Tips for First-Time Homebuyers: What You Need to Know

Financial Tips for First-Time Homebuyers

Buying a home can be a worthwhile move for those who no longer want to rent, but it's also a huge financial transaction and commitment that takes a lot of preparation. Below are some tips for preparing your finances from start to finish.

1. Improve Your Credit Score

Mortgage lenders will run your credit before approving you for a home loan. Minimum credit score requirements vary depending on the lender and the type of mortgage you're seeking, but you'll generally need a score of 620 or higher to qualify for a conventional mortgage. You could get a government-backed mortgage with a score as low as 500, however.

Start by checking your credit report and FICO^® Score^Θ, which you can do for free with Experian. If your credit score needs some work, you can take steps now to improve your credit before applying for a mortgage. That includes:

• Paying your bills on time: Your debt payment history is the most important factor used in calculating your credit scores.
• Reducing your credit card balances: Paying down your credit cards reduces your credit utilization rate, which in turn can help your scores.
• Avoiding new credit applications: Avoid taking on other new credit until your mortgage is finalized.
• Disputing any errors on your credit report: You have the right to dispute items on your credit report you believe are inaccurate or potentially fraudulent.

Learn more: What Credit Score Do I Need to Buy a House?

2. Build an Emergency Fund

As a first-time homebuyer, you can expect surprise expenses at some point. If your roof springs a leak or your air conditioning calls it quits, you'll be grateful to have an emergency fund to see you through.

Most experts recommend socking away at least three to six months' worth of living expenses in your emergency fund, but you might set a higher target if you have unpredictable income. Using a high-yield savings account for your fund helps your money earn more interest. You can start by setting up automatic monthly transfers to your savings account. You can also use financial windfalls to bolster your cash reserves.

If you intend to ask a close friend or family member for down payment help, make sure you understand your lender's gift letter rules. It's generally not recommended to borrow money for a down payment, either as borrowed funds may not be allowed as part of a down payment. Even if they are, they could affect your debt-to-income ratio (DTI) enough that your loan application gets denied.

3. Set a Budget

Having a strong budget is always important, but it's especially crucial when buying your first home. Understanding your income and expenses can help you determine how much house you can afford.

One benchmark is to keep your monthly housing costs at or below 28% of your gross income. For example, if your pretax income is $10,000 per month, your housing costs would ideally not exceed $2,800. That includes your monthly mortgage payment, homeowners insurance and property taxes.

Getting preapproved for a mortgage should clarify your borrowing power—but remember that you don't have to (and shouldn't) borrow up to your approved limit if it stretches your budget.

Learn more: How Much House Can I Afford Calculator

4. Save for a Good Down Payment

Your minimum down payment will depend on your lender and the type of home loan you're applying for. Putting down 20% has long been the golden rule, and doing so has its perks, but first-time homebuyers can get approved with much less. Some conventional loans allow for down payments as low as 3%. Qualified buyers may be able to get an FHA loan insured by the Federal Housing Administration (FHA) with a 3.5% down payment—and some government-insured mortgages have no down payment requirements at all. (More on this below.)

Research average home prices in your area, then review your budget to determine your down payment goal. Just be aware that if you put down less than 20% on a conventional loan, you'll likely be on the hook for mortgage insurance. This protects the lender if you default on your mortgage, but it will increase your monthly mortgage cost.

5. Plan for Closing Costs

You'll also need to account for closing costs, which typically range from 2% to 5% of the sale price. Closing costs often include:

• Loan origination fees
• Mortgage points
• Home appraisal and inspection fees
• Title search services
• Title insurance premiums
• Real estate attorney fees
• Prepayments of homeowners insurance premiums, mortgage insurance premiums and property taxes

6. Consider Move-In Expenses

You'll receive the keys to your new home once the deal is finalized. The next step is moving in, which comes with costs of its own. Hiring movers could set you back anywhere from $882 to $2,567, according to HomeAdvisor. You might also need to rent a moving truck, pay for packing materials and buy new furniture, appliances and home decor. These are costs you'll want to plan for ahead of time. Otherwise, you might accumulate new debt to cover your moving expenses.

Home-Shopping Tips for First-Time Homebuyers

Housing inventory can fluctuate and will depend largely on whether it's a buyer's or seller's market. Having said that, here are some tips that can make finding a home a little easier.

1. Find a Reputable Real Estate Agent

An experienced real estate agent can be one of the most important people on your homebuying team. They should be familiar with housing trends in your area, which can help you make a competitive offer that's aligned with your budget. Your real estate agent can also hand-pick listings for you based on your criteria—and help you negotiate with sellers and understand your contract.

Up until 2024, the standard practice was for the home seller to pay the commission for both the buyer's agent and seller's agent. This typically worked out to 5% to 6% of the sale price, which was split between both agents. But those rules recently changed, and it's now the buyer's responsibility to compensate their agent—unless the seller agrees to cover it during negotiations.

2. Choose a Home Type

Ask yourself what you're ultimately looking for in a home. Your ideal property might be a traditional single-family home, townhome, condo, apartment or duplex. Your desired square footage and budget will be important factors. You'll also need to consider whether you want to live somewhere that has a homeowners association (HOA) that maintains the community and may provide amenities. If so, you can expect to pay HOA fees.

