First-Time Homebuyers: What to Know Before Looking for a Home

Before you start house-hunting, read this guide

couple excited at being in their first home together hugging surrounded by boxes around
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Buying a home is a big move. It requires time, money, and research, and when you’re just starting out it can feel a little daunting. Fortunately, the right preparations and up-front knowledge can alleviate this stress—and make the process easier, too.

If you’re a first-time homebuyer looking for a home, here are the steps to get started.

Step 1: Understand Your Homebuying Budget

Your first step toward buying a home is to understand your budget. You need to have a good handle on your finances, as well as know what you can afford to spend on a monthly basis for your new home.

To determine this, you should:

  • Know how much you bring in on a monthly basis (you and any co-buyers)
  • Tally up your monthly expenses and debts
  • Assess your savings scenario

Most experts recommend spending no more than 30% of your income on housing. This rule can help you determine an appropriate monthly payment that fits your budget. You can also use a mortgage calculator for a more exact number. Keep in mind there will also be additional costs that may come with being a homeowner, like maintenance and repairs, utilities, property taxes, mortgage insurance, homeowners insurance, and more. 

Step 2: Gather the Down Payment

Keep in mind that you’ll need to have a certain amount of cash on hand to fund your home purchase. In general, you’ll need a down payment, normally 3% to 20% of the purchase price. You’ll also need cash to cover closing costs, which can usually add up to another 2% to 5% as well as moving expenses. 

Your required down payment will depend on the type of mortgage loan you choose. FHA loans require as little as 3.5% down while conventional ones generally require at least 3%. In order to qualify for the best mortgage rates and save more money, however, you may need to put down as much as 20%. 

There may be some exceptions. If you qualify for a VA loan (for veterans and military members) or a USDA loan (for homes in eligible rural areas), you may not be required to come up with a down payment at all.

During your homebuying journey, your mortgage lender can tell you the types of loans you may be eligible for and the down payment that’s required for each. Don't be afraid to shop around for a mortgage too to get the best rate.

There are many ways to fund your down payment. You can use money in savings, ask a family member for help, or crowdfund a gift via a platform like HomeFundIt. Depending on your income and credit score, you may qualify for a number of different first-time homebuyer loans. There are also down payment assistance programs that can lower your costs or even cover them completely in some cases.

Step 3: Assemble the Mortgage Paperwork

You don’t need to get a loan until you have an accepted offer on a house. Once you do, however, you’ll want to close on the loan quickly. So it’s better to get a jump on the mortgage process even before you start the home search.

Get prequalified and preapproved for a mortgage so that you can better understand how much a lender will loan you and what interest rate you might receive once you’re ready to officially secure a mortgage.

Most lenders will require you to submit a significant amount of paperwork to show that you can afford to make your monthly payment and, ultimately, repay the loan. This documentation can take some time to assemble. 

Prepare a folder with the following documents:

  • Two years’ worth of tax returns
  • Your recent W-2s
  • Your most recent pay stubs from the last 30 days
  • Your two most recent bank account statements
  • Other asset and investment statements (401(k)s, bonds, stocks, etc.)

If you have everything organized ahead of time, you can potentially close on a loan within weeks.

The lender will also check your credit during the preapproval process. Your credit score and history will influence the loan programs you’re eligible for, as well as what interest rate you will get.

Step 4: Get Preapproved for a Mortgage

A quick internet search will tell you that there are hundreds of mortgage lenders and banks you can utilize for your mortgage loan. That’s good news for you as a buyer, since rates and loan terms can vary a great deal. So make sure to shop around and get quotes from multiple lenders. One study found that getting just one additional rate quote can save you as much as $1,500.

Once you’ve settled on a lender, get preapproved for a loan. This is typically a quick process, especially if you’ve assembled your paperwork ahead of time. You’ll fill out an application, submit the required documents, and agree to a credit check. The lender will assess your mortgage options based on your credit and financial scenario and send you a preapproval letter stating the amount and interest rate of the loan you’ll likely qualify for.

Tip: You can include this preapproval letter in any offers you submit to show sellers you’re serious about purchasing their home.

Keep in mind that you don’t have to take a final loan for the amount you were preapproved to borrow. While a lender thinks you can afford the payment associated with that loan balance, it may be more than you feel you can comfortably afford. Maxing out your homebuying budget could put additional financial stress on your household, so don’t be afraid to take a smaller loan.

Step 5: Start the Home Search

Once you know your budget, have the right partners in place and are preapproved for your loan, the fun part starts—shopping for and visiting homes.

While you may want to start by scouring various real estate sites like Zillow and Trulia, you may also want to enlist a real estate agent to guide you on your way. Buyer’s agents can help you vet properties, negotiate offers, and recommend other professionals you may need during the process.

As with your mortgage lender, you should shop around and interview several real estate agents before deciding who you want to use.

When you find a home you’d like to make an offer on, you should:

  • Include your preapproval letter
  • Use local comparable sales to focus in on the right offer amount
  • Consider including contingencies, like a home inspection contingency
  • Write an offer letter to personally appeal to the sellers
  • Be ready to negotiate if there are other interested buyers

After a seller accepts your offer, you’ll move into the final stages of purchasing the house. Your lender will begin processing your loan, and you can opt for a home inspection of the property (if you included this contingency in your offer) and a home appraisal before your purchase moves toward closing. You may need an attorney present at closing so be sure to understand your state’s requirements. Most mortgage loans close in around 42 days or less. 

Article Sources

  1. U.S. Department of Housing and Urban Development. "Rental Burdens: Rethinking Affordability Measures," Accessed Oct. 30, 2019. 

  2. Consumer Financial Protection Bureau. "Preparing to Shop: Determine Your Down Payment," Accessed Oct. 30, 2019. 

  3. Freddie Mac: Down Payments and Closing Costs 

  4. HUD.gov: Let FHA Loans Help You 

  5. Veteran's Association: VA Home Loans

  6. Consumer Financial Protection Bureau: Create a Loan Application Packet

  7. Freddie Mac: Why Are Consumers Leaving Money On The Table?

  8. New York State Division of Licensing Services: "Disclosure Form for Buyers and Sellers," Accessed Oct 30., 2019

  9. Consumer Financial Protection Bureau, Do I need an attorney or anyone else to represent me when closing on a mortgage?

  10. Ellie Mae: Ellie Mae® Origination Insight Report, July 2019