The Ultimate Guide to Buying Your First Home
For first-timers, the process of buying a home can be as intimidating as it is exciting. We interviewed experts and dug into the details to outline what you can expect from the moment you start looking right up to closing day.
Is It the Right Time to Buy?
Renting vs. buying: Pros and cons
Renting isn’t “throwing money away,” and homeownership isn’t a guarantee of future wealth. Each has its own pros and cons. Renting offers more flexibility and fewer upfront costs, plus the convenience of calling your landlord when something breaks — but no tax breaks or equity.
Homeownership offers more stability (since there’s no landlord to evict you or raise the rent), freedom to customize your space, and the opportunity to build equity long term but reduces your flexibility to relocate easily. Owning a home also puts you on the hook for additional expenses, like property taxes, homeowners insurance (which costs more than renters insurance), repairs, and maintenance costs. These expenses can change, which makes predicting the total monthly cost of homeownership more difficult.
Whether it’s better to rent or buy depends on many factors both personal (like your job stability) and environmental (like property values in your area). The New York Times’ rent vs. buy calculator can give you an idea of the price at which buying becomes the better deal in your area.
Renting vs. Buying: Points to Consider
Income and job stability
A 30-year, fixed-rate mortgage is the most popular loan type among homebuyers because it offers stable, predictable payments for the long haul. When deciding if you want to buy (and how much you can spend), ask yourself: How likely are you to stay in your current job, at your current salary? If your household is dual-income, would you be able to make mortgage payments on a single income? Buying a home that’s priced at the upper end of your budget could mean living paycheck to paycheck or facing foreclosure if your circumstances change later on.
Are you happy where you are, or is a move on the horizon? If the latter, you may want to wait to buy in the next city. After purchasing a home, you would ideally stay put long enough to accrue equity that recoups your closing costs (which average two to four percent of a home’s total value.) How long this takes will depend on the terms of your loan and how property values in your area fluctuate — but a few years is a good rule of thumb. “It normally takes five or more years to break even in your home investment,” says Heather James, attorney and co-founder of Cook & James, a real estate law firm in Atlanta. “Be careful [not to] throw away money by purchasing if you think you might want to move soon.”
Your credit score
As with any type of financing, a healthy credit score signals to lenders that you’re a responsible borrower. That means a higher likelihood of approval and more attractive loan terms, like a lower interest rate. While you don’t need a perfect credit score to get approved, improving your score before you start shopping could lower your monthly mortgage payment and save thousands over the life of your loan. In the example below, raising your FICO score from the 620 - 639 range to 640 to 659 would save $108 per month — and nearly $40,000 in interest over the 30-year term.
Data generated with the MyFICO Loan Savings Calculator for a $309,800 home (the median sales price in the U.S. at time of writing). Figures assume 100% financing. “Monthly payment” refers to principal and interest (P&I).
Current interest rates and projections
Even if you can make a significant down payment, a mortgage is a major investment, since hundreds of thousands of dollars and decades of interest accrual are on the line. Small differences in interest rates — even fractions of a percentage point — can have a big impact on the total cost of financing your home. That’s why it’s important to shop around and compare quotes to find the best mortgage rates. When you’re deciding whether to buy now or continue saving, you’ll also want to consider projections for future interest rates. If rates are likely to be higher next year, and you’re ready to buy, starting the process sooner could mean long-term savings.
Fluctuations in the real estate market can affect home prices. Is your city considered a buyer’s market or a seller’s market? Have property values in your area decreased, increased, or held steady in recent years?
“Home prices have risen considerably in recent years,” says Deborah Kearns, a mortgage analyst and reporter at Bankrate. “The inventory of traditional ‘starter homes’ that appeal to first-time buyers is lean in many markets. Still, avoid the temptation to buy more home than you can afford, or you'll end up house- poor.”
If you’re having trouble finding homes in your price range, it may be best to wait and continue saving — or to expand your search.
Getting Ready to Buy a Home
Prepping your finances
Check your credit score
Your credit score is an important part of your financial profile, and it’s a major piece of how lenders evaluate your mortgage application. It can also have a big impact on your annual percentage rate, or APR — and therefore your monthly payment. (Note that APR and interest rate aren’t the same thing. While the interest rate only reflects the cost of borrowing the mortgage principal, APR includes fees, closing costs, and more for a complete picture of the total borrowing costs.)
