Complete Guide
First-Time Homebuyer Guide
Everything you need to know about buying your first home, from saving for a down payment to closing day.
In This Guide
1. Are You Ready to Buy?
Buying a home is one of the biggest financial decisions you'll make. Before diving in, honestly assess whether you're ready:
Signs You're Ready
- ✓ Stable income for 2+ years
- ✓ Emergency fund of 3-6 months expenses
- ✓ Low debt-to-income ratio (under 36%)
- ✓ Good credit score (680+)
- ✓ Planning to stay 5+ years
- ✓ Have savings beyond the down payment
Signs to Wait
- ✗ Job instability or recent career change
- ✗ High-interest debt (credit cards)
- ✗ No emergency fund
- ✗ Credit score under 620
- ✗ Might relocate in 1-3 years
- ✗ Using retirement funds for down payment
Pro Tip: Renting isn't "throwing money away." If you're not ready, renting gives you flexibility to build savings, improve credit, and wait for the right opportunity.
2. How Much Can You Afford?
Banks will often approve you for more than you should actually spend. Use these guidelines to determine a comfortable budget:
The 28/36 Rule
28%
Maximum of gross monthly income on housing costs (mortgage, taxes, insurance)
36%
Maximum of gross monthly income on total debt (housing + car + student loans + credit cards)
| Annual Income | Max Monthly Payment (28%) | Approximate Home Price* |
|---|---|---|
| $60,000 | $1,400 | $210,000 - $250,000 |
| $80,000 | $1,867 | $280,000 - $330,000 |
| $100,000 | $2,333 | $350,000 - $420,000 |
| $150,000 | $3,500 | $525,000 - $630,000 |
*Assumes 20% down, 7% interest rate, includes estimated taxes and insurance
Remember: Just because you're approved for a certain amount doesn't mean you should spend it. A smaller mortgage means more money for retirement, travel, and life's other priorities.
Try our calculator: Use our Mortgage Calculator to see exactly what your monthly payment would be, including taxes and insurance.
3. Saving for a Down Payment
The down payment is often the biggest hurdle for first-time buyers. Here's what you need to know:
How Much Do You Need?
3-5%
Minimum for conventional loans
Requires PMI
10-15%
Good middle ground
Lower PMI, better rates
20%
Traditional target
No PMI required
Strategies to Save Faster
- Automate savings: Set up automatic transfers to a dedicated "house fund" account
- Cut big expenses: Downgrade your car, find a cheaper apartment, reduce subscriptions
- Increase income: Side hustles, freelancing, or asking for a raise
- Bank windfalls: Tax refunds, bonuses, and gifts go straight to savings
- High-yield savings: Earn 4-5% APY while saving (not in stocks—too volatile for short-term goals)
Down Payment Assistance Programs
Many first-time buyers don't realize help is available:
- FHA loans require only 3.5% down
- VA loans offer 0% down for veterans
- USDA loans offer 0% down in rural areas
- State and local programs offer grants or low-interest loans
- Employer programs (some companies help with down payments)
4. Understanding Credit Scores
Your credit score significantly impacts your mortgage rate. A higher score means lower monthly payments.
| Credit Score | Rating | Typical Impact |
|---|---|---|
| 300-579 | Poor | Difficult to get approved |
| 580-669 | Fair | Higher rates, FHA loans available |
| 670-739 | Good | Competitive rates available |
| 740-799 | Very Good | Better than average rates |
| 800-850 | Excellent | Best rates available |
How to Improve Your Credit
- Pay bills on time - Payment history is 35% of your score
- Keep credit utilization under 30% - Ideally under 10%
- Don't close old accounts - Length of credit history matters
- Limit new credit applications - Each inquiry dings your score
- Check for errors - Dispute any inaccuracies on your credit report
The Rate Difference: On a $400,000 loan, improving your score from 680 to 740 could save you 0.5% on your rate—that's $100+/month or $36,000+ over the life of the loan.
5. Types of Mortgages
Conventional Loans
Not government-backed. Require 3-20% down. Best rates for buyers with good credit (700+). PMI required if down payment is less than 20%.
