Buying a home is a significant milestone, and for first-time buyers, it can be both an exciting and overwhelming experience. However, it can also be a complex and overwhelming process.
As a first-time homebuyer, it’s essential to know what to expect, including costs, mortgage options, ongoing expenses, and any benefits that you might be able to take advantage of as a first-time homebuyer.
Although many first-time homebuyers view the down payment as the most significant obstacle, closing costs are equally important. Closing costs generally vary from 2% to 5% of the purchase price of the home, and, in some cases, they can even exceed the down payment.
Visit our closing costs guide page for a full breakdown of what to expect.
A conventional mortgage is a type of home loan that is not guaranteed or insured by the government, such as the Federal Housing Administration (FHA) or the Veterans Administration (VA). Putting down less than 20% will require Private Mortgage Insurance (PMI).
Jumbo loans exceed the loan limits set by the Federal Housing Finance Agency (FHFA). Jumbo loans usually require 20% down and may be subject to stricter underwriting guidelines.
An FHA (Federal Housing Administration) mortgage is a government-backed mortgage program designed to help low-to-moderate income borrowers buy a home.
FHA loans only require a down payment of 3.5%. This can make it easier for people to afford a home, especially if they don’t have a lot of savings.
FHA loans have more lenient credit score and qualification requirements, making it easier for buyers to qualify.
Department of Veteran Affairs (VA)
You may be eligible for a VA loan if you are an active-duty service member, a veteran of the U.S. Armed Forces, or a family member of a serviceperson.
VA loans may not require a down payment, or private mortgage insurance, making them an attractive option for first-time homebuyers.
USDA loans are government-backed mortgages available to individuals in certain rural and suburban areas. USDA loans do not require a down payment, making them an attractive option for first-time homebuyers in eligible areas.
Advantages of Being a First-Time Homebuyer
Fannie Mae HomeReady Program
The Fannie Mae HomeReady program offers down payment assistance and other benefits to first-time homebuyers who meet certain income requirements. This program allows for a down payment as low as 3%.
Freddie Mac Home Possible Program
The Freddie Mac Home Possible program offers down payment assistance to first-time homebuyers who meet certain income requirements. This program allows for a down payment as low as 3%.
State and Local Down Payment Assistance Programs
Many state and local governments offer down payment assistance programs to first-time homebuyers. These programs vary by state and locality, so it’s important to research what programs are available in your area.
Some employers offer down payment assistance programs to their employees as a benefit. These programs may have specific eligibility requirements and may be limited to certain geographic areas.
Homeowners with a mortgage can benefit from additional deductions. The mortgage interest deduction is among the several tax deductions available for homeowners provided by the Internal Revenue Service (IRS).
Homestead exemption is available in most areas for those who reside in the property full-time. If the home is used as a vacation or investment property, you may not be eligible for this exemption.
Once you’ve purchased your home, ongoing maintenance costs become a regular expense. These expenses can vary depending on the age, size, and location of your home. Common maintenance costs include:
Property taxes, also called Real Estate Tax, are determined by the value of the home. The amount and calculation of property taxes vary and are established by the state or county of residence.
Insurance provides protection for you home and belongings. Lenders require hazard insurance coverage to cover any loss in case of a hazard such as fire or flood.
Repairs, ranging from leaky roofs to broken appliances, can become expensive quickly. Setting aside an emergency fund for unexpected repairs is crucial.
Maintaining your yard, gardens, and trees can be time-consuming and costly. Hiring a landscaper or doing it yourself can be a significant expense.
Electricity, gas, water, and sewer bills can add up quickly, especially during extreme weather conditions.
Homeowner Association Fees
If you purchase a home in a planned community, you may be required to pay homeowner association fees for common area maintenance and services.
Gather Your Financial Documents
You’ll need to provide your lender with documents that verify your income, assets, and debts. This may include pay stubs, W-2s, tax returns, bank statements, and investment account statements.
Shop Around for Lenders
Not all lenders are created equal. Shop around and compare rates and terms from different lenders to find the best one for you.
Submit Your Application
Once you’ve chosen a lender, you’ll then submit your application. This may be done online or in person.
Wait For Your Pre-Approval
The lender will review your application and financial documents and determine whether to pre-approve you for a mortgage. If you’re approved, you’ll receive a preapproval letter that you can use when making an offer on a home.
Key Factors That Lenders Consider Before Pre-Approval
Your Credit Score and History
Lenders will review your credit score and history to determine your ability to make payments on time and manage debt. A higher credit score can increase your chances of being approved for a mortgage and may result in a better interest rate.
Employment History and Income
Lenders will want to verify your employment history and income to ensure that you have a stable source of income and can afford to make mortgage payments. Self-employed individuals typically have stricter underwriting standards.
Your debt-to-income ratio represents the amount of debt (monthly obligations) you have in comparison to your income. Lenders typically prefer a debt-to-income ratio of 43% or lower.
Lenders will want to review your assets, such as checking, savings, money market, or certificate of deposits, to determine if you have the financial resources to make a down payment and cover closing costs.
Loan-to-Value (LTV) Ratio
The loan-to-value (LTV) ratio is evaluated by lenders as part of their risk assessment process when approving a mortgage. Loans with higher LTV ratios are generally viewed as carrying higher risk, which could result in a higher interest rate if the mortgage is approved.
If you have a specific property in mind, lenders will want to review information about the property, such as the appraisal value, property condition and property taxes, to determine the loan amount and terms.
With the right research, preparation, and guidance, you can take advantage of special programs and incentives designed to help first-time buyers achieve their dream of homeownership.
Remember to compare mortgage offers from multiple lenders to find the best possible loan terms and interest rates for your financial situation. By taking these steps, you can become a confident and successful first-time home buyer.