A house is the biggest purchase you’ll ever make in your life (unless you go way overboard buying modern art). You might feel anxious or excited about buying a home . . . and probably have lots of questions: Are there first-time home-buyer programs? What is the buying process for a first-time home buyer?
Don’t worry. We’ve got your back. In this first-time home buyer’s guide, we’ll walk you through everything you need to know to make your journey into homeownership a success.
Let’s start by looking at the different first-time home-buyer programs out there.
Types of First-Time Home-Buyer Programs, Loans and Grants
First-time home purchasers have several programs available to them, but the most popular are: FHA loans, USDA loans, VA loans and down payment assistance loans. Let’s take a quick look at how they work.
The Federal Housing Authority (FHA) offers government-backed loans to first-time home buyers called FHA loans. These loans are designed for people with low down payments (as little as 3.5%) and not-so-great credit. FHA loans are the most popular first-time home-buyer program.
Find expert agents to help you buy your home.
FHA loans seem great at first, but they have some sneaky fees. They require you to pay a 1.75% mortgage insurance premium (MIP) up front and an annual premium between 0.45% and 1.05% for the life of the loan.1 So, an FHA loan can cost you thousands of extra dollars that don’t go toward paying off your mortgage.
United States Department of Agriculture (USDA) loans are a type of government-backed loan for people who live in rural areas. USDA loans require no down payment, but they also include additional premiums with an initial fee of 1% and a 0.35% annual fee.2
U.S. Department of Veterans Affairs (VA) loans are for military veterans and are similar to USDA loans. They include fees up to 2.3% of the purchase price.3 Just like with FHA and USDA loans, those fees add up pretty quickly.
Down Payment Assistance Loans
As you get more serious about buying a home, you might hear about down payment assistance (DPA) programs offered by some cities and states. These programs offer low- or no-interest loans to help people with lower incomes afford a down payment.
A few larger cities across the country offer grant money as part of a no down payment program for first-time home buyers with low incomes in minority neighborhoods. A first-time home-buyer grant does not have to be repaid.
Be careful though: These types of DPA loans and grants could get you stuck living in a home you can’t afford with little or no equity—which could be a big problem when you go to sell your house.
Since all of these first-time home-buyer programs have additional costs that don’t help you pay off your home, we recommend avoiding these types of programs and choosing a 15-year fixed-rate conventional loan. This will get you a better interest rate, allow you to build equity, and get your home paid off faster.
Let’s take a look at how the cost of first-time home-buyer loans compares to a conventional loan.
Total Cost Breakdown
We’ve thrown around a lot of percentages and numbers. So to help you wrap your head around the differences between the cost of an FHA loan and a 15-year conventional loan, here’s a side-by-side comparison of the costs for both.
We used our mortgage calculator to show the difference between a 15-year fixed-rate conventional loan and a 15-year FHA loan for a house priced at $300,000. To keep things simple, we left out property tax, homeowners insurance and HOA dues.
15-Year Fixed-Rate Loan for $300,000 House
Base Loan Amount
$2,651 (includes 0.7% MIP payment)
Total Mortgage Insurance Premiums
$22,323 ($5,066 up-front MIP + $17,257 annual MIPs)
None (You don’t need private mortgage insurance if you put 20% down.)
So a conventional loan with a 20% down payment could save you nearly $50,000 over the life of the loan. Plus, the payment on the conventional loan is $600 less—leaving you a lot more money in your budget for other expenses and financial goals. And those savings only go up if you buy a more expensive home.
Qualifications for First-Time Buyers
Listen, defining first-time home buyer sounds simple. If you’re buying a home and you’ve never bought a home before, that makes you a first-time home buyer, right? Yes, that’s true, but the U.S. Department of Housing and Urban Development (HUD) also has five first-time home-buyer loan requirements that could make you eligible even if you’ve already owned a home. Here they are:
- You or your spouse haven’t owned a home in three years. If you have owned a house but your spouse hasn’t, you both are considered first-time home buyers.
- You’re a single parent who owned a house with a spouse while married.
- You’re a homemaker who owned a house with a spouse before getting divorced.
- Your previous principal residence was not on a permanent foundation—this applies to mobile homes.
- You owned a house that was not in compliance with building codes and could not be brought into compliance for less than the cost of building a new house.4
Even though you might be eligible for a federal first-time home-buyer loan, you should steer clear of these programs because they’ll cost you a lot more in the long run. The truth is if you can’t afford to buy a home with a conventional, fixed-rate mortgage, then you can’t afford to buy a home right now. Talk with a professional real estate agent to guide you through your best options.