FHA Loans
Government-insured. Only 3.5% down with 580+ credit. More lenient requirements but requires mortgage insurance for the life of the loan.
VA Loans
For veterans and active military. 0% down payment, no PMI, competitive rates. One of the best loan programs available.
USDA Loans
For rural and suburban homebuyers. 0% down payment. Income limits apply. Check USDA eligibility maps for your area.
Fixed vs. Adjustable Rate
Fixed-rate: Same rate for 15 or 30 years. Predictable payments. Best for long-term owners.
ARM: Lower initial rate that adjusts after 5-7 years. Risky if rates rise. Only consider if you'll move before adjustment.
6. Getting Pre-Approved
Pre-approval is essential before house hunting. It tells sellers you're a serious buyer with financing ready.
Documents You'll Need
- Pay stubs (last 2-3 months)
- W-2s and tax returns (last 2 years)
- Bank statements (last 2-3 months)
- Investment account statements
- ID and Social Security number
- Employment verification
Important: Get quotes from at least 3 lenders. Rates can vary significantly. All credit inquiries within a 14-45 day window count as one inquiry for your credit score.
7. House Hunting Tips
Make a Must-Have vs. Nice-to-Have List
Can't Change:
- Location/neighborhood
- School district
- Lot size
- Commute time
- Basic structure/layout
Can Change Later:
- Paint colors
- Flooring
- Kitchen updates
- Landscaping
- Fixtures and finishes
Red Flags to Watch For
- Water stains on ceilings or walls
- Cracks in foundation
- Musty smells (could indicate mold)
- Uneven floors
- DIY electrical or plumbing work
- Neighborhood with many for-sale signs
8. Closing Costs Explained
Beyond the down payment, closing costs typically run 2-5% of the home price. Budget for these:
| Cost Type | Typical Amount |
|---|---|
| Loan origination fee | 0.5-1% of loan |
| Appraisal | $300-$700 |
| Home inspection | $300-$500 |
| Title insurance | $1,000-$3,000 |
| Attorney fees | $500-$1,500 |
| Prepaid taxes/insurance | 2-6 months worth |
| Recording fees | $50-$250 |
Negotiation tip: You can sometimes negotiate for the seller to pay some closing costs, especially in a buyer's market. Ask your agent about "seller concessions."
9. Common Mistakes to Avoid
Making big purchases before closing
Don't buy a car, furniture, or anything on credit. Lenders re-check your finances before closing.
Skipping the home inspection
Never waive inspection to win a bidding war. A $400 inspection could save you $40,000 in repairs.
Emptying your savings for the down payment
Keep an emergency fund. Homes always have unexpected expenses.
Buying at the top of your budget
Just because you're approved for $500K doesn't mean you should spend it. Leave room for life.
Forgetting about ongoing costs
Property taxes, insurance, maintenance, HOA fees, and utilities add up. Budget 1-2% of home value yearly for maintenance.
10. Your Homebuying Checklist
6-12 Months Before
- ☐ Check and improve credit score
- ☐ Save for down payment and closing costs
- ☐ Build emergency fund (separate from down payment)
- ☐ Research neighborhoods and price ranges
- ☐ Calculate what you can afford
2-3 Months Before
- ☐ Get pre-approved (compare 3+ lenders)
- ☐ Find a real estate agent
- ☐ Make your must-have list
- ☐ Start touring homes
Making an Offer
- ☐ Research comparable sales
- ☐ Submit offer with pre-approval letter
- ☐ Negotiate terms
- ☐ Sign purchase agreement
Under Contract
- ☐ Schedule home inspection
- ☐ Complete loan application
- ☐ Get homeowner's insurance quotes
- ☐ Review inspection report and negotiate repairs
- ☐ Complete appraisal
- ☐ Do final walkthrough
Closing Day
- ☐ Review closing disclosure (3 days before)
- ☐ Wire funds or bring certified check
- ☐ Sign documents
- ☐ Get your keys!
Ready to Crunch the Numbers?
Use our calculators to plan your home purchase: