Are you a first-time home buyer?
Where do you start if you want to buy a house?
What qualifies you as a first-time home buyer?
What credit score do you need?
And how much money should you put down?
Keep reading to find the answers to these questions and understand the entire process for your first-time home buyer journey!
First Things First: What Qualifies You as a First-Time Home Buyer?
Generally, this is a pretty easy answer- a first time home buyer is someone who has never owned a home before.
But if you have owned a home before, you could still qualify as a first-time home buyer.
According to the Department of Housing and Urban Development (HUD), a first-time homeowner is someone who hasn’t owned a home in the past three years.
So if you (and your home buying partner, if you have one) haven’t owned a home in the past three years, the government considers you a first-time home buyer, and there are some extra benefits to you in the home buying process.
Which leads me to step 1…
Step 1: Learn About First Time Home Buyer Programs
If you take some time to do your research, it may save you a LOT of money.
Are you are a teacher, police offer, or EMT? check out the Good Neighbor Next Door program.
Are you are a veteran? Check out the VA loan program.
If you’re interested in buying in a rural area, check out the USDA home loan program.
If you don’t qualify for any special programs but you don’t have a lot of money for a down payment, check out an FHA loan.
There are a lot of programs to help first-time home buyers, so do your research!
Step 2: Set your budget BEFORE you get approved for a mortgage
Do NOT let the bank be the one to tell you what you can afford.
Trust me- they don’t have your best interest at heart.
First things first, if you don’t have a budget yet, check out my complete guide to creating a budget.
When you have your budget all set, check out my guide to calculating how much mortgage you can afford.
Remember that your monthly budget line for your new home has to include:
- Home insurance,
- Any HOA fees
- PLUS utilities and regular home expenses.
Step 3: Save for Your Down Payment AND Closing Costs
No matter how much your mortgage will be, you will have to find some money to put into a down payment.
For a conventional mortgage loan, you will be expected to put down 20% of the value of your new home.
On top of your down payment, you will also have to pay 2-5% of the property’s value in closing costs.
Closing costs typically include lender fees, title or attorney fees, and prorated taxes and insurance.
What If I Don’t Have a 20% Down Payment?
20% of a mortgage is obviously A LOT of money.
If you’re buying in a low cost of living (LCOL) area, this may mean saving $22,000 for a $100,000 property.
If you’re buying in a high cost of living (HCOL) area, this may need saving $143,000 for a $650,000.
Good news: If you don’t have a 20% down payment, you can still get a mortgage!
However, lenders are going to think that you are a higher risk, and you’re going to have to pay more because of it.
When you apply for a mortgage pre-approval, you’ll likely hear the letters “PMI.”
PMI stands for “private mortgage insurance,” and basically means “money to protect the lender in case you can’t make your payments.”
Unlike your principal and interest payments, which decrease your overall mortgage, PMI is just an insurance that goes straight to your lender.
PMI can typically range from .55% to 2.25% of your original loan amount, and it can add up.
When I bought my home as a first-time home buyer, I didn’t have a big down payment, so I took out an FHA loan with a $100/month PMI charge.
Given the problems that my inspector missed before I bought my house (I’ll explain that in a minute), I really could have used that $1200 each year.
Can I Get Rid of PMI?
There are only two ways to prevent PMI:
- Put 20% or more down on your mortgage, or
- Pay your mortgage balance down to 80% of the value of your home.
One important thing to keep in mind (that your lender usually won’t tell you):
if you have a Conventional mortgage, your PMI will automatically fall off when you reach 80%.
If you have an FHA mortgage, you will have to refinance to remove your PMI when you reach 80%. Otherwise, you will pay PMI for the remainder of your loan.
Step 4: Check Your Credit Report
Your credit will be pulled a few different times throughout your journey to buy your home, so make sure you have an idea where it is in advance.
If you don’t know how to pull your credit score for free, check out my guide to getting your credit score and credit report for free.
Make sure you review your credit report with a fine-toothed comb.
Each part of your credit report will be scrutinized, so pay close attention to any incorrect information.
A lot of people ask a very important question: What credit score does a first-time home buyer need?
The easy answer is the higher the score, the better your chances of qualifying for a mortgage AND the better your interest rate will be.
This doesn’t mean you need an 850.
If you’re in the “Excellent” range of 750 to 850, you will get the best rates available.
If your score is under 550, take some time to focus on building up your score before you apply for a mortgage.
Need help understanding your credit score and how to raise it?
Check out my guide to the 5 factors that determine your credit score.
Step 5: Get Pre-Approved For a Mortgage
Once you have your budget set, your down payment saved, and your credit score checked, it’s time to start contacting lenders for a pre-approval.
A pre-approval is a tentative promise from the lender to lend you a certain amount of money at a certain interest rate for a certain term.
When you get preapproved for a mortgage, your lender will assess your financial situation.
You will typically have to provide your lender with:
- Your last two years’ tax returns and W-2s,
- 30 days of paystubs,
- 2 months of bank accounts statements, and
- A signed authorization for a hard credit inquiry.
Once your credit is pulled by a lender for a mortgage, you have a 45-day window where ANY credit check from ANY mortgage lender is recorded as a single inquiry.
This means you should take the time to apply with multiple lenders, especially since a different lender may pre-approve you for a better mortgage.
