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Buying Your First Home? Make Sure You’re Financially Prepared With These Steps

Getting ready to buy your first house can be daunting. Credit scores, down payments, and mortgages are all on your mind. Here’s a guide to help you get ready to make one of the biggest purchases of your life.

How To Be Financially Prepared To Buy A House

Buying your first home can be one of the most exhilarating — and stressful — moments of your life. But armed with the right information, you can shop for a house, apply for a mortgage, and close the deal with confidence.

Step 1: Determine how much house you can afford

The first thing to do before buying a home is to make sure it’s the right time to do so. Generally speaking, owning a home pays off financially if you will live in it for at least five years. Otherwise, there’s nothing wrong with renting. Your actual numbers may vary, but you can play with scenarios using our rent vs buy calculator.

You might disagree, but I don’t believe you should treat your home as an investment. Yes, hopefully it will appreciate over time. But you should buy it because you want a home, not an investment.

That means you should never stretch to buy your primary residence thinking you can take cash out or flip it for a quick profit in a few years. Only buy a house that you can afford today!

Although it may not always be feasible if you live in an expensive real estate market, try to keep your total housing payment under 30 percent of your gross monthly income. When you spend much more than that on your mortgage, you risk becoming “house poor” — you might live in a beautiful home but find it difficult to save or even cover other monthly expenses.

Step 2: Prepare your finances for the mortgage process

The last thing you want to do is find your dream home only to discover you’re not financially qualified to buy it. To guarantee you’re financially ready to buy your first home, you’ll need good credit, cash to close, and a verifiable income.

Check your credit

Hopefully this isn’t a a surprise, but getting a mortgage requires a good credit score. It’s a good time to check your credit reports for errors and possibly invest in a few months of a daily credit score monitoring service.

A fast way to improve your score by a few points is to pay down credit card balances and stop using them for two months before you apply for a mortgage. Also, you’ll want to avoid applying for credit (for example, a new credit card or car loan) until after you’ve closed on your new home.

If you’re buying a home with a spouse or other co-buyer, your mortgage lender will likely consider both buyers’ credit scores in the application process. That’s not to say you’re necessarily doomed if one person’s credit isn’t as good, but don’t count on things going off without a hitch just because one buyer has a stellar score.

Finally, remember that improving your credit score significantly can take at least six months, so get started if you need to!

Save cash for a down payment and other expenses

In addition to making sure your credit score is in order, you’ll also want to consider the cash you’ll need to make buying your first home a reality. Of course there’s your down payment — typically between 3.5 and 20 percent of the purchase price.

As you save money for your down payment, avoid the temptation to invest in the volatile stock market with money you hope to use in the next year or two. While you might be tempted to try to earn a greater return on your money than an online saving account paying one percent, the greatest risk is not having your money available when you’re ready to buy a house.

As you save, don’t underestimate how much money you’ll need — you might be surprised at how much cash you’ll need for closing.

Get your documentation in order

Finally, if you’re close to putting an offer on a home, begin to collect documents that you’ll need to verify your finances on the mortgage application: paystubs, W-2’s, bank statements and, if you have freelance or self-employment income, copies of your last two tax returns.

Step 3: Go shopping for a mortgage

Too often, home buyers leave mortgage shopping to the last minute and watch their dream home go to another bidder who had financing in order. Mortgage pre-approval is a free and non-binding process that presents you as a serious, qualified buyer when buying your first home.

Today’s mortgage rates:

Mortgage types

Comparing two mortgages can be confusing. There are fixed-rates and adjustable rates, or ARMs, which are priced very differently. You can take out a mortgage for 30 years or as little as five years (interest rates are typically higher the longer the term of the loan).

Most buyers should look at fixed-rate mortgages and, indeed, the 30-year fixed rate mortgage is the most common kind of loan, by far. Still, it doesn’t hurt to become familiar with how mortgage rates work and the different kinds of loans that are available.

You may also want to run some scenarios through a mortgage calculator to see how different terms and rates will affect your monthly payment.

Mortgage fees

To make matters worse, mortgage lenders charge fees that aren’t necessarily reflected in the interest rate. There can be fees for appraising the home, checking your credit, and preparing documentation.

In some cases, you may be offered the option to pay “points” at closing that will reduce your interest rate. Points are essentially prepaid interest. This can be a tricky decision, but it can make sense if 1) you can afford to put down the extra cash and 2) expect to carry the mortgage for many, many years.

It can be a good habit to compare mortgage rates online regularly.

Private mortgage insurance (PMI)

If you put less than 20 percent down, your lender will likely charge you a monthly premium for what’s called private mortgage insurance, or PMI. Private mortgage insurance protects the bank in the event you default on your loan and the value of your home declines significantly.

Where to get mortgage rates and pre-approval

The only wrong way to get a mortgage is to walk into your local bank, ask for a loan officer and accept whatever rate she gives you without ever shopping around.

You can compare rates with any number of leading online mortgage lenders or find a local mortgage broker who will shop your application to multiple lenders on your behalf.

I often also recommend using the site, LendingTree to quickly get four or five competing mortgage rates from different banks. These rates will be more accurate than the ones you see in advertisements and websites because banks provide real rates based upon your credit profile and the location and value of the home you want to buy. Learn more about getting mortgage quotes and pre-approval from LendingTree.

Summary

Buying your first home is exciting, but there’s a lot to think about before you start looking. Start by getting all your finances in order, and using online tools to compare mortgage rates, and manage your credit score.

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About David Weliver

David Weliver is the founding editor of Money Under 36. He's a cited authority on personal finance and the unique money issues we face during our first two decades as adults. He lives in Maine with his wife and two children.