If there are any issues with your credit, you’ll want to find out before lenders do — and address them before you start shopping. Many free tools allow you to access your credit score, but few give you scores from Equifax, Experian, and TransUnion. Check out our review of the best credit report services to find one that does, and use it to get a comprehensive picture of your financial health. If there are any errors, contact the credit bureau in question to have them removed. If your score needs some work, don’t get discouraged; start with what you can control.
“Make sure to pay all bills on time and free up as much of your credit as possible,” recommends Brenda Di Bari, a licensed associate real estate broker with Halstead Real Estate in New York City. “Ask for credit line increases from your creditors, but don’t use [them]. Do not open any new credit lines. The farther you are from using your available credit [limit], the better this looks to a lender.”
Finalize your budget
When you get pre-approved, a mortgage lender will set an upper limit for how much it’s willing to loan you. This number should not be confused with your actual budget. “Lenders approve you for a mortgage based on your gross income, and they don't take your full budget into account in their calculations,” Kearns says. “Qualifying for a $400,000 loan doesn't mean you can afford the monthly payments that come with that amount.” She cautions buyers to factor in “the hidden costs of homeownership,” such as property taxes, HOA fees, maintenance, and repairs.
Consider using personal finance software to find out how much of your net pay (that’s your gross pay minus deductions for taxes, health insurance, 401(k), and the like) you can dedicate to housing costs. You may also find a home affordability calculator useful for estimating how much you can afford.
Consider down payment size (and save aggressively)
For most people, saving for a down payment is one of the biggest hurdles to becoming a homeowner. Saving up the recommended 20 percent has a number of benefits: it allows you to bypass private mortgage insurance (PMI), it can lower your interest rate, and it decreases the likelihood that you’ll owe more than your house is worth if a downturn in values occurs. But putting 20 percent down isn’t the only way.
Special mortgages backed by the VA, USDA, and FHA — and even some conventional loans — allow for a drastically lower down payment. Many low-down payment mortgage options require PMI, but you can request to cancel it once you’ve gained 20 percent equity (by making payments, by price appreciation if your home’s value increases, or by a combination of the two.). Making a down payment of less than 20 percent could be a good option if housing prices in your area are rising faster than you can save and you’re worried about getting “priced out.”
You’ll also need to balance the goal of making a large down payment with maintaining some liquid cash on hand for emergencies. If putting less than 20 percent down allows you to buy a home sooner and avoid draining your bank account, a low-down payment mortgage is worth considering.
Research homebuyer assistance programs
First-time buyers have access to a variety of homebuyer assistance programs. These can take the form of loans or grants. Eligibility requirements vary; some are location- or job-specific, while others help homebuyers below a certain income threshold.
Additional programs may be available at the local level. Check out HUD’s home buying programs by state — and check for options in your city, too.
Applying for a mortgage means opening your financial history up to scrutiny. Start gathering the necessary documents now, and you’ll save time during the approval process.
Be prepared to establish:
- Identity and personal details (Social Security card, details about current and past employers, current salary, etc.)
- Income (federal tax returns, pay stubs, etc.)
- Assets (bank statements, retirement accounts, etc.)
- Debt, credit, and recurring expenses (car or student loans, credit card balances, rent, etc.)
- Other details (bankruptcy or foreclosure, divorce, child support, etc.)
If you’re expecting help with your down payment from friends or family, be ready to provide a gift letter, which asserts that your loved one doesn’t expect repayment. (If the gift is actually a loan, it will count as a debt, not an asset.)
Research mortgage types
Each type of mortgage comes with its own set of pros and cons. There are government-insured home loans backed by the FHA, USDA, and VA; adjustable-rate, fixed-rate, and interest-only conventional mortgages; and others. The mortgage product you choose will determine your interest rate, minimum down payment, closing costs, loan term, and borrowing requirements. The Consumer Financial Protection Bureau’s overview of loan choices is a good starting point for your research. Understanding what’s out there will help you compare options when you meet with a mortgage broker or a lender.