Step 6: Make a List of Your “Needs” and “Wants”
While you’re waiting for your mortgage pre-approval, sit down and write out your new home needs and wants.
Have you fallen in love with a specific neighborhood?
Must have an attached garage?
Need 3 bedrooms and at least 2 bathrooms?
Really want a home with a pool?
Write it all out, making sure you note your “need” items vs. your “want” items.
Once you have your pre-approval and you know what you want, it’s time to start looking for your new home!
Step 7: Choose a Realtor and Visit Homes that Fit Your Criteria
While some home buyers choose to skip a realtor, I highly recommend a realtor to a first-time home buyer.
Ask your family, friends, neighbors, and coworkers for references for a realtor.
Anyone who had a good experience shouldn’t hesitate to make a recommendation.
If you don’t have anyone to ask, check out Nextdoor or other local forums.
It’s worth finding a good realtor for your first home.
You’re about to make a decision that will impact your finances for the rest of your life.
Wouldn’t you rather have someone guiding you through the process who knows what they’re talking about?
Show them your lists of needs and wants, talk to them about your budget, and let them work their magic.
Just remember: a realtor can find houses that Zillow and Redfin haven’t yet.
Trust me on this one.
Step 8: Make an Offer and Negotiate
When you go house shopping, ALWAYS take a checkbook.
When you’re ready to make an offer, you’re going to need it!
Since they know the market and your budget, chat with them about the best strategy for making an offer.
Make sure you include any contingencies that would keep you from going through with the offer
A contingency might be something like major problems the current owners won’t fix or if the home appraises for less than the value of your mortgage.
Then you’ll have to write a check for “earnest money.”
Earnest money is proof to the seller that you’re serious about wanting to purchase their home.
Remember that the check is typically not cashed until closing and will go towards your down payment.
But that doesn’t mean you should write a check for money you don’t have- make sure it’s in your bank account.
Ask your realtor what’s customary in your area for earnest money, since it can run between .5% and 2% of the home’s purchase price.
If the seller chooses another buyer, it’s time to get back out there and try again.
If the seller negotiates with you, check in with your realtor to decide what is in your best interest.
And if the seller accepts your offer, it’s time to apply for your mortgage.
Step 9: Apply for Your Mortgage
Since you’ve already been pre-approved, this should be a pretty smooth process.
Contact the lender you chose from step 5 and get a list of the remaining information they’ll need.
Keep in mind that it typically takes around 30 days to close your mortgage.
Pay close attention to your emails and return your lender’s phone calls ASAP to keep the process moving smoothly.
Step 10: Schedule a Home Inspection
While your lender puts together your mortgage, it’s time to find a home inspector.
Take it from someone who had a bad home inspector: get a good home inspector!
Reach out to your contact list again and ask if anyone has a home inspector that they recommend.
Whatever you do, DO NOT skip this step.
You will have to pay around $300-$500 out of pocket for an inspection.
I promise it is worth spending a few hundred dollars to avoid missing something that will cost you thousands over time.
Trust me on this one!
Step 11: Schedule a Home Appraisal
A home appraisal will determine if home’s true market value matches the cost that you’re about to pay for it.
Typically your lender will have an appraiser that they recommend.
If you want to find an appraiser on your own, you may be able to save some cash.
You will have to pay around $300-$500 out of pocket for an appraisal.
Again, DO NOT skip this step.
It exists to protect you and your investment.
Step 12: Shop Around for Homeowners Insurance
Your lender will not let you close on a mortgage without insurance.
Research local insurance providers, make some phone calls, and find an insurance provider who aligns with your needs.
Compare rates and coverage from multiple providers to make sure that you’re getting exactly what you need.
For a comprehensive guide on purchasing homeowner’s insurance, check out this guide from US News & World Report.
Step 13: Take One Final Walkthrough Before Closing
Once your mortgage is finalized and you’re ready to close, schedule one final walkthrough.
Your final walkthrough should take place as close to closing as possible.
The seller should be completely moved out, so there should be no surprises when you move in.
Make sure that:
- Any requested repairs from the inspection are complete
- No new issues have come up since inspection
- All agreed-upon items are still in the home (ex: if the washer and dryer are supposed to stay)
- All systems and appliances are functioning correctly
Step 14: Sign the Papers
You may be worn down from the long process.
You just want to move into your new home.
And you will need a hand massage from signing all of those pages.
But you’ve made it to the end!
Once your funds have transferred and you have the property title in your hand, you’re done!
You are officially a homeowner!
What Should I Do Next?
Over the next few weeks, you’ll want to:
- Move in!
- Call utility companies and have accounts transferred into your name
- Make copies of important documents and store them in a safe place.
- Change or rekey your locks.
- Change your address with USPS and anyone else who needs to know where you live.
- Once your finances have recovered from the down payment withdrawal, start a home maintenance sinking fund and build up your emergency fund.
And most of all, enjoy your new home!
Are you looking for a new home? Does the first time home buying process scare you? Does this post help? What remaining questions do you still have?
Share your answers in the comments!
Want to be the first to read my new posts? Sign up for my email list and receive a FREE printable Level Up Financial Freedom Roadmap download!
Related Debt & Savings Posts:
Your New Mortgage: How Much Home Can You Afford?
Budgeting 101: Your Complete Guide to Building Your Budget
How a Sinking Fund Can Keep You On Budget and Out of Debt
Emergency Fund 101: Why You Need an Emergency Fund