Buying Process for First-Time Home Buyers
Whether you’re buying a home for the first time or the seventh time, the buying process is pretty close to the same—with a few subtle differences. But as a rookie home buyer, you really need to be on your game, so you don’t end up making mistakes.
Here’s an overview of the steps you need to take on your way toward buying a home.
1. Figure out how much house you can afford.
Your house payment (including principal, interest, property taxes, home insurance, PMI and homeowners association fees) should be no more than 25% of your take-home pay. If your payment is more than that, you’ll end up being house poor. We want you to own your house, not have a house that owns you. Our How Much House Can I Afford? calculator can help you figure out exactly how much you can afford.
2. Save for a down payment.
Try to save at least 20% of the home price for a down payment. As a first-time home buyer, it’s okay to only save 5–10%. But that means you’ll have to pay private mortgage insurance. Also, don’t forget to save for closing costs and moving expenses.
3. Identify your favorite neighborhoods.
Instead of running around the whole city looking for a house, narrow down your home search to just a few areas. Remember, real estate prices are all about location, location, location. More desirable neighborhoods will have higher-priced homes, so don’t fall in love with a neighborhood you can’t afford. A good real estate agent can help you find the house and the neighborhood of your dreams.
4. Get preapproved for a 15-year fixed-rate conventional loan.
A 15-year fixed-rate mortgage is the best mortgage for a first-time home buyer because it will cost you much less in interest over the life of the loan. Steer clear of FHA, USDA and VA loans. Use our mortgage calculator to see how much your monthly payment (including taxes and insurance) will be on a conventional loan. Getting preapproved for your loan before you buy will be helpful when you’re ready to make an offer on a home you love.
5. Find an expert real estate agent.
You want an agent you can trust—one who has lots of experience and can guide you through every step of the home-buying process. Just because Uncle Ron is a part-time agent, that doesn’t mean he should be your agent.
6. Meet with an agent and discuss your list of must-haves.
Getting on the same page with your agent will help you find the kinds of houses you actually want and can afford.
7. Go house hunting.
It takes time to find a house, so get in the habit of checking online listings. About 97% of home buyers search for homes online. Most buyers search for eight weeks and go to nine home showings before they find the home they buy.5
8. Make an offer on a house.
Once you find an affordable home you love, trust your real estate agent to help you make a competitive offer and negotiate with the seller for the best price. This is also where your preapproval comes in handy. It shows the seller you’re serious about your offer because you’ve already taken the initial steps to get financing.
9. Pay the security deposit and start the mortgage process.
10. Get a home inspection and appraisal.
A home inspection will let you know of any major or minor problems the house might have, and your agent can negotiate for the seller to pay for some or all of the repairs. An appraisal will protect you from paying too much for a house.
11. Be patient as your lender finalizes your loan documents.
There’s a ton of paperwork that goes into getting a mortgage, and it usually takes 30 or more days to get to closing day.
12. Start looking for homeowners insurance.
Your lender will require you to have coverage before financing your home. Set up a policy with one of our RamseyTrusted insurance agents.
13. Close on your house—finally!
Review all of your closing costs, sign a mountain of paperwork, and you officially become a new homeowner with the help of your agent.
Tips for First-Time Home Buyers
Remember how you felt the first time you jumped into the deep end of a pool? You were probably scared and excited at the same time. Being a first-time home buyer feels pretty much the same way. You’re signing up for a new—and big—responsibility, and you want to get things right so your home is a blessing and not a curse. To help you sort through it all, we’ve got some tips for first-time home buyers that’ll get you ready to jump into the deep end.
Pay off all debt and build an emergency fund.
It can be tempting to just dive into homeownership without a plan. But you really need to make sure your financial house is in order before you even think about buying a house. This means you need to get out of debt and save a fully funded emergency fund of 3–6 months of living expenses.
This sounds like a lot to do, but once you’re out of debt and have an emergency fund, your money won’t be tied up in monthly payments, and you’ll be able to save for a down payment like never before. Emergencies won’t derail your saving either. Buying a house is stressful, but being debt-free will lower your stress level like a day at the beach (assuming no sharks are spotted).
Save, save, save.
After you’ve figured out your house budget by following the 25% rule, you really have to get serious about saving for a down payment. Yes, a 5–10% down payment will work, but the more you save, the more house you can afford.
It’s hard work, but having a big down payment can be a game changer when you start shopping.
Get clear on needs versus wants.
Before you get serious about shopping for a home, you need to get clear on your needs versus wants. If you’re married, sit down with your spouse and make a list of needs and wants. Consider things like neighborhood, number of bedrooms and bathrooms, school district, and lot size.