This is the big one. Pre-approval is what separates serious buyers from casual window shoppers. It allows you to move quickly when you find a home you love — and signals to sellers that you’re both committed and capable of buying, which makes your offer more compelling. Dan Green, founder of real estate blog Growella, recommends taking the plunge ASAP.
“Pre-approvals are for the buyer, not the lender,” he says. “They're for information gathering. And the sooner, the better.”
Note that pre-approval and pre-qualification aren’t the same thing. A pre-qualification gives you an idea of what you might qualify for based on an estimate of your income and credit score. It holds no weight with sellers and doesn’t involve vetting your credit, income, or employment. A pre-approval, on the other hand, gives you a concrete idea of how much you can borrow when the time comes, because the lender will verify the information you share. To get pre-approved, you’ll have to submit a mortgage application, which will include your social security number and information about your assets and liabilities, employment information, credit, and more.
Don’t rush this step. Taking the time to compare multiple lenders’ rates — getting pre-approved with a few of the best, or working with a mortgage broker who can shop multiple lenders on your behalf — will help you find the best mortgage lender for you.
Narrowing your search
Create a shortlist of neighborhoods
An older house in a desirable area often costs more than a brand-new house in a less prime spot. Why? Location is one of the most significant factors in determining fair market value.
“This is where you will spend the majority of your time,” says Craig Mracek, CEO of Keylo, a real estate agent matching service based in Canada. “The neighborhood [your home is in] will indirectly affect your safety through crime rates, happiness through access to local facilities, and much more.”
Your home’s location can impact how easy it is to sell if you need to move — and whether or not it will hold its value over time.
While you can change your home’s interior and layout, you have only one option if you dislike the location: moving. Pat Vosburgh, a Realtor with NextHome in Saint Petersburg, Florida, recommends looking past surface imperfections if you find a home that checks the most important boxes.
“You might not get your dream home [the first time],” Vosburgh says. “This is a start. You may not always get the granite or flooring that you desire, but you can fix it up as you go.”
Remember the part about staying put long enough to recoup closing costs? Push yourself to think long-term. For example, a short commute might be a priority, but your job could change. School districts might not matter much if you’re child-free now, but they will if you plan to start a family.
“Do you feel sure that you’ll be [in your new home] for at least five years? If you’re at all on the fence, consider renting nearby first,” says James, the attorney.
Make a list of wants and needs
A fireplace. A swimming pool. Four-plus bedrooms and a walk-in closet. Most homebuyers have a long wishlist of home features, but the longer the list, the tougher it will be to find a property that checks all the boxes.
“Start attending open houses sooner rather than later,” says Evan Roberts, a Realtor with Dependable Homebuyers in Washington, D.C. This will give you an idea of what features matter most to you — which is especially important if you’re buying with someone else, since their priorities might differ from yours, he adds.
Separating “must-haves” from “nice-to-haves” can help you narrow down your choices. Your agent can use this information to filter listings for you and help you determine what’s reasonable for your price range.
“A quality buyer’s agent will ascertain [a buyer’s] needs and wants, and cross-reference those things with their budget,” says Di Bari, the New York City broker. “During this phase, there may be adjustments necessary to make the budget align realistically with the needs list.”
Finding an agent
What you get out of working with an agent
Basic information about listings is readily available online,; so you may be tempted to avoid working with a real estate agent altogether. But buying a home is a complicated process, and inexperience can get first-time buyers into trouble.
Deni Supplee, a Pennsylvania Realtor and co-founder of Spark Rental, says buyers often underestimate how much an agent can do for them. “It’s much more than showing a home and accompanying [the buyer] to closing,” she says. “Many, many things go on in the background of a sale.”
How an agent can help a homebuyer
- Finding “off-market” listings
Doing your own research online can be helpful, but real estate websites don’t give a complete picture of what’s available in a neighborhood. Through his or her professional network, a well-connected agent might know about properties before they’re listed, which gives you the opportunity to tour or make an offer quickly (a strong advantage in a competitive market).
No one wants to overpay. But if you “lowball” the seller, you risk losing out on a home you’re interested in. An experienced agent will leverage his or her knowledge of the market to help you negotiate — both the asking price and concessions like repairs or closing cost assistance — and craft an offer that will be taken seriously.
- Process guidance
There’s a lot of paperwork involved in buying a house and many opportunities for things to go awry. Your agent can help you corral the many moving parts to ensure you close on schedule.
