Being a first-time home buyer is exciting! But I know it can also feel overwhelming—especially when you see homes being purchased at a median of nearly $350,000 and available homes flying off the market in just over two weeks.1
With real estate trends like those, you might be tempted to make an impulsive purchase that could hurt your financial goals and keep you paying a mortgage well into retirement.
No one wants that! Trust me, you guys, it’s worth buying your first home the right way. And that means buying a home that you love and that doesn’t hurt your future money goals.
You may be thinking, Yeah, that would be great, Rachel. But where do I even start?
I’m so glad you asked! I’ve put together 10 tips for first-time home buyers as they tackle the home-buying process. Put these into practice today so your first home is a blessing, not a burden.
10 First-Time Home Buyer Tips
- Pay Off All Debt and Build an Emergency Fund
- Use the 25% Rule to Know How Much House You Can Afford
- Save a 10–20% Down Payment
- Don’t Forget to Save for Closing Costs
- Get Preapproved for a Loan Before House Hunting
- Find a Home for Sale in Your Price Range
- Research Neighborhoods for Best Fit
- Think Long Term
- Make a Competitive Offer (That’s Within Your Budget!)
- Be Prepared for Closing
1. Pay Off All Debt and Build an Emergency Fund
It may not be the first-time home-buying tip you were expecting, but it is hands down the most important. Why? Because owning a home is expensive—much more expensive than renting, even if your monthly house payment will be similar to or cheaper than your current rent amount. When you own a home, you’re responsible for everything. All the maintenance. All the mishaps. All the upkeep. And that can add up fast! Before you even think about buying your first home, make sure you’re debt-free and have an emergency fund of three to six months of expenses in place.
See how much house you can afford with our free mortgage calculator!
Buying a home debt-free (besides the mortgage) with a nice big emergency fund protects you from huge financial setbacks when things go wrong. And trust me, things will go wrong. But because your money won’t be tied up in payments and boatloads of interest, you’ll have the cash to pay for any expenses that suddenly come your way. Talk about peace of mind.
Now, once you’re debt-free, I want you to stay debt-free. So, as you’re shopping for your first home and getting excited about decorating and filling it with new furniture, make these four words your mantra: Stick to the budget.
The spender in me knows that’s easier said than done. Especially if that means you might have some