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Buying a Home for the First Time? How to Navigate Your Purchase

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Nothing could be more exciting than buying your first home! After years of saving and renting, it’s finally time to be the master of your own domain. But buying a home can be much more complicated than you might realize. The asking price of the home is just one piece of the equation as you navigate this all-too-important purchase. From shopping for a mortgage to budgeting for unexpected costs, we’ll walk you through every step of the process.

Man and a woman sitting on a couch, smiling together while looking for home listings on their phone.
Yellow notepad with pen svg icon Lesson Notes
  • Build your budget including the down payment, insurance, taxes, closing costs and other fees.
  • Add up your costs to determine how much you can afford.
  • Determine whether you’ll use a conventional or government loan and know the different requirements for the type of mortgage you select.

Budgeting for Your First Home

Before you find the home of your dreams, you need to know exactly how much you can afford to spend. It’s always best to stay within your means when buying your first home. You will likely need to take out a loan (also known as a mortgage) to buy the house, which means going into debt. The longer it takes you to pay off the loan, the more you’ll have to pay in interest.

Buying a home involves so much more than the asking price. Here’s a list of all the expenses that go into buying a home:

Down Payment

When taking out a mortgage to buy your home, the bank or credit union will ask for an initial down payment, usually expressed as a percentage of the total amount. The percentage depends on the type of mortgage, lender and your credit score. While many people typically believe that you need to make a 20% down payment, that is not always the case. If you have good credit, you might be able to get away with paying just 3%, while others may have to pay as much as 5%.

That may not sound like a lot, but a down payment of 3% can easily add up. If you’re looking at buying a home worth around $300,000, your down payment will be around $9,000.

It’s usually best to talk to a few lenders to get an idea of how much you’ll need to spend on the down payment before you start shopping for your first home.

Mortgage Insurance

Banks and credit unions will often use mortgage insurance to lower the risk of underwriting the loan. If you are looking to pay less than 20% of the home’s total value as a down payment, the lender will likely ask you to pay for mortgage insurance. This would protect the bank or credit union from any financial losses if you should default on your loan or fall behind on making payments.

The mortgage insurance will be included in the terms of the loan agreement. It will be tacked onto your monthly mortgage payments, so keep this figure in mind when comparing different types of loans. You can also try to increase your down payment to 20% or choose a cheaper home to avoid paying mortgage insurance. Note that MI premiums can be canceled once you've paid off 20% of the loan balance.

Property Taxes

Research the local property taxes when shopping for your first home. Your taxes may rise or fall dramatically depending on which neighborhood or state you choose. Consider how much your taxes will change over time. You could end up paying $1,500 or more at the end of the year, so consider this when budgeting for your new lifestyle.

You will be responsible for paying the property taxes on your new home as soon as the deal has been closed. The seller will usually pay the property taxes up until the day of the closing, so both of you are only paying taxes during the time you own the property.

Homeowners Insurance

You’ll also have to insure your new home once it officially belongs to you. When looking for insurance products and services, it’s always best to shop around. This could be one of the most important purchases of your life, so it’s important to get the proper coverage to protect it.

Go through the terms of the policy with a fine-tooth comb to see what’s covered and what’s not. Your monthly premiums depend on a range of factors, including where you live, the perceived risk, the amount on coverage and the size and value of your home. Currently, the national average for homeowner’s insurance premiums is around $101 a month. Consider setting money aside each month for the deductible, in the case that you need to make an insurance claim.

If you have a lot of valuables lying around or live in an area with a high flood risk, consider expanding your coverage or taking out an insurance rider to cover your belongings. It’s always better to be safe than sorry.

Home Inspection

The home inspection is one of the most important parts of buying your first piece of property. It’s important to note that the inspection is entirely optional, but you should never buy a home without first having it evaluated by a professional, regardless of how well you know the seller. This is your only and last chance to address any potential issues with the house. Many of these issues can be hard to spot for the untrained eye, such as land, plumbing, ventilation and construction issues.

