The Ultimate Guide for First-Time Homebuyers

What Is a First-Time Homebuyer?

The definition of a first-time homebuyer goes beyond those who have never purchased a home. For example, you may be considered a first-time homebuyer if you meet any of the following criteria:

• You haven't owned a home in the past three years.
• You're a single parent who has only owned a home with a previous spouse while married.
• You're a displaced homemaker who has only owned a home with a spouse.
• You've only owned a residence without a permanent foundation.

If you fall into any of these categories, here are some steps you can take to become a homeowner.

1. Review Your Finances

A home is a major financial commitment, so it's important to make sure your finances are in impeccable shape before you start the homebuying process. In particular, here are some aspects of your financial situation you'll want to evaluate.

Credit

You can get approved for a conventional mortgage loan with a credit score of 620 or above, and some government-backed loan programs may even go lower than that. However, you'll have a better chance of securing the best interest rates if your score is in the mid-to-upper 700s or higher.

When you register with Experian, you can get free access to your Experian credit report and FICO^® Score^☉. You can also get free weekly credit reports from all three consumer credit bureaus (Experian, TransUnion and Equifax) at AnnualCreditReport.com.

With these resources, you can get the full picture of your credit profile and, if needed, identify potential steps you can take to build credit to buy a house.

Tip: Mortgage lenders typically review your credit reports from all three credit bureaus when evaluating your creditworthiness. That's why it's important to review each report carefully before you apply for a mortgage.

Learn more: Which Credit Scores Do Mortgage Lenders Use?

Debt-to-Income Ratio

Your debt-to-income ratio (DTI) indicates how capable you are of taking on more debt. You can calculate it by adding up all of your monthly debt payments and dividing the sum by your gross monthly income.

In general, lenders like to see a DTI of 36% or lower—and the lower you go, the better your chances of qualifying for a lower interest rate. However, some may be willing to go up to 50% or higher in some cases.

Paying down credit card balances and smaller loan balances can help lower your DTI. Keep in mind, though, that lenders may exclude payments on loans when you have 10 or fewer payments left from your DTI calculations.

Learn more: How to Calculate Your Debt-to-Income Ratio

Savings

The minimum down payment for a first-time homebuyer is 3% for conventional loans, and some government programs may allow you to buy with no down payment at all. However, making a larger down payment can help you reduce your monthly payments by lowering the loan amount and potentially qualifying for a better interest rate.

In addition to your down payment, you'll want enough savings to cover closing costs, moving costs and potential maintenance and repair expenses.

As you evaluate your budget, figure out how much you want to save up and then create a plan to set aside enough money each month to meet your savings goal by the time you're ready to buy.

Learn more: How Your Down Payment Affects Your Mortgage

Budget

The type of house you can afford is largely dependent on how much you can manage to put toward your monthly mortgage payment. That includes principal, interest, taxes and insurance.

If you don't already have one, create a budget by reviewing your income and expenses over the past few months. It may even help to categorize your expenses so you can identify areas where you can cut back if necessary.

Once you know how much you can comfortably spend each month, use a mortgage calculator to get an estimate of how much you can borrow. You can also get prequalified and compare your numbers.

Mortgage calculator

2. Understand How Fixed-Rate and Adjustable-Rate Mortgages Work

There are two general types of interest rates you can get with a mortgage loan: fixed or adjustable. Here's a quick summary of how each one works and when it makes sense.

Fixed-Rate Mortgage

With a fixed-rate mortgage (FRM), your interest rate remains the same throughout your loan's repayment term. As a result, your monthly payment is unlikely to fluctuate much (property taxes and insurance premiums may still change over time).

An FRM is best for homeowners who prefer predictability. However, your rate will be higher compared to the initial fixed rate on an adjustable-rate mortgage.

Adjustable-Rate Mortgage

An adjustable-rate mortgage (ARM) offers an initial fixed period of usually five, seven or 10 years, during which your interest rate stays the same. After that, though, your rate can go up or down based on market conditions.

There are some caps on how much your rate can change, but you're still taking on the risk of interest rates potentially rising over time. That said, the starting rate is lower compared to an FRM.

