Learn strategies for saving a down payment, shopping for a mortgage, finding the perfect house and more tips for first-time home buyers.
In a climate as complex and competitive as today’s housing market, first time home buyers often experience anxiety. They worry about budgeting for their down payment, qualifying for a mortgage and many other parts of the home buying process. In this post, we offer nine tips for first time home buyers — each of which should make you feel a bit more prepared. From deciding how much money they need for a down payment to determining which mortgage best suits their situation, we explain it all. We’ve categorized our tips for first-time home buyers into a few groups. These include “preparing to buy tips,” “home shopping tips” and “home purchasing tips.” Follow below to learn more about the home buying process as you get ready to buy your first home!
Section One: Tips for Buyers As They Prepare to Purchase Their First House
TIP 1: Start Saving Early
It takes an average 14 years for first time homeowners to save enough money for their down payment. However, the 3 – 20% down payment first time home buyers deposit is not the only cost they need to budget for. Quoting Housing and Economy reporter Swapna Venugopal, Sykes and Kramar explain. They write that “‘aside from the mortgage payment [homeowners must budget for] costs like mortgage interest, property taxes and maintenance.” Homeowners must also budget for closing costs, moving expenses, new furniture and site-specific insurance premiums like those for wildfire, earthquake and flood protection.
Costs to Budget For When Buying Your First House
#1 Down payment
Your required down payment will depend on the type of mortgage you choose, your lender’s terms, and how much money you put down. Experts typically recommend putting 20% down. However, some buyers with excellent credit who qualify for government backed loans could pay less. Those who qualify for USDA loans, VA loans or other FHA loans are able to get loans with as little as 3% down. However, even 3% can be a challenge to save. Buying a $500,000 house? That 3% is $15,000.00. Keep in mind that putting down less than 20% could cause you to incur private mortgage insurance. This adds to your monthly mortgage payment. Investopedia’s Deborah Kearns notes in “How Much Money Do I Need to Put Down on a Mortgage?” most first time buyers split the difference. She writes that “while a 20% down payment was once the standard, the median average is now 12% for many homebuyers.”
Figure out how much money you will need for a down payment early on. This way, you can start setting up a monthly amount going from your checking to savings accounts. Opening a high yield savings account could also help you save for your dream home. Remember, the more money you put down initially, the less you pay in interest and in your overall monthly mortgage payment. Discuss your options with a mortgage lender early in the process to avoid a shock when the down payment comes due.
#2 Closing Costs
As a first time home buyer, you might not know what closing costs are. For those who may be unfamiliar, closing costs are fees and expenses you pay to finalize your home purchase. While buyers and sellers split some closing costs, the amount owed by the home buyer can be $5,000-$10,000 – or even more. As of November 2021, the average closing costs in California amounted to just under $7k. In Massachusetts, closing costs averaged just over $7k and in New Hampshire just over $8k with taxes included. This usually represents between two and five percent of the home’s total purchase price, or about what you would pay a realtor in commission. Both closing costs and realtor commissions are due at the same time, though Torii offers a different approach to home buying.
Which Closing Costs Do Buyers Pay?
In a recent article for Million Acres, Certified Financial Planner Matt Frankel provides an exhaustive list of closing costs traditionally paid by the buyer. These include real estate attorney fees, credit report fees, loan origination fees, inspection fees and appraisal fees. Other closing costs include land survey fees, a small percentage of the lender’s title insurance policy and title search fees. You might also expect escrow deposits, recording fees and underwriting fees. We explain each of these closing costs and more in greater detail throughout our post “How Much Are Closing Costs for Home Buyers?.”
Keep in mind that the closing costs are NOT included as part of your loan. If you are worried about covering closing costs on your purchase, consider looking to closing cost assistance programs. Both local and state housing commissions offer certain closing cost assistance to certain homebuyers. Connect with your local housing commission or reach out to the Department of Housing and Urban Development for more information about payment assistance. HUD might also be able to offer you down payment assistance.
