First-Time Homebuyers: 10 Basic Things You Should Know

first time home buyer

If you’re a first-time homebuyer, before you start house hunting, you’ll need to know the basics of home buying.

Because this will be the first home you will purchase you’re prone to make mistakes, especially if you don’t learn everything you can about the home buying process before you jump in.

In this article, we’re going to show you everything you need to know about buying your first home, what kind of mortgage to get, how to get a low rate, how to ensure you don’t buy a home with problems, and more.

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1. Get Pre-Approved Before House Hunting

You must have a pre-approval letter in hand before you start your home search. Most sellers will not accept an offer from a buyer who does not have a mortgage pre-approval letter. In fact, many real estate agents will not even start showing you homes before you’re pre-approved.

Pre-qualified is not the same thing as pre-approved. Pre-qualified means a lender has pulled credit but has not verified any income, assets, or verified employment. Many agents and sellers will not accept a pre-qualification letter.

Getting pre-approved is free and can usually be done in a matter of minutes. You will need to send a mortgage lender a few documents to validate your income, assets, and credit.

The first thing a lender will do is pull a copy of your credit report and scores from all three credit bureaus. Secondly, they will request the following documents:

Documents Needed for a Mortgage

• Last two years of W2's from all employers

• Last two years of tax returns

• 30 days worth of paystubs

• Three months of bank statements

• Profit and loss statements if self-employed

• Driver's License

• Divorcee decree (if applicable)

• Bankruptcy paperwork (if applicable)

Get Pre-Approved for a Mortgage Today

2. Check Your Credit Report & Improve Your Score

Your credit rating determines your eligibility for a mortgage and the interest rate you receive. The lower your score is, the higher your mortgage rate will be and vice versa. Before you make an offer on a home, you should make sure your credit score is as high as possible.

There are a few things you can do now that will increase your credit score in as little as 30-45 days.

  • Pay down credit card balances – The amount of available credit you are using on your credit cards is called your credit utilization ratio. It makes up 30% of your overall credit score. Only your payment history (35%) has a bigger impact on your score. Try to pay down your credit card balances below 15% of their limit.
  • Don’t apply for new credit – Credit inquiries and new accounts each make up 10% of your score. It would help if you waited on getting a new credit card or a new car until after you have closed on your home.
  • Contact creditors about collections and late payments – If you have any collection accounts on your report, you can contact the collection agency and see if they will remove the delinquent account if you pay it off. This is known as a pay for delete. You can also call creditors to see if they will remove late payments as an act of goodwill. Sometimes it works.


3. Shop and Compare Loan Offers from Multiple Lenders

Mortgage rates and closing costs can vary greatly from lender to lender. It’s important to shop multiple lenders to get multiple loan quotes to ensure you get the best deal and most competitive rate. You can also use loan estimates from other lenders to help you negotiate better terms with the lender you feel most comfortable with.

Shop and Compare Loan Offers from Multiple Lenders

4. Choosing the Right Real Estate Agent

Not all Realtors are created equal. In fact, each realtor will have his or her own strengths and weaknesses. Some are very busy but are great negotiators, while others may dedicate more time and be a better option for first-time homebuyers.

You can talk to friends or family to see if they have any recommendations. Or you can hop on Trulia or Zillow to search real estate agents in your area and read customer reviews.

Buying your first home will take time; you will have tons of questions; you need a realtor with patience who can take the time to explain everything to you.

5. Buying the “Right” Home

The adage “Locations, Location, Location” is very true. It’s good to know which area you want to be in, but you should remain open to surrounding neighborhoods. Sometimes prices can be quite high in the community you want to live in.

Know which features you want in a home—3 bedrooms, 3 bathrooms, formal dining, media room, etc. Chances are you will have to compromise a little when buying your first home.

Right down all the features, you want in order of importance. You can use the list, later on, to see which home gives you the most important features you need.

