Best Way to Buy a House First Time Buyer

13 Min Read | Sep 24, 2021

Being a first-fourth dimension home buyer is exciting! Only I know it tin can also feel overwhelming—peculiarly when yous see homes beingness purchased at a median of well-nigh $350,000 and bachelor homes flight off the market in simply over ii weeks.¹

With real estate trends like those, you might be tempted to make an impulsive purchase that could hurt your fiscal goals and go on you paying a mortgage well into retirement.

No ane wants that! Trust me, you lot guys, information technology's worth buying your first habitation theright way. And that means buying a home that you love and that doesn't hurt your future coin goals.

Yous may be thinking,Yes, that would exist great, Rachel. But where do I even offset?

I'1000 then glad you asked! I've put together ten tips for first-time home buyers as they tackle the home-buying process. Put these into practice today so your first home is a blessing, not a brunt.

10 First-Time Home Buyer Tips

Pay Off All Debt and Build an Emergency Fund
Apply the 25% Rule to Know How Much House You Can Afford
Salve a 10–20% Down Payment
Don't Forget to Salvage for Closing Costs
Go Preapproved for a Loan Before House Hunting
Find a Home for Sale in Your Price Range
Research Neighborhoods for All-time Fit
Think Long Term
Make a Competitive Offer (That'south Within Your Budget!)
Exist Prepared for Endmost

1. Pay Off All Debt and Build an Emergency Fund

Information technology may non be the first-fourth dimension home-buying tip you lot were expecting, only it is easily downward the well-nigh important. Why? Because owning a home is expensive—much more expensive than renting, even if your monthly house payment will be similar to or cheaper than your current rent amount. When yous own a home, y'all're responsible for everything. All the maintenance. All the mishaps. All the upkeep. And that can add up fast! Earlier you even think about buying your first home, make certain yous're debt-free and have an emergency fundof three to six months of expenses in place.

See how much business firm you can beget with our free mortgage computer!

Buying a dwelling debt-free (besides the mortgage) with a squeamish large emergency fund protects you from huge fiscal setbacks when things become wrong. And trust me, things will go wrong. But considering your money won't be tied up in payments and boatloads of involvement, you'll accept the cash to pay for any expenses that all of a sudden come your mode. Talk about peace of mind.

At present, once you lot're debt-costless, I want you tostaydebt-gratis. So, as you lot're shopping for your first home and getting excited almost decorating and filling information technology with new piece of furniture, make these four words your mantra: Stick to the budget.

The spender in me knows that's easier said than done. Peculiarly if that means you might have some empty rooms for a little while. But your futurity self will thanks! And if you find yourself thinking,Oh well, I'll just put it on credit—end right there! Y'all want the adept money habits you learned while getting out of debt to stick, which means yous've got to end repeating bad ones.

2. Use the 25% Dominion to Know How Much House You Can Afford

Earlier y'all become emotionally attached to a beautiful house, check your monthly budget to make up one's mind how much house you can beget. Make sure your monthly housing costs (including HOA fees, taxes, insurance, etc.) are going to be no more than 25% of your monthly accept-habitation pay.

For example, permit's say you bring habitation $6,600 a month. Multiply that by 25% to found your maximum monthly house payment of $1,650. Simply don't forget that belongings taxes and homeowners insurance factor into that monthly payment. And then, based on a xv-year mortgage with a 4% fixed involvement rate, a 1.14% property tax rate and a homeowners insurance policy that costs $1,200 per year, here are the abode options you tin beget:

$195,000 home with a x% downward payment ($19,500)
$225,000 home with a xx% down payment ($45,000)
$253,000 abode with a 30% downwardly payment ($75,900)
$288,00 domicile with a 40% down payment ($115,200)

Remember, these are just estimates. Employ our mortgage calculator to try other combinations and detect the correct mortgage amount, involvement rate and down payment for your budget. And since property taxation rates and the cost of homeowners insurance vary, cheque with your existent estate agent and insurance visitor for estimates to calculate how much house you tin can afford.

3. Salve a x–20% Down Payment

If saving up to pay cash for the total price of a house isn't reasonable for buying your first home, at least salve for a downwardly payment of x–twenty% or more. A 20% down payment gets yous out of paying for private mortgage insurance (PMI), which protects the mortgage company in case y'all can't make your payments and end upwardly in foreclosure. PMI usually costs 1% of the full loan amount, and you'll be charged that 1% every year. Then it can really add a lot to your monthly mortgage payment.