The best real estate agents are well-connected (and well-regarded) in the local real estate community. Your agent should be able to recommend trustworthy lenders, attorneys, contractors, and more.
Do you need your own agent?
You aren’t required to have a buyer’s agent; the same agent can assist both the buyer and seller in a home sale. But is that the best approach? Not according to Shelton Wilder, a real estate agent with Douglas Elliman Real Estate in Los Angeles.
“A lot of people don’t know how it works, so they might end up going with the listing agent, where they’re not completely protected,” Wilder says. “If you work with your own agent, [he or she] has a fiduciary duty to you — to protect you, to look out for you and your best interests. Whereas, if you work with the listing agent, their fiduciary duty is to their seller. It’s very difficult for them to have your back completely because they are trying to work for two different people.”
If you’re planning to work with a dedicated agent, Di Bari recommends involving him or her early on.
“It will really help to streamline the process and avoid many common mistakes if you have your buyer’s agent ready to go when you are ready to buy,” she says. “Your agent will [guide you through] the steps you need to take as you get closer to buy-time, such as getting a mortgage pre-approval letter and [selecting] other team members, such as a real estate attorney, home inspector, or maybe a contractor if you’re looking to buy a fixer-upper.”
When you’re ready to find an agent, friends and family members may be able to help. Ask which agent(s) they’ve worked with and what their experience was like. You can also use a referral service or search online for specialists in your city. Whichever avenue you choose, take the time to find an agent you gel with.
To legally sell real estate, agents must complete pre-licensing courses and pass a licensing exam. Specific requirements vary by state, so agents must be licensed in every state they work in. (This is especially relevant if your home search encompasses multiple states.)
Agents may also opt to become a Realtor® by joining the National Association of REALTORS® and agreeing to follow the NAR’s Code of Ethics. If they want to specialize in a particular type of real estate, Realtors® can pursue designations and certifications, such as the Accredited Buyer’s Representative (ABR), by taking extra courses.
Certification is only one piece of the puzzle when you’re weighing an agent’s expertise. It’s wise to consider agents who have experience helping buyers in your situation.
“Real estate is diverse,” says Earl White, vice president of House Heroes Realty in Sunny Isles Beach, Florida. “You want to be represented by an agent with experience in the type of purchase you’re considering. Looking to buy a condo? Make sure the agent is versed in homeowner association procedures. Looking for something in a high price range? Luxury properties present unique challenges.”
If you click with an experienced agent who doesn’t work in the neighborhoods you’re interested in, don’t rule them out too quickly. Gary Lucido, president of Lucid Realty in Chicago, says, “A Realtor doesn’t have to be a ‘neighborhood expert’ — whatever that is — in order to help you. They have to know enough, and they have to know how to do research.”
By this stage, you’ve done your research. You have a list of agents licensed in your state, ideally a few referrals from people you trust, and all of them seem experienced. How do you choose one? By asking the right questions.
“Ask them if you email them at 7 p.m. on a Friday night when should you expect a response,” Lucido says. “Ask them about the most recent deal they closed for a buyer, then ask how the buyer benefited from their efforts versus not using an agent. If they give you a lot of vague platitudes, they’re not very good.”
It’s in your best interest to meet with multiple candidates before you choose — and choose carefully. Ask them a lot of questions, both to gauge their qualifications and to find someone you trust and will enjoy working with.
“The bar of entry to be a Realtor is low,” says Aaron Hendon, a broker with Keller Williams Realty in Seattle. “It takes 1,000 hours to get licensed to cut hair but just 90 to sell homes. And yet [most] consumers will use the first Realtor they meet.”
James McGrath, co-founder of Yoreevo, a real estate brokerage in New York City, adds, “The goal of any introductory conversation with a real estate agent should be [gauging] if the buyer feels like the agent listens to his or her clients and develops a real connection with them.”
Your agent can have a big impact on how smoothly your home buying experience goes, so take your time choosing one you trust.
Experts Say: Common Home Buying Pitfalls
Homebuyers Say: What I Wish I’d Known
How to Buy a House
1. Consolidate funds
By this point, you’re a serious buyer. You’ve been pre-approved, so you know how much you can afford. You’ve zeroed in on a few neighborhoods of interest. You’ve found an agent (if you’re working with one). All you need now is the right house. Right?