6. How Much Can You Afford?

When it comes to finding out how much house you can afford, your debt-to-income ratio is the most important factor. You can figure out your DTI ratio by adding up all your monthly debt payments, such as credit card payments, student and personal loans, and your estimated mortgage payment.

Then divide that number by your gross monthly income before taxes. You will need a debt-to-income ratio of 41% or lower for most mortgage loans. However, a 36% DTI ratio is considered ideal.

Front-End and Back-End Ratios

Front-end ratio – This is your DTI ratio before adding your estimated mortgage payment. Most lenders will want to see a front-end ratio no higher than 28%.

Back-end ratio – This is your debt-to-income ratio after including your estimated mortgage payment into your monthly debt obligations. Lenders prefer a back-end ratio below 36%; sometimes, a 43% ratio may be accepted.

Some first-time home buyers are unaware of all the additional monthly costs associated with a mortgage loan. In addition to your mortgage payment, property taxes, private mortgage insurance (PMI), and homeowners insurance are added to your monthly payment.

Use our home affordability calculator to find out how much you will qualify for. Our calculator includes PMI (if needed), the property tax rate in your state, and homeowners’ insurance.

7. Don’t Skip the Home Inspection

It may seem the house is in great shape or is so new you don’t think there are any issues. But don’t ever skip the home inspection; even brand new homes may have issues only a professional can spot.

Inspections cost between $300-$500 on average. It’s well worth it. The alternative is finding out your home needs a new $10,000 roof or some other expensive repair. If anything needs to be fixed, you can ask the seller to make the repair before closing.

8. Have Your Documents Ready

Mortgages are often quite complicated and require tons of paperwork. Not having all the documents or taking your time to respond to your mortgage lender’s document requests can lead to delays in closing. To avoid this, it’s important to gather all of the documents needed for a mortgage and submit them early on.

Documents Needed for a Mortgage

• Last two years of W2's from all employers

• Last two years of tax returns

• 30 days worth of paystubs

• Three months of bank statements

• Profit and loss statements if self-employed

• Driver's License

• Divorcee decree (if applicable)

• Bankruptcy paperwork (if applicable)

9. Know Your Loan Options

FHA Loans

FHA loans are very popular with first-time homebuyers because they require just a 580 credit score with a 3.5% down payment making them easier to qualify for.  

VA Loans

Veterans of the U.S. military are eligible for a VA loan, which requires no down payment or mortgage insurance.

USDA Loans

USDA loans are for low-to-median income homebuyers in rural parts of the country. The biggest benefits are that they don't require a down payment and have the lowest mortgage insurance rate of any home loan of just .35%.

FHA 203k Loans

FHA 203k loans are a rehab loan where borrowers can finance the purchase of the property plus the funds for make renovations or repairs to the home with one loan.

Conventional Loans

A conventional mortgage is not backed by the Government and meets the requirements of Fannie Mae and Freddie Mac, the two largest buyers of home loans. A 5-20% down payment is needed with a minimum 620 credit score.

Conventional 97 Loans

Fannie Mae and Freddie Mac created the Conventional 97 loan program, which requires just a 3% down payment. They are more difficult to qualify for, requiring a 680 credit score.

HomeReady / Home Possible Loans

Fannie Mae and Freddie Mac created the HomeReady and Home Possible loan program to compete with low down payment home loans such as FHA loans. With just 3% down and a minimum credit score of 620, you may be eligible.

Piggyback Loans
A piggyback loan allows you avoid PMI with less than 20% down on a conventional loan. You will get two loans, one for the purchase of the home, and another for a portion of the 20% down payment. 

10. Check for First-Time Homebuyer Assistance Programs & Grants

One of the benefits of buying your first home is that there are many grants and down payment assistance programs for first-time buyers. You can apply for a first time home buyer program by searching on your local city or county website.

There are also HUD sponsored programs in all 50 states. You can search for available programs and grants in your state on the HUD website.