The Worst Mortgages for Kickoff-Time Home Buyers

If a 20% downward payment seems out of accomplish, first-time dwelling heir-apparent programs that offer unmarried-digit down payments may sound tempting. Simply don't use them! These options will cost you more than in the long run. And recall—if it seems similar a deal for you now, information technology's because information technology's an even better bargain for your lender in the end.

Here are some depression-to-no downwardly payment mortgage options to avert:

Adaptable-Rate Mortgages (ARMs): Artillery might seem great with a depression initial interest rate, but they allow lenders to arrange the charge per unit to transfer the risk of rising interest rates (and monthly payments) to you.

FHA Loans: You may be able to get an FHA mortgage with as fiddling every bit 3.v% downward, merely you lot have to pay a mortgage insurance premium (similar to PMI) for the life of the loan. That's thousands of dollars that won't get toward paying off your mortgage.

VA Loans: VA loans allow veterans to buy a habitation with no downwardly payment. Only if the real estate market shifts, you could easily owe more than the marketplace value of your dwelling house. These loans too conduct a bunch of fees and usually charge interest rates that are college than those for conventional loans.

The Best Mortgage for First-Time Abode Buyers

I only recommend a 15-twelvemonth, stock-still-rate conventional mortgage with a 10–twenty% downwards payment. Here are the reasons why:

A 15-twelvemonth term does create a higher monthly payment, simply you'll pay off your mortgage in half the fourth dimension. That means in 15 years, you completely own your home and can put what you'd spend on the side by side xv years of firm payments toward edifice wealth and giving. Not to mention, a 15-year term lets you have a lower interest rate and save tens of thousands of dollars in interest.

A fixed-rate conventional loan keeps your interest rate the same for the life of the loan, which protects you from the increasing expenses of rising rates.

How a 30-Yr Mortgage Compares

If you're considering a thirty-year mortgage for your first home because of the lower monthly payment, please, don't do information technology. When you lot look at the math on a xv-year versus a xxx-year, you'll realize you pay a whole lot more coin on a 30-year mortgage in the long run. Like tens of thousands of dollars more.

Look at it like this: Let'due south say you lot desire to buy a $225,000 house with a 20% downward payment. That means you need a mortgage for $180,000. Here's how the toll differences break down between your 15-year and the 30-year mortgage options.

fifteen-Year at 4%	Vs.	30-Year at four.v%
180	Number of Payments	360
$1,608	Monthly Payment	$ane,189
$59,658	Total Involvement Paid	$148,334
$239,658	Full Amount Paid	$328,334

At present, that's $88,676 in savings with a 15-year fixed-charge per unit mortgage—non to mention you'll exist payment-freefifteen years sooner. I mean, near $xc,000 in savings—hi!

iv. Don't Forget to Salvage for Endmost Costs

Along with your downward payment, you'll likewise need to pay for closing costs. On average, closing costs are about 3–4% of the purchase toll of your habitation.ⁱⁱ Your lender will give you a specific number so you know exactly what to bring on closing day. These fees pay for of import steps in the dwelling house-buying process, including:

Appraisement
Home inspection
Credit written report
Attorney
Homeowners insurance

Allow'south meet how this plays out with our case of a $225,000 home. If you multiply $225,000 by the higher 4% closing cost average, y'all'll notice that y'all need $ix,000 for closing costs. Now, let's add together that to your 20% down payment of $45,000. Together, the ii equal $54,000, which is about what you'll need to salve to pay for the down payment and the closing costs on your outset house.

Tackle saving for your closing costs and down payment with the same corporeality of intensity I tell people to use when they're getting out of debt and building a full emergency fund to get information technology washed as fast as possible. In fact, it's okay to put retirement savings on agree for a short flow of time to salve for a domicile—only y'all've got to hustle!

5. Get Preapproved for a Loan Before House Hunting

Once you're confident you have enough greenbacks saved to pay for closing costs and 10–20% of your abode, you're gear up to handle the residuum by talking to a mortgage lender.

Get prequalified for a loan and accept the extra time to become a preapproval letter before you start your dwelling house search. Preapproval shows sellers that you're a serious buyer, which is a great manner for first-time dwelling buyers to get ahead in a competitive market place.

To get preapproved, your lender will need to verify your fiscal information (proof of income, taxes, etc.) and submit your loan for preliminary underwriting. If you lot live a debt-complimentary lifestyle like I teach, you may need to find a lender who believes in debt-gratuitous homeownership and will work with first-time home buyers who have no credit score.