#3 Moving Expenses, New Furniture, Home Repairs, and Upgrades
Most first time home buyers need some cash after their home closes to make updates, move their belongings and buy new furniture. According to Home Advisor chief economist Brad Hunter, every first time homebuyer should budget quite a bit for upkeep. Hunter suggests budgeting around 1% of your home’s purchase price for routine maintenance and emergency repairs each year. Given this, preparing an emergency fund is a vital part of getting ready to buy a house. Second, first time homebuyers must set aside some money for moving costs. Check out this moving cost calculator from Moving.com to estimate what you might pay.
Lastly, you might want to buy a few pieces of furniture after purchasing your home. Of course, there is no need to furnish your entire home as soon as you buy it. However, first time homebuyers should budget at least a few thousand dollars for new furniture in order to create a functional space. Generally, home buyers can expect to pay anywhere between $2,500 and $50,000 to furnish an average sized home. The total amount depends heavily on whether buyers hire an interior designer or purchase high-end products. Those who “do it themselves” and purchase less expensive options will budget for a lower amount.
TIP 2: Decide What You Can Realistically Afford
Next, buyers should talk with a mortgage lender to determine what their monthly mortgage payments would be. These conversations can help you set a price range you are comfortable with. Donna Fuscaldo elaborates in her article “How to Set a Budget for Buying Your First Home” for Investopedia. Fuscado writes that buyers should avoid monthly mortgage payments that exceed 28% of their monthly income.
However, the US Federal Housing Administration (FHA) is “a bit more generous.” The FHA recommends home buyers “spend as much as 31% of their gross income on a mortgage.” Homeowners must consider their overall financial health — including various debts — before determining the right budget for their future home. Try to talk with multiple lenders when discussing monthly payments, interest rates and more.
TIP 3: Work On Your Credit Score
Depending on the lender, homeowners with credit scores as low as 500 could qualify for a mortgage. However, the interest rates for these mortgage loans could make monthly payments untenable. In the end, buyers who purchase a home with a high interest mortgage could pay much more than their house is actually worth. In her article “What credit score is required to buy a house?” for CNBC, Alexandria White explains. She writes that “home buyers should aim to have credit scores of 760 or greater to qualify for the best interest rates on mortgages.” Typically, loans that are not insured by the government – such as conventional and jumbo loans – require higher credit scores. This is when compared to “government-backed loans” like FHA and VA loans.
A conventional loan will require a minimum credit score of 620 and a jumbo loan will require a minimum 680 score. An FHA loan will require only a 500 point credit score with a 10% down payment or 580 with 3.5% down. Neither VA loans nor USDA loans officially define a minimum credit score requirement, though they prefer applicants with scores above 620 or 640 respectively. You can get free copies of your credit report from each of the three major credit bureaus. By pulling your credit report, you can see what you need to work on to improve your score. Keep your balances low, don’t open any new credit cards and pay all of your bills on time to improve your credit score.
TIP 4: Explore Mortgage Options
There are many mortgage options available for all types of buyers. These include everything from USDA loans backed by the U.S. Department of Agriculture to conventional loans. You’ll also have to decide whether you want a 15-year mortgage or a 30-year mortgage. Homeowners must also consider if they want a fixed or variable interest rate. Your lender can help you figure out what your monthly payment would be on each type of mortgage. They will also help you determine what you are eligible for. Don’t be afraid to talk to multiple mortgage lenders to see what programs and terms are available before deciding on a home loan. Remember that mortgage lenders absolutely cannot discriminate against buyers. Learn more about your rights as a prospective homebuyer by visiting the Consumer Financial Protection Bureau website.
TIP 5: Get Your Pre-Approval Letter
A mortgage preapproval is a lender’s offer to loan you a certain amount of money at particular terms (including mortgage rates, other terms). A preapproval letter shows home sellers that you are a serious buyer. In some markets, loan approval can give you an edge over other home buyers. However, in a competitive market, loan approval is an essential part of the homebuying process.