3. Research Neighborhoods

Which part of town do you ideally want to live in? Home values will likely be higher in neighborhoods that:

• Are conveniently located near grocery stores, restaurants and entertainment venues
• Have low crime rates
• Are in desirable school districts

Also consider your own unique needs. For example, you might prefer living in a walkable area that's close to public transportation or somewhere with an easy commute to work.

4. Look Online

If you're a first-time homebuyer, the internet can provide a wealth of free information. Websites like Zillow and Realtor.com allow you to browse local listings, take virtual tours, compare prices and view the sale history of specific properties. You can view a home's public tax history as well. This kind of research can give you a feel for your local housing market. You might even come across a listing that your real estate agent missed.

5. Attend Open Houses

You'll want to view properties in person before making an offer, and your real estate agent should know of upcoming events. You can also search online for open houses in your area. If you haven't partnered with a real estate agent yet, you can attend open houses on your own without having to sign a written buyer agreement. But be prepared to enter into an agreement once you begin working with an agent.

Mortgage Tips for First-Time Homebuyers

Unless you're buying your home in cash, you'll need a mortgage to finance the transaction. Getting approved for a mortgage is a multi-step process. We've got you covered with these straightforward tips.

1. Explore Mortgage Options

The first step is deciding which type of home loan you want. Below are the most common options available to first-time homebuyers:

• Conventional loans: These home loans are originated and serviced by private mortgage lenders. You'll need a down payment of at least 3% for a conventional loan, and you can cancel your mortgage insurance once you have 20% equity in your home.
• FHA loans: These mortgages, which are insured by the Federal Housing Administration, have low down payment requirements and softer credit criteria than conventional loans. That could be a good option for some first-time homebuyers.
• VA loans: These loans insured by the Department of Veterans Affairs (VA) are designed for U.S. service members and veterans, as well as eligible family members. Lenders often require a credit score of 670 or higher, but there are no down payment requirements.
• USDA loans: These mortgages are backed by the U.S. Department of Agriculture (USDA) and geared toward low-income buyers in specific rural and suburban locations. Qualified borrowers can get approved with no down payment. Most lenders require a minimum credit score of 640.

Learn more: What Type of Mortgage Loan Is Best?

2. Compare Rates and Fees

Once you understand your options, it's time to shop around and compare different mortgage lenders. You'll want to research:

• Loan fees
• Typical closing costs
• Average mortgage rates
• Mortgage options
• Loan amounts
• Customer reviews

Gathering these details can help point you toward the right mortgage lender for you.

3. Get Preapproved

It's wise to get preapproved for a mortgage before you start house hunting. Your lender will review your financial information and conduct a hard credit inquiry, then provide a preapproval letter that outlines your expected approved loan amount and interest rate. You can use this information to make a reasonable offer on a home—and show sellers that you're a legitimate buyer. You'll still have to submit a formal mortgage application when the time comes, and preapproval doesn't guarantee final loan approval, but getting preapproved can streamline the process.

Learn more: Prequalified vs. Preapproved: What's the Difference?

4. Move Forward With the Sale

If you make a successful offer on a home, you'll arrange a home inspection and officially apply for a mortgage. Your application will go through your lender's underwriting process to ensure that you meet all of their lending requirements. You can expect them to order a home appraisal during this time.

You might need to provide additional documentation, such as a gift letter, at this time. You'll also use this time to secure a homeowners insurance policy. If all goes well, you'll pay your closing costs and finalize the transaction.

Closing Tips for First-Time Homebuyers

The final step in the homebuying process is to close the deal. Here are some important things for first-time homebuyers to know before going to the closing table.

1. Review Your Closing Disclosure

Early in the loan process, your lender should provide a loan estimate that outlines the basics of your mortgage—like the expected term length, loan amount, interest rate, monthly payment and closing costs. After your loan is approved, the lender is legally required to send you a closing disclosure three business days before closing. This document lays out the final terms and closing costs for your home loan.

Review this document closely for any errors or changes to your closing costs. Keep in mind that your final closing costs may be higher if your financial situation has changed since receiving your loan estimate.

2. Do a Final Walk-Through

It's in your best interest to do one final walk-through of the home to make sure the seller made any repairs you requested. You can also use this time to test out the appliances and scan the home for any issues you may have missed the first time around.

If you come across something, you can negotiate with the seller before closing the deal—or back out altogether if there's a significant problem. However, you might lose a portion of your down payment known as your earnest money deposit.

3. Gather the Required Documents and Funds

Be prepared to provide the following when closing on your home loan:

• Government-issued ID
• Proof of homeowners insurance
• A cashier's check or wire transfer to cover the remainder of your down payment

Learn more: Checklist of Documents You'll Need for a Mortgage

4. Ask Questions Before Signing

The last thing to do is sign your loan documents. If you have any questions or concerns, now is the time to get clarification. You might choose to bring a real estate attorney to the closing table for additional guidance. Your real estate agent, escrow company and title insurance company may also have to sign off on the transaction.

Learn more: The Complete Guide on How to Get a Mortgage

The Bottom Line

If you're a first-time homebuyer, you'll need to find a home, secure financing and go through the closing process. That may sound like a lot, but remember that it isn't an overnight process. Going at your own pace and working with an experienced real estate agent can help take the stress out of buying a new home. Taking the time to strengthen your finances and improve your credit score can also go a long way in getting approved for a mortgage.