Almost. Once you make an offer, you’ll be writing several sizable checks, so it’s a good idea to get the funds lined up before you need them. This is particularly important if you’re using a down payment gift, because large, last-minute deposits are a red flag to lenders.
Get your funds squared away a few weeks before you plan to make an offer, in an account that’s in your name. If you’re lucky enough to have help from friends or family, make sure you have a gift letter to prove it’s not a loan.
2. Submit an offer (and negotiate if needed)
So you’ve found a house you like, in a great location, that checks off most of your must-haves. Congratulations! Now it’s time to submit your offer. The process can be complex and can vary by state, but here’s an overview of what you can expect.
Elements of an offer
Your offer, also known as a residential purchase agreement, is a binding legal contract that outlines the terms of a real estate transaction. Elements of a residential purchase agreement include:
- Details about the home, including address and purchase price
- Financial details, including earnest money, down payment, and closing costs
- Contingencies, or conditions that allow you (or the seller) to back out of the agreement
- The expected closing date
- Items included in the sale, such as appliances or fixtures
- An expiration date for the offer
If you haven’t sought professional help yet, do so before submitting an offer. While basic RPAs are available online, using one that isn’t tailored to your situation could become a costly mistake — and a poorly constructed offer can kill a sale before it starts. Your real estate agent can help you draft an effective offer letter that both appeals to the seller (which could be the difference between acceptance and rejection) and checks all the legal boxes in your state. But if you run into complications beyond your agent’s scope, hiring a real estate attorney would be the next step.
Note: Some states require a real estate attorney’s involvement at closing or at another point in the process. Some require an attorney to be physically present, while others stipulate that an attorney must draft closing documents. Ask your agent about laws in your state — and know that you can choose to involve a real estate attorney at any part of the home buying process, whether or not it’s required where you live.
What you’ll have to pay
The down payment isn’t the only large withdrawal on the horizon. Attempting to purchase a home can get expensive, even if the agreement ultimately falls through. Payments you’ll have to make include:
- Earnest money, which proves you’re a serious buyer — and compensates the seller if the deal falls through. This money goes into an account that belongs to neither the buyer nor the seller (escrow or trust) once your offer is accepted. If you successfully buy the home, your earnest money is applied toward your down payment. But if you back out for any reason other than a failed contingency, the seller will likely get to keep it.
- Various closing costs, which include fees for inspection and appraisal; administrative costs related to lending, like a loan origination fee; transfer taxes; and more. Average closing costs vary by state. Some may be negotiable.
When you can back out
Contingencies are important to get right because they specify what situations would give you an out — the opportunity to walk away from the sale without losing your earnest money. The most common contingencies involve financing (getting approved for a mortgage) and inspection (resolving major issues found during a professional home inspection), but you might include additional contingencies for appraisal, clear title, closing date, etc. You’ll have more power to add contingencies — and to negotiate in general — in a buyer’s market. But in any market, including too many caveats can make your offer less attractive to the seller.
Once you’ve submitted your offer, the seller can do one of three things.
Real Estate Offer Outcomes
Remember, a residential purchase agreement is legally binding; by submitting it, you agree to everything in it. If you choose to back out of the deal for a reason other than what’s stated as a contingency, the seller keeps your earnest money (and could have legal grounds to sue you). That’s why it’s so important to make sure you understand the terms before you make an offer.
If you’re buying in a hot market, you’ll likely have competition from other buyers. Offers that involve more money — more earnest money, larger down payments, and even offers above asking price — are more attractive to sellers, because they’re seen as less likely to fall through.
3. Arrange for inspection and appraisal
This step is twofold: Inspection, which is for your benefit, and appraisal, which is mainly for your lender’s.
The goal of an appraisal is to estimate a home’s value. Most lenders require an appraisal before finalizing your loan because a home that sells for more than it’s worth is more likely to go “underwater” if the market falls, which could cost the lender money. Even if you’re willing to pay an asking price above market value, your lender may refuse to loan you more than the home’s appraised value.
