.
Before you can start finalizing your decision on what kind of house to buy, you’re going to have to take an honest look at your entire financial situation. Reviewing your finances ensures that you can afford your first home.
Which factors should I consider before buying a home?
- Credit score
- Monthly income
- Debt-to-income ratio
- Savings and assets
Take a moment to seriously consider with what you afford. Conducting a review of your finances is the best way to know where you stand.
If you decide you’re ready to plunge into the world of homeownership, then it’s recommended you seek pre-approval. In today’s competitive housing market, this is an essential streamlining step to take as a first-time homebuyer.
Credit score*
Before you set out on your journey to buy a home, you will need to take a moment to look up your credit score. While there is no specific credit score minimum for first-time homebuyers, you’ll have a much better chance of securing a mortgage on the terms you want if your score falls into the following credit score ranges:*
- Good (670-739)
- Very Good (740-799)
- Exceptional (800-850)
Because credit scores are an updated, aggregate expression of creditworthiness, it has become essential to lenders as a way to measure the likelihood of on-time repayment. The average credit score for first-time homeowners is 716.
Credit scores alone do not determine whether you are approved for a mortgage or not. However, they certainly factor in to a large degree. Your credit score can also impact the mortgage rate offered and overall costs. As a first-time homebuyer, you don’t want to have poor credit.
Fortunately, there are programs in place by the federal government that enable homebuyers to get a mortgage with a credit score that falls into the Fair range. 'Fair' is considered to start at 580. With some added stipulations, such as a higher down payment, individuals with Poor credit scores may also receive federally backed loans if they meet the lenders other requirements.
Before you make an offer on a house, make sure you’ve been exercising the kind of financial maturity that’s typically associated with a healthy credit score. It takes time to build good credit, but it’s your best ally when applying for a mortgage.
Monthly income
One of the most important factors lenders weigh when considering mortgage approval is your monthly income. Simply put, earned income is what enables you to pay back your mortgage. This is also a key factor in a lender's decision to approve your home loan.
There are a range of loans available to today’s borrowers and almost all of them will require you to demonstrate proof of monthly income. It’s very important that you can show lenders that this income is stable and consistent; that’s part of the reason recent college grads with good salaries, for example, might have difficulty gaining approval. In their case, the income is there but it doesn't show the consistency that lenders want.
Debt-to-income ratio
You can’t mention income in the context of mortgages without discussing debt-to-income ratio. DTI is a measurement of monthly income compared to recurring monthly expenses. It includes the proposed mortgage premium. Your DTI is often shown as a ratio or a percentage.
For conventional loans (those backed by Fannie Mae and Freddie Mac), it’s recommended that DTI does not exceed 45%. This can be extended to 50% in some instances for individuals with high credit scores, savings and liquid assets.
Savings & assets
Savings are the backbone of any large purchase, and lenders will need to know how much money you have on hand when determining if you’re a qualified, low-risk applicant for a first-time mortgage. Lenders always prefer to work with borrowers who can demonstrate both creditworthiness and ample savings. They are aware that life is full of unexpected events that can quickly gobble up available funds (and put mortgage payments in jeopardy). Having enough savings on hand shows your mortgage provider that you’re prepared to make monthly payments even if an emergency arises.
Given the number crunching, it can be very useful to have a mortgage calculator at your disposal to help you figure out exactly what you can afford. However, even the best industry calculator can’t get inside your head. You’ll have to ultimately determine what you’re comfortable with spending on your house as a first-time homeowner.
Are there requirements or incentives for first-time homebuyer loans?
Because both the federal and state governments have long believed in homeownership as a key driver of personal and generational wealth, there are certain programs, policies and products in place to provide incentives to first-time homeowners. The following are some of the government programs for first-time homebuyers you can take advantage of.
- Conventional loans with low down payments options. Credit scores must be at least 620.
- FHA loan: A popular federally backed loan program for buyers with lower credit scores, and down payment options.
- USDA loan: down payment options on designated rural and suburban properties.
- VA loan: Home loans for service members (and their spouse) with down payment options.
- State first-time home buyer programs: Many state housing authorities offer an array of discounts to first-time homebuyers in their respective states, including down payment options, help with closing costs and tax credits.** Check with your specific state to learn more.
- Dollar Homes: These are foreclosed homes for sale by the government at reduced prices. Check the HUD website for more information.
- Good Neighbor Next Door: Home price discounts for law-enforcement officers, firefighters, first responders and educators. In an effort to foster neighborhood revitalization, discounts can be as much as 50% off the list price of a home. Check the listings in your state to see what is available.
How to take the next steps toward your first home
Once you’ve determined your budget, conducted an audit on your own finances and explored government options that incentivize first-time homebuyers, you’re ready to take the next steps in the homebuying process. It's time to get pre-approval. At this stage you'll give your lender with all the necessary paperwork and making an offer on a home.
This is when your chosen lender goes into overdrive: checking credit scores, scrutinizing employment and bank account information and determining your debt-to-income ratio (DTI). If everything matches up, your loan proceeds toward the closing table.
It’s worth noting that even if you’re preapproved for a mortgage, it’s not a done deal until the underwriting department signs off on the loan. Underwriting guidelines are complex and are often subject to change. For example, have you made any large recent purchases that are only now becoming evident in your credit score? Details like this can affect determinations from underwriting.
How to make an offer on a first home
Now that you're working in with a real estate agent, it’s now time to make an offer. This is not just a monetary offer. The contract can also include certain terms and conditions.
Typically, your agent will make the offer to the seller’s agent, with all the necessary terms and conditions included. For example, you might want to include contingency language that addresses the state of your offer should a home inspection reveal alarming structural problems or expensive repairs.
Hiring a trusted, accredited home inspector is an important part of the home-buying process and one that first-time homebuyers need to write into their offers. A good real estate agent will advise you on matters such as this and any other conditions that need to be included in the offer.
An appraisal is typically ordered during this period as well; the price (usually a few hundred dollars) comes out of your pocket as part of the closing fees. Appraisals are important because lenders want to make sure the the property value is sufficient collateral for the loan. They also want to be able to recoup the cost of the home in the event that you default.
If everything goes as planned, the seller accepts your offer and the mortgage goes into final approval and then closing. In some cases, lenders offer digital contactless closing.
How can a first-time homebuyer get started?
Buying a house is serious business. It’s doubly serious when you’re a first-time homebuyer and not yet experienced in the process of finding a home and getting a mortgage.
Our team is here to support you at every step of your journey to a new home. Start by applying for a pre-approval and our team will contact you to discuss next steps.
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* Sample FICO Score ranges. Rate does not provide credit counseling or credit repair services.
** Rate does not provide tax advice. Contact your tax advisor with any tax related questions.