Comments

We invite readers to respond with questions or comments. Comments may be held for moderation and will be published according to our comment policy. Comments are the opinions of their authors; they do not represent the views or opinions of Money Under 36.

  1. Ridley Fitzgerald says:

    Thanks for the great home buying tips. My wife and I really want to buy our first one this year, so this is great to know! I’ll be sure that we both have good credit and have enough for a down payment, like you said.

  2. Vivian Black says:

    Several years ago I remember a friend advising me to purchase a house before I was ready, and now I have been curious about the repercussions of purchasing a house outside your financial capabilities. I appreciate that you specifically pointed out that you should never stretch to buy your primary residence thinking that you can take cash out or flip it for a quick profit in a few years. Thank you for the advice regarding financial planning in purchasing real estate!

  3. Bethel Smith says:

    My husband and I are looking to buy our first home. I really liked your suggestion about making sure that your credit is in order. We want to find the right mortgage for our finances and credit is huge. We will be sure to do whatever we can now to build it up.

  4. Deb Pearl says:

    My husband and I really want to buy our first home, but we don’t know what steps to take. I’m glad you mentioned that we should try and keep our total housing payment under 30 percent of our monthly income. I think that would be a good goal to try and hit.

  5. Bethany Birchridge says:

    I love how this article mentioned to run possible loan scenarios through a mortgage calculator. When my parents bought our first family home, you could tell they were quite stressed at first. Luckily, my older cousin worked at a bank and was able to help explain the different types of loans so they could choose the best one.

  6. Ridley Fitzgerald says:

    You’ve got some great tips for buying our first home. We’ve finally decided to take this step, so I’ll remember what you said here. My wife definitely needs to check her credit; she loves shopping, so hopefully it’s still good!

  7. Elsa Anderson says:

    I was readying myself to start my move as I am aiming to work away from our home and getting a new home is something that’s on my list of priorities. Knowing that getting one’s financial ready first for us to learn whether if we have enough income to sustain ourselves once we move as you’ve mentioned is a very helpful tip. That is something I would surely keep in mind as it would ensure that I can keep on living alone and independently. Thanks for the helpful guide on how to purchase one’s first home!

  8. Anthony Wally says:

    My wife and I would love to move into our first house together this next year. I appreciated the tips you provided since neither of us have any home buying experience. We’ll be sure to take your advice and figure out how much home we can afford before we start looking so that we can make sure we don’t fall in love with a home we can’t afford.

  9. Finley Moreira says:

    I’ve never bought a home before, so I found the tips her to be very helpful. I especially liked how you suggested only buying a home that has a monthly payment of under 30% of my gross monthly income. I’ll definitely keep this in mind since I was wondering previously about how I find a home that I can afford.

  10. Ridley Fitzgerald says:

    We are hoping to buy our first home soon, so thanks for these tips. I appreciate how you said to look at how much of a home we can afford. It’s not a ton, that’s for sure, but we’ll be sure to find one that doesn’t have payments of more than 30% our income.

  11. Kyle Winters says:

    I do like that one of the big things you suggest in the article is to check your credit. After all, if you’re planning to buy a home, then you need to have a good credit score. This way the bank will be willing to lend you a better mortgage that you can use to help buy the house.

  12. jresquival says:

    That’s a good tip to keep your mortgage payment under 30% of your income. That way you’ll be able to afford your other living expenses. It’s important to live within your means so that you don’t develop a debt problem.

  13. Rachel Lannister says:

    Thank you for the wonderful advice. I particularly liked what you said about considering the mortgage fees, and all other things that you will have to pay for when getting a house, to ensure you know what you can afford. My brother is in the market for a home, and was wondering what he should know. If he were to consider these things into his budget, he could know what house he could afford, and move forward with peace of mind.

  14. Rea Yaninen says:

    Thank you David. This is very useful for me.

  15. justin says:

    Very helpful post! I’ll be a first time home buyer in the near future and don’t know much about the whole process so this helps out a lot!

  16. Chelsea Santiago says:

    I believe some of the best advice is to PREPARE! I hear so many people say “Ok, we wanna buy a house now” and it’s like…WOAH WOAH WOAH…you can’t just go out & get one! There’s several things that need to happen beforehand. Unfortunately, money management is not a strong point for many of us young folks, but I’m getting better at it (and helping my husband do the same!). Thank you!

  17. MB @ Millennial Boss says:

    My tip – STICK TO YOUR PRICE RANGE! We looked at 10 houses in our price range and one house just north of our price range. Of course – the more expensive house looked better. We fell in love with it and we stretched our budget to afford it! We didn’t have a chance to view any other prices in that higher price range either so didn’t know if our offer was too high (it was in hindsight). Just a tip!

  18. Daniela Adams says:

    Great article, very helpful. I love how you mention getting both of the partners’ credit scores in shape and saving money for a down payment. You have to start preparing for a new home long before you actually buy one. My husband and I have been working towards it for a few years, and we are finally ready to start looking! I am so excited and nervous at the same time!

  19. Erinn says:

    I just want to say thank you for creating a site geared towards younger people who actually want to do something with their lives. Most people treat young people like myself like aliens or freaks or something. I am 21, my husband is too, and we have a daughter who is almost a year and a half. We are both college students, me about to graduate from a community college and go on to a 4 year university, and my husband in the beginning steps of Engineering. Soon, we are looking to buy a home, but we still have about a year or two’s worth of prep. My credit is non-existent, and when it finally does exist, it won’t really be good due to some think-fast decisions that had to be made. My husband has good credit. We knew about that part, but all the other things we didn’t know about you covered pretty well I will be a regular visitor to your site, keep supporting us who are under 30!

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