11 First-Time Homebuyer Tips You Need To Know

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When my wife and I were first-time home buyers, there was a lot we didn't know. There are many ins-and-outs of buying your first home that most first-time homebuyers need to know. In this post, I'll go over my top 11 first-time homebuyer tips for those who are about to buy their first home.

1. Build an Emergency Fund

Before you consider a home purchase, build an emergency fund. Can you imagine spending your life's savings on your down payment and closing costs only to have a financial emergency a week later? You'll want three to six months' worth of living expenses in your emergency fund.

The fastest way to fund your emergency fund is to take on a temporary side hustle. Check out this post for over two dozen side hustle ideas.

Put your emergency fund in an online savings account away from the rest of your finances. I recommend CIT Bank's Savings Builder account for such. By separating your emergency money from your checking account, you are much less likely to dip into it for a non-emergency.

2. How Much House Can You Afford?

When deciding on a first-time home purchase, consider how much money the house will cost you over the long term. Your mortgage payment, plus homeowner's insurance, taxes, and HOA fees, should never be greater than 28% of your gross monthly income and your total debt (loan plus other debt minimum payments) should not be higher than 36% of your gross monthly income.

Other factors to consider are your lifestyle choices. How much money do you need for your kids? How much money do you need for travel? Will you need money for an upcoming expense, such as going back to school or buying a new car? Is there a chance you or your significant other could lose their job?

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Important first-time homebuyer note: The amount of money a bank approves for you to buy a house may not be the actual amount you can afford. You must take into consideration the what-ifs. Be wary of the situation where you end up taking on too much debt and run out of money.

3. Improve Your Credit Score

As a first-time homebuyer and in order to get the best mortgage rates, you'll want to have as high a credit score as possible when you apply for your mortgage. Some tips for improving your credit score include:

  • Correct any errors on your credit report: Check your credit report with Equifax, Experian, and TransUnion. If you find any errors, contact the three bureaus to dispute the errors.
  • Pay down as much debt as possible: The amount of debt you have compared to the maximum amount of debt you can have affects your credit score heavily. By paying down high balances, your credit score will increase.
  • Don't apply for credit outside of your mortgage application: When you apply for credit, your credit score dips for a few months. Ideally, don't apply for credit for at least twelve months leading up to when you apply for your mortgage.
  • Don't close unused credit card accounts: If you aren't using some of your credit cards, leave the accounts open, and consider using each card a few times per year to keep the card active. By keeping your credit card accounts open, you will maintain a higher maximum credit limit, which improves your score.

4. Save for a Downpayment and Closing Costs

Whether you get a traditional mortgage, a VA loan, an FHA loan, or similar, you'll need some amount of money as a down payment and for closing when you're buying a home. In some instances, you can put down 0% or as little as 3%, but beware that when you put a minimum amount of money down on a house, your monthly payment for the duration of the mortgage will be higher. Additionally, if your house drops in value early on, you may become underwater in your mortgage. This means your house is worth less than your mortgage.

For most people, if you don't put 20% down on your house, you'll have to pay PMI, or private mortgage insurance. PMI generally comes out to 1% of your total mortgage loan. That means if you take out a $200,000 mortgage loan, your annual PMI may be $2000, paid monthly (approximately $167).

If you're saving up 20% for your home loan, it may take you a few years to get there, depending on the price of the home you're looking at and your income and debt situation. My wife and I put down 20% on our first home, a condo, using money we saved up from working in school and my first job out of college, combined with money we received when we got married.

5. Check Out Programs for First-Time Homebuyers

Many states have first-time homebuyer assistance programs. These assistance programs help with things such as downpayment and closing cost funds. They may also help with getting a better mortgage interest rate.

NerdWallet covers many first time home buyer assistance programs by state so that you can find one local to where you're going to live.

6. Don't Make Decisions Based on Emotions

Homeownership is a big deal. It's important not to get caught up in the emotional aspect. When you're looking for your first home, many things can happen to trigger your emotions, which may lead to poor decisions.

An example is falling in love with a house, but the price is too high. You may fall in love with a house that you can just barely afford. This might lead you to purchase it, only to realize a year down the line that you can't really afford it. Since there's no backing out now, you might have to sell your house or find a way to make more money.

You might also feel the need to rush the process because you want the house so badly. When you rush the process, you may not shop around for the best mortgage rates or miss an important detail when reviewing the home inspection.

The bottom line: Take your time with the home-buying process and buy a home you're able to afford.

7. Compare Lenders and Get Preapproved

When comparing mortgage lenders, two things I always look for is what is the mortgage rate, and what are the closing costs. I also ensure that there are no penalties for paying back the mortgage early.

Remember, even a 0.5% difference in the interest rate of a conventional fixed-rate loan could save you over $12,000 on a $200,000 mortgage over 30 years.

Once you find a lender you're comfortable with, seek preapproval. Mortgage lenders will look into several key factors, including:

  • Your credit history and score
  • Debt-to-income ratio
  • Employment history and length of current employment
  • Income
  • Assets and liabilities including all of your bank, brokerage, and retirement accounts

8. Find a Good Real Estate Agent

Hire a real estate agent who has a lot of experience representing home buyers. Your agent should be experienced in finding homes in your price range and meeting your specific needs. They should be able to help you make an offer to the seller and negotiate when needed.

Interview at least three real estate agents and request references from them. Take a close look at the contract they offer and ensure you're comfortable with their terms.

When it comes down to it, your realtor should know the area you're looking at as well as understanding how much money you're looking to spend on a house. They should also be sensitive to your needs as a first-time homebuyer.

9. Hire a Good Home Inspector

First-time homebuyers may be excited at the prospect of their future home while not paying heed to the home inspection. Hire a good home inspector that will go over every detail with you and answer all of your questions.

You might be tempted to go with your real estate agent's suggested inspector, but make sure you do your research first and check a few inspectors' credentials. Find out their training and experience and what type of service you're getting for the price they're charging.

Consider asking for a sample report from various inspectors to see how they do their inspections and what you may expect in your own report.

10. Shop Around for Homeowners Insurance

Your lender will require homeowners insurance before they close on the house. Homeowners insurance covers repairs to your home if your home is damaged by anything covered in your policy. It also covers liability if someone is injured on your property.

Make sure to have enough homeowners insurance to cover a complete replacement of your home. Additionally, shop around at different insurance companies and find the best rates. Oftentimes bundling your auto insurance with your homeowners insurance can save you quite a bit of money.

11. Close on the House

Bring all required documents to closing and show up on time. At the closing, you'll sign all the necessary paperwork, and funds will be transferred to the seller. You'll get a key to your new home and wrap up any final details.

$10,000 EACH YEAR

Download our 11 step guide on how to save up to $10,000 each year. You’ll also get regular money-saving tips sent straight to your inbox!

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Congratulations! You've purchased your first home!

Wrapping It Up

Everyone is a first-time buyer at some point, and following these tips will ensure a smoother purchase of your first home. This post went over the top tips to help first time homebuyers. Shopping for homes is exciting, and I wish you all the best in your home purchase!

Until next time!

When my wife and I were first-time home buyers, there was a lot we didn't know. There are many ins-and-outs of buying your first home that most first-time homebuyers need to know. Click to learn my top 11 first-time homebuyer tips you need to know if you're about to buy your first home.



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