Be realistic. A swimming pool and three-car garage probably won’t make the needs column for your first house. And as you look at homes, you might have to compromise on some of your needs and wants based on your budget.
And that brings us to our next tip:
Stick to your budget.
If you set your budget at $350,000, we can almost guarantee a $400,000 dream house will catch your eye. And then you’ll want to start fudging the numbers on your budget. Don’t give into the temptation to buy a home you can’t afford.
If you buy that budget-busting dream home, it will soon become a nightmare. Your house payment will become a source of constant stress, and every time the house needs some type of repair (and it will), you’ll feel like it’s the end of the world.
Tips for New Homeowners
After you’ve closed on your house and put down that fancy new welcome mat at your front door, we’ve got a few more tips to set you up for successful homeownership.
Beware of rip-off insurance offers.
Home transfers are public information, so after you move in, your mailbox might get stuffed with junk mail offering things like home warranties and mortgage life insurance. Toss that stuff in the trash.
If you’re not sure which types of insurance are a gimmick and which kinds you actually need, take our 5-Minute Coverage Checkup.
Update your coverage when you update your home.
The homeowner’s insurance policy you signed up for when you first bought your home might fall short of protecting you and your property if you do some home improvements. Updating your home increases its value, so you need to update your policy before trouble comes knocking at your door.
On the flip side, upgrades like a new roof, HVAC or a security system could actually save you money on coverage. If you need help figuring this out, connect with an independent insurance agent we trust.
Don’t be surprised during tax season.
Buying a house could impact your income taxes come April. You can deduct your mortgage interest, and if you’re self-employed and work from home, you might be eligible for the home office tax deduction.
If you want to make sure you file your taxes correctly, connect with one of the tax professionals we recommend. They’ll help you find out if you need to make any withholding adjustments now, so you don’t owe (or get an overly large refund) later.
Buy a house with help from an agent.
When it comes to making the biggest purchase of your life, you really need an experienced real estate agent who knows the market like the back of their hand. For a quick and easy way to find RamseyTrusted agents in your area, try our free Endorsed Local Providers (ELP) program. We only recommend agents who share our mission to serve you with excellence.
Still want some more info on the home-buying process? Download our free Home Buyers Guide.
Frequently Asked Questions
Still have questions? Here are some common ones to consider:
Are there first-time home-buyer benefits available?
Federal, state and local governments see the value of citizens being homeowners. And that’s why they’ve created benefits and programs like FHA loans and down-payment assistance to help you get a house.
But don’t let the government determine your future. Just because you qualify for a government-backed loan, that doesn’t mean you’re ready to buy a home. You have to make sure you’re on firm financial footing before you buy one.
How much money should I save before buying a house?
How much you save will depend on your budget and how much of a down payment you’re planning to put down. So, if your budget is $400,000, at the minimum you’ll need to save $20,000 for a 5% down payment. But remember, 10% ($40,000) would be even better and 20% ($80,000) would be best because you’ll avoid paying PMI. Also, don’t forget to save for closing costs, which are usually about 3–4% of the amount you borrow.6
How much money should I have in the bank before buying a house?
When you’re saving for a house, keep your money in a traditional savings account or even better—a high-yield savings account. That way your money is nearby if you need it but not so close you might accidentally spend it (like if you kept it in your checking account).
How much you need in the bank before buying a house depends on your budget. But remember, cash is king. (You can’t secure a loan with your vintage guitar collection.) Your lender needs to be able to look at your bank account and see that you have enough cash on hand to buy a house.
And one more thing: An emergency fund is not a down payment. It’s for emergencies only
Who pays for closing costs?
It’s kind of a bummer, but you should plan to pay 3–4% of the cost of your home for buyer’s closing costs. Some sellers might agree to pay some of the buyer’s closing costs to try to sweeten the deal, but that’s not as common as it was years ago.
Buyer’s closing costs cover things like inspection and appraisal fees, loan origination and processing fees, property taxes, title insurance, and homeowners insurance. Sellers don’t get off the hook though either. They have to pay a real estate agent commission (typically 6% of the sales price split between the listing agent and the buyer’s agent).
Can I use my 401(k) to buy a house?
You can withdraw money from your 401(k) to buy a house. But we’re not going to beat around the bush: Making an early withdrawal is a horrible idea. You’ll get hit with income taxes plus a 10% penalty. No thanks!
Hey, we know it’s tempting to tap into that pile of cash in your retirement account, but it’s not free money to spend however you want. Plus, you’ll derail your retirement savings—missing out on years and years of compound growth.