A home inspection is a detailed process that aims to identify a property’s potential flaws. That’s why it’s important to work with someone honest and experienced — and why some experts recommend working with an independent home inspector that doesn’t partner with real estate agents. (Some argue that an inspector who gets most of his leads via an agent has a conflict of interest — that he or she could feel pressured to encourage the sale, even if the property isn’t in good shape.)
If issues with the property turn up and the seller hasn’t previously disclosed them, you have several options:
- Request that the seller make repairs
- Purchase the home “as-is,” but negotiate the price
- Purchase the home “as-is” at the original price
- Back out of the deal (unless you waived the inspection contingency in your offer letter)
Carefully weigh the circumstances before agreeing to buy a property “as-is.” While you may be tempted to make major concessions for a house you love, major defects can impact your ability to get homeowners insurance — and increase your insurance premiums.
4. Get final loan approval
Before closing, the lender will thoroughly investigate your finances one more time during a process called underwriting. The lender will check all your financial documents, proof of homeowners insurance, and details about the home against loan eligibility requirements and issue a final determination: approved, conditionally approved, or denied.
If your application is approved, the lender will mark your application “clear to close.” If there are minor issues with your application, your conditional approval will depend on your ability to rectify the issues — to provide additional documents, for example — so be ready to respond quickly to keep the process moving.
If the result is denied, find out why, then work with your lender to explore possible solutions. If the home appraised lower than the asking price, for example, you could request another appraisal. If there were issues with your credit or income, you’ll have to decide whether to apply with a different lender or revisit home buying later, after you’ve had a chance to improve those areas. Should you decide to walk away, your financing contingency should allow you to do so without forfeiting your earnest money.
5. Purchase homeowners insurance
Insurance might be the last thing on your mind as closing day approaches — but don’t wait until the last minute to compare your options. Your lender will ask for proof of homeowners insurance coverage before your loan can be finalized, and it’s crucial that you review potential policies carefully for both cost and coverage. Request quotes from multiple providers, and give some thought to endorsements, or additional coverage, you’d like to add to your policy, such as coverage for detached structures (like a shed) or coverage for big-ticket items (like heirlooms or jewelry).
Three business days before closing, you’ll receive a closing disclosure, which will specify the final numbers, from your interest rate to closing costs. Review it carefully, because it’s your last chance to make corrections or changes before the purchase is finalized.
Closing procedures vary state to state — some allow the seller and buyer to close at separate appointments, while others require you to meet; some require a lawyer to be present; etc. — but regardless, you can look forward to reading and signing a lot of paperwork with your agent and the loan officer. Take your time, and don’t be afraid to ask questions; every document you’ll sign at closing is legally binding.
Once everything has been signed by both you and the seller, your mortgage will be funded, the title will be transferred, and you’ll get the keys to your new place. Congratulations, you’re officially a homeowner!
Preparing to Move
Find a moving company
The best moving companies boast strong customer service (with few complaints!) and will help you move anywhere in the U.S. We researched 28 nationwide providers to find standout options you’d trust with your fine china.
Switch your services
Many of the first-time buyers we polled said setting up utilities was a hassle. We’ve researched the best high speed internet providers and the best TV providers so you can compare top companies quickly — and get connected with minimal stress.
Protect your investment
Homeowners insurance protects against theft and damage, but it doesn’t cover wear and tear or appliance failure. That’s where the best home warranty companies come in. For extra peace of mind, check out our review of the best home security companies.
Forward your mail
Somebody somewhere will probably send mail to your old address. To make sure nothing gets lost, notify the USPS that you’re moving a few weeks in advance. (Tip: Skip the drive to the post office by submitting your change of address form online.)
Request auto insurance quotes
Did you know moving to a different ZIP code can affect your auto insurance premium? Request quotes from the best auto insurance companies to compare rates in your new area.
Need something for your new place? From mattresses to dishwashers, we’ve done the research so you don’t have to.
First-time Home Buying FAQ
- How Much House Can I Afford? (via Bankrate)
- Buying a House: Tools and Resources for Homebuyers (via ConsumerFinance.gov)
- Local Home Buying Programs (via HUD)
- HUD-Approved Housing Counseling Agencies (via HUD)
- First-Time Homebuyer Tax Credit (via IRS)
- Starting the Home Buying Process (via Fannie Mae)
- Counseling for First-Time Buyers (via the NFCC)