Buying your first home is a major financial decision—most likely the biggest of your life so far. But this milestone moment is about so much more than money. Purchasing a home is both a logistical decision and an emotional one. After all, this is where you’ll live for the next several years. You’ll have to consider what type of living situation will lead to your happiness now, and in the future. Will you have (more) children? Do you value a short commute or a sprawling lawn? How can you balance your mortgage payment and your love of trying the latest restaurant?
Small wonder that many first-time homebuyers fluctuate between excitement and anxiety, confidence and feeling overwhelmed. Not only is the scale of this purchase immense (you'll sign papers for a loan that stretches 15 or 30 years into the future), but the jargon and process can feel intimidating.
Don't let that stand in the way of your becoming a homeowner—we've assembled tips from experts on how to master the required paperwork, determine the right house for your finances and lifestyle, and land the home of your dreams.
Start early with a deep dive into your financial life.
Before you commit your Saturdays to open houses, spend time reviewing your finances, from what you make to what you owe.
“Take a big-picture overview of your personal financial situation, looking at your assets, looking at any liabilities you have, and figuring out if you are on track for common goals like saving for retirement—just to get a sense of where you stand financially,” recommends Eric Tyson, author of Home Buying for Dummies.
Yes, this is more tedious than gazing at photo galleries on real estate websites, but this information will shape your search and ensure you’re looking at the right homes for your budget and lifestyle. Here’s what to look at:
1. Credit Score
Check your credit score and get a credit report early on, advises Tyson. “You are entitled to a free copy of your credit report once a year from each of three major rating agencies,” he says, noting it’s a good idea to know your score before you apply for a mortgage. That's because your credit score plays a big role in the interest rate you'll get on your mortgage, says Adam P. Smith, president and CEO of The Colorado Real Estate Finance Group, Inc. Don’t despair if it’s low—paying off old, outstanding bills or paying down debt can help improve this number.
Typically, the down payment is 3.5-10 percent of the price of the home, with the gold standard around 20 percent. That can be a significant amount! First-time home buyers, however, are eligible for a Federal Housing Administration loan, which requires, depending on your credit score and other factors, a down payment as low as 3.5 percent. Even with a lower down payment, however, you'll still need to have money in your savings account to use for closing costs, homeowner’s insurance, and the other non-mortgage expenses of homeownership.
3. Your Monthly Budget
As well as looking at the big picture of your finances, create a monthly budget, and compare your take-home to your spending (including any debt payments, retirement savings, and expenses).
“The general rule of thumb is that you don’t want your mortgage payment to exceed 30 percent of your gross income,” says Anthony N. Badillo, CFP®, ChFC®, EA, and Lead Planner at Gen Y Planning, who notes that as a financial advisor, he encourages clients to opt to spend just 15 to 20 percent of gross income on mortgage payments. There are, after all, more costs to home ownership than your mortgage—such as insurance, property taxes, and interest.
Examining your finances brings clarity and structure to your home search. You may find yourself with a to-do list of projects: adjusting your budget so you can save more for your down payment, improving your credit score, etc. Or, it may reveal that given where you want to live, renting makes more sense. In competitive markets, typically seen on the coasts of the country, often renting is more affordable and buying might mean devoting hours of your day to a commute.
If you do decide to move forward in the home-buying process, you won’t regret this time spent combing through your finances. “Going out and buying a home and committing to that much of a financial purchase sends shockwaves through your household finances,” says Tyson. It’s good to know where you stand, he says, before you start your home hunt.