6. Observe a Home for Auction in Your Price Range

Near first-time domicile buyers typically notice the home they purchased online or through a real manor agent. Doing both sets you upwardly for success!

Detect homes you like online and send them to your real manor amanuensis then they accept a skillful idea of what you're looking for. Then they can use a multiple listing service (MLS) to discover homes that encounter your criteria in your desired areas.

An MLS is created, maintained and paid for by existent estate professionals, and it can really help first-time home buyers like you lot to view the largest pool of properties for auction in the marketplace. Real manor agents also provide valuable marketplace expertise and tin can help yous find groovy deals on homes as presently as (or before) they're listed.

7. Inquiry Neighborhoods for All-time Fit

Be careful non to buy a home based on the belongings and price solitary. According to an NAR survey, home buyers are more willing to compromise on a home'southward condition (20%) and size (18%) than on the quality of its neighborhood (vi%) and distance from a school (2%).ⁱⁱⁱ Then brand certain you factor neighborhood quality and location into your decision.

Ask your real estate agent for data on criminal offense rates and the quality of schools around your prospective neighborhoods. Summate your new commute times to see if they seem manageable. Visit the neighborhood at unlike times and days to check for traffic weather and dissonance levels and to see if people are comfortable existence outdoors. Only choose a neighborhood that y'all and your family feel good nigh.

Once you've narrowed down the neighborhoods, attend a few open houses. Looking at homes that are for sale—fifty-fifty if they're not a perfect fit for y'all—is a peachy way to learn more most the area. When yous do eventually detect a house you love, you'll know how your place compares to better or worse homes in that neighborhood.

viii. Call back Long Term and Be Patient

When it comes to buying, a good strategy is to find the virtually affordable house in the best neighborhood. If y'all buy at the bottom of the price range in a expert neighborhood, you'll have more room to build dwelling house value. Futurity buyers who are shopping in a $200,000 neighborhood won't be looking for a $300,000 home.

For example, let'south say you find a domicile that's the only one on the block without wood floors and granite countertops. If you have the cash to make those upgrades, y'all'll exist able to add instant value to your home!

Make sure to pay attending to home values and economic activity in the expanse. Are home prices rising or declining? Are businesses booming or closing? You can tell a lot most how valuable a neighborhood is past what's happening in the community. Information technology may take a footling longer to find a home that volition be a practiced investment in the long run, but especially for your first home, information technology is then worth it.

9. Make a Competitive Offer (That'due south Within Your Budget!)

Permit's say you found the home yous want and can afford. Since yous're already preapproved for a loan, you're set to brand an offer. If yous're a commencement-time habitation buyer, information technology may be hard to know how much you should offer. That's when you lot tin rely on the expertise of your real estate agent.

Inquire your amanuensis to help yous make sure your offering is competitive only as well inside your budget and the home'due south value. Be careful not to brand an impulsive offering that'south higher than y'all tin can afford merely to knock out the competition. A personalized letter might help your offer stand out among multiple bids in a hot market.

10. Be Prepared for Closing

Once a seller accepts your offer, the closing process volition begin. Keep things running smoothly past knowing what to await when endmost on a house. The average closing process takes 53 days, which gives y'all enough of time to tackle closing items.⁴ A real estate agent will schedule the remaining steps from abode inspection to final walkthrough, and they'll keep you informed about any roadblocks.

As you lot prepare for closing, make certain you read every document and ask your real estate agent to explain anything you don't understand—especially before you lot sign the official contract for the home transaction. It'll beyour signature on the documents, so you'll be the one responsible for anything you lot sign.

Gear up to Get Started?

Your start dwelling house is a large purchase—perhaps fifty-fifty the biggest 1 you'll take e'er made upward to this point in your life! Because of that, you don't desire to risk messing this up. A existent estate professional will take the weight off your shoulders by helping you find a home, negotiate a deal, and see the process through until endmost.

Need help finding an expert you lot can trust with such an of import purchase? Bank check out our RamseyTrusted Endorsed Local Providers (ELP) program. We merely recommend real manor agents who shut at to the lowest degree 35 home transactions per year or close more home transactions than ninety% of the agents in their market. Not to mention our agents must maintain excellent levels of customer service and are personally coached by our Ramsey team.

Trust me, these pros are the best! Find an agent now!

Rachel Cruze

About the writer