If you're buying a starter home and plan to move before the initial fixed period ends, an ARM can be worthwhile. You may also choose to refinance the loan into an FRM to avoid fluctuating rates, but there's no guarantee that rates will be better at that point in the future.

Learn more: Common Types of Adjustable-Rate Mortgages

3. Research Mortgage Options

Lenders offer a variety of different loan options, and the right one for you will depend on your situation and goals. Here's a look at some of the most common types of mortgage loans:

Conventional Loan

A conventional loan is effectively any mortgage loan that isn't insured by a government agency, and it's the most common type of mortgage loan.

Most conventional loans are conforming loans, which means that they conform to the standards set by Fannie Mae and Freddie Mac, the two government-sponsored enterprises that own many mortgages in the U.S.

If you put down less than 20% on a conventional loan, you'll likely need to pay for private mortgage insurance (PMI), which protects the lender if you default on your payments. PMI typically costs between 0.2% and 2% of the mortgage balance each year, but you can remove it once your loan-to-value ratio (LTV) reaches 80% or lower.

Government-Insured Loan

There are three main types of government-backed loans, including:

• FHA loan: Designed for people with lower credit scores and moderate income, Federal Housing Administration (FHA) loans require a down payment of 3.5% for borrowers with credit scores of 580 or higher, but you can get approved with a score as low as 500 if you put down 10% or more. FHA loans come with upfront mortgage insurance and ongoing insurance, which can be difficult to remove.
• VA loan: You can qualify for a VA loan—backed by the Department of Veterans Affairs (VA)—if you're an eligible member of the military community or a surviving spouse. These loans don't require a down payment, and instead of paying for mortgage insurance, you'll pay an upfront funding fee.
• USDA loan: You can get approved for a U.S. Department of Agriculture (USDA) loan if you're planning to buy a home in an eligible rural area and have low to moderate income. The loan program doesn't require a down payment, but there is an upfront and ongoing guarantee fee that you can't remove.

Jumbo Loan

A jumbo loan is a conventional loan that doesn't conform to Fannie Mae and Freddie Mac's guidelines for loan size. If you're planning to borrow more than the conforming loan limit, consider this option.

Keep in mind, though, that eligibility requirements are more stringent with jumbo loans, and interest rates may be higher. You'll also face PMI if you put down less than 20%.

4. Get Preapproved

Getting preapproved for a mortgage loan can tell you how much you can borrow and what your loan terms might look like. It also shows potential sellers that you're likely to get approved for financing.

It's a good idea to get preapproved with multiple lenders so you can compare your offers. The preapproval process requires you to provide the following information and documentation:

• Name, date of birth and Social Security number
• Income and employment information
• Tax returns
• Recent bank statements
• Expected down payment and desired loan amount
• List of debts

The lender will also run a hard inquiry on your credit reports to evaluate your credit history. However, if you complete the rate-shopping process in a short period, the multiple inquiries will only count as one for credit-scoring purposes. That period is 14 days for older scoring models and 45 days for newer ones.

Once you get preapproved, it's typically good for 60 to 90 days.

Learn more: How Long Does a Mortgage Preapproval Letter Last?

5. Find a Real Estate Agent

A real estate agent is a licensed professional who can help you find and buy a home. Having an experienced agent can save you a lot of time and help you negotiate a better deal with potential sellers. Here are a few things you can do to find a good real estate agent:

• Ask for referrals. Get recommendations from friends, family members or coworkers who've recently bought or sold a home.
• Check credentials. Make sure they're licensed and have experience in your local market, including knowledge about neighborhood trends, pricing and inventory.
• Read reviews. Look for agents with positive client feedback and a track record of success.
• Interview multiple agents. Compare communication styles, experience and strategies before deciding.

It's important to note that some agents may use the term Realtor instead of real estate agent. This just means that they're an active member of the National Association of Realtors.

Learn more: Who Pays Real Estate Agent Commission Fees?

6. Start House Hunting

Once you find an agent, they'll ask you about your needs and wants in a new home. This information will help them curate a list of potential properties you can visit to find the best fit for you.