Homeowners might not even look at your application, allow you to put in an offer or schedule a showing without loan preapproval. Be sure to apply for a pre-approval once you are ready to start shopping for a home. Your loan officer can guide you through the preapproval process. Explore our related article “What is a pre-approval vs. pre-commitment?” for more information.
Section Two: Tips for First-Time Buyers As They Actively Shop for a House
For all home shoppers, house hunting is probably the most fun and most stressful part. If you’re a first time homebuyer, visit open houses to get a sense for what you like in a home (or definitely don’t want).
TIP 6: Choose Your “Must-Haves” for Neighborhood and Type of House
Figure out what you need in a home so that you can narrow down your search. Do you want a yard or do you prefer to be in a condominium where someone else is responsible for the outdoor upkeep? In the latter case, can you and your partner afford the homeowners association fees that come with living in a gated community? Are you interested in a fixer upper that needs a lot of work or are you more interested in a turn-key home?
Whatever your preferences, you should decide on what you must have in your home – and what you definitely don’t want. This will help you narrow down what homes you should go see at an open house or on a private showing. Once you find a home you love, visit at different times to get a sense for traffic and noise in the neighborhood.
TIP 7: Choose Your Real Estate Agent Carefully
A good real estate agent will watch the market for homes that meet your requirements and budget. The right real estate agent will never push you to exceed your budget, especially if it will go beyond your mortgage approval. Probably most importantly, your agent will guide you through the negotiation and closing process. Get referrals from other recent home buyers, check references and ask about the agent’s experience working with first-time home buyers before hiring your realtor.
Section Three: Tips for Buyers As They Make Offers and Close on Their First House
Once you’ve found a home, have your mortgage loan figured out and want to move forward, here’s what you need to do:
TIP 8: Don’t Go Beyond Your Budget
As mentioned above, the list price of each home you are interested in is not the total amount you will actually pay. In addition to your down payment and monthly mortgage payment, the homebuyer is usually responsible for a number of closing costs. You may also need additional funds for repairs or improvements, so don’t spend beyond your budget on your first home. Avoid financial stress down the road by setting a budget and sticking to it.
Tip 9: Negotiate
Our final tip is to negotiate with the seller on contingencies, list price and more. Your real estate agent will be able to help you negotiate your offer to a home seller and work in necessary contingencies. In an article for The Balance, Elizabeth Weintraub identifies negotiating skills as one of the “top five reasons to hire a real estate agent.” Weintraub writes that your real estate agent’s fiduciary responsibility means that they must “get you the best possible price for your home.” If not, they must “see to it that you get the best possible deal.”
Thankfully, most real estate agents “are trained to negotiate well, if only from experience.” Perhaps most importantly, Weintraub notes that realtors “have no emotional stake in the outcome that can cloud their thinking.” Not only will real estate agents help you get the best deal possible. They will also prevent you from jumping into a bad buy. Weintraub writes you as the homebuyer “might be willing to come up with $10,000 more to purchase that to-die-for home.” However, “it’s just more money saved if you have an agent who prevents you from taking an unnecessary financial plunge.”
Final Thoughts on Our Tips for First Time Home Buyers
Buying your first house is a big deal. Not only is it one of the largest purchases you may ever make. Your first house will also serve as the setting for many years of memories. We know that the traditional home buying process can be convoluted, archaic and invasive. At Torii, we offer home buyers a streamlined approach to the home buying process. We have integrated automation and machine learning with the personal touch of human-to-human customer service to minimize stress while maximizing efficiency.
Our team of licensed real estate professionals is often lauded for its flexibility, commitment and deep understanding of the market. The Torii platform lets users hunt for their next home, submit an offer and track their progress privately from their own phones. Learn more about our approach to home buying here.