Hiring a home inspector means bringing in an impartial third-party to thoroughly inspect the home. If they find an issue, you can still back out of the purchase or ask the seller to make repairs or lower the price.

In most cases, you will need to pay for the inspection out of pocket. Choose a reputable company with a strong rating. It usually costs around $400 to have a 2,000 square foot home inspected, but it will cost extra if you have a large home.

Realtor Fees

There’s a good chance you’ll have to use a realtor when buying your first home. They will help lock down a great deal as you navigate the local real estate market. Having a good agent by your side will also help you carry the load. After all, shopping for a home can feel like having a part-time job, so don’t be afraid to ask for help. They will also give you an honest opinion in terms of how much you can afford and where it’s best to live. Realtors usually charge around 6% of the final sale amount of the home. Note that this commission is paid by the seller, not the buyer.

Closing Costs

Finally, the lender will ask you to cover the closing costs of the mortgage, which makes the loan official. This usually ranges from 2% to 5% of the loan amount. Be sure to include this figure in your budget.

Closing costs usually involve a number of products and services, including processing, underwriting, appraisal, recording and courier fees. The bank or credit union may also charge you when checking your credit report or transferring funds. Make sure you understand the full cost of taking out a mortgage. The customer representative or teller should go over every charge before having you sign on the dotted line.

Move-in Expenses

Lastly, don’t forget about the cost of moving, buying new furniture and making repairs. It’s hard to know exactly how much you’ll need to spend until you move in, so set aside plenty of room in your budget for last-minute adjustments as you get settled in your new home.

How Much Can You Afford?

So, now you know everything that goes into buying a home. Add up all these expenses, including up-front costs like the down payment and closing fees, as well as monthly costs like insurance and mortgage payments. Based on your current finances, you should have a rough idea of how much you can afford when shopping for your first house.

Use our home affordability calculator below to see how much can spend.

 

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Choosing a Mortgage

Once you have a rough budget in mind, it’s time to select your mortgage. There are generally two types: those backed by the government and those that are not. Most consumers will receive a conventional loan or mortgage, but there are a few exceptions.

Conventional Loans

A conventional loan is issued by a bank or credit union. It’s not backed by the government, which means the lender is taking on some level of risk by issuing you the loan.

To qualify for a conventional loan, you will need a decent credit score. The higher your score, the more agreeable the terms. If you have a score above 700, you should be able to lock in a lower interest rate or reduce your down payment. If you have little to no credit, you might have to pay more in interest as well as a higher down payment to show the bank you can repay the loan on time.

Government Loans

Government backed loans are guaranteed by the government, which means the lender isn’t taking on as much risk by issuing the loan. If the borrower falls behind on their payments or defaults on the loan, the government will compensate the lender for any losses. The government backs these loans to encourage banks and credit unions to lend money to customers that wouldn’t qualify for a conventional home loan on their own

Loans backed by the Federal Housing Authority (FHA) are designed to help low to middle-income families buy their first house. To qualify, you will need to show proof that you make less than a certain amount. The down payment may be as little as 3.5% with competitive interest rates

Loans backed by the Department of Veterans Affairs are reserved for former or active duty members. These loans may require a 0% down payment to help veterans reassimilate to civilian life.

Loans backed by the U.S. Department of Agriculture are designed to help rural Americans and farmers buy land in rural areas. To qualify, the land or home in question must be in an area that’s designated as “rural.” The USDA will even make direct payments to low-income borrowers to help them hold onto the land.

Unless you meet the criteria above, you will likely have to go with a conventional loan. These are used to purchases a wide variety of homes across the country. Be sure to compare different types of loans and mortgages during the shopping process.

Use our calculator below to see how loan programs differ from one another.

 

 

VIEW MORE CALCULATORS

 

You may be able to lock in a lower interest rate by going to your local credit union as opposed to a national bank. Credit unions specialize in serving customers in the regional area. They also tend to be knowledgeable when it comes to the local housing market.

Use this information when buying a home for the first time. Plan ahead and pad your budget in case of the unexpected. It’s always best to choose a home that’s within your means as opposed to an extravagant house and living paycheck to paycheck.

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