Some of the details you'll want to list out and consider include:

• Property type
• Price budget
• Location
• Square footage
• Lot size
• Number of bedrooms and bathrooms
• Age
• Features (for example, swimming pool, fireplace and central heating)

Depending on how hot your local market is, you may need to arrange a showing quickly after finding a listing you like, so you can compete with other buyers.

7. Make an Offer

When you find a home you like that fits into your budget, work with your real estate agent to make an offer on the home. Here are some things to keep in mind:

• Amount: The amount of your offer will depend on the listing price, comparable homes in the area, necessary repairs or renovations and competition from other buyers.
• Contingencies: Depending on the state of the market, you may or may not be able to add contingencies to your offer. For example, an appraisal contingency lets you back out of the deal if the appraisal comes in lower than the loan amount. A financing contingency lets you back out if you can't secure financing.
• Earnest money: Earnest money is a good faith deposit showing that you're serious about buying the home. If you back out of the deal for an unapproved reason, the seller can keep the funds. If you don't, you can put it toward your down payment or closing costs. Earnest money typically ranges from 1% to 3% of the purchase price. Higher amounts may be necessary in a competitive market.

8. Finalize Your Loan Application

If the seller accepts your offer, you'll work with your lender to finalize your loan application. This may require updated information about your employment and income, along with other documentation, so the lender can get a complete picture of your creditworthiness.

Be sure to stay in communication with your lender throughout this process and answer any questions or documentation requests promptly.

Upon approval, the lender will give you a loan estimate showing the exact terms of the loan it's offering to you. At this point, you can lock in the rate to prevent it from going up before you close on the loan.

9. Do Your Due Diligence

As you prepare for closing, you'll need to do some due diligence to meet lender requirements and make sure that you're getting what you expect. Due diligence may include:

• Seller disclosure: In this document, the seller will outline the condition of the house, including any potential problems that may influence your decision to move forward with the purchase.
• Home inspection: A professional inspector will come out to the home and review its condition, test home systems and suggest repairs.
• Appraisal: A professional appraiser will walk through the home, evaluating its condition and features. They'll also run an analysis of comparable properties in the area, so they can tell you what the property is worth.
• Title search: A title company will complete a title search to determine if there are liens or other ownership claims that may impact the seller's ability to transfer ownership to you at closing.
• Insurance: Before you can close, you'll need to obtain homeowners insurance. You'll want to shop around and compare quotes from multiple insurers to find the best fit. Keep in mind that you can often qualify for a discount if you insure your car and home with the same company.

Tip: As you complete your due diligence, you may be able to use what you find to negotiate further with the seller. For example, you may request that they complete certain repairs before closing or provide a credit, which you can use to complete the repairs yourself.

Shortly before closing, the lender will perform one final review of your credit history and income to make sure you still qualify for the loan terms it's offering. If something has materially changed, it could result in a higher interest rate or even denial.

Learn more: How Long Does Mortgage Underwriting Take?

10. Close on Your Home Purchase

As you near the closing date on your home purchase, you'll receive various disclosures you'll want to review.

Once you've completed every step up to this point, you'll be clear to close. At this point, the title company will schedule your closing meeting and tell you how much cash you'll need to provide to finalize the transaction.

Also known as cash to close, this includes your down payment, closing costs and prepaid expenses. It may be reduced by lender and seller credits. Depending on the title company, you may have the option to pay what you owe with a cashier's check, certified check or a wire transfer.

At your closing meeting, you'll go through the closing documents and sign them to complete the process and get your keys.

Learn more: The Complete Guide to Closing on a House

The Bottom Line

Buying a home is a multi-step process that can take several months to complete. However, it's important to start preparing your finances and credit long before you start looking at houses.

Throughout the homebuying process, it's crucial that you safeguard your credit health by continuing to practice good credit habits and avoiding new credit applications other than for your mortgage loan.

You can keep track of your credit with Experian's free credit monitoring service, which includes access to your FICO^® Score and Experian credit report. You'll also get real-time alerts when changes are made to your report, making it easier to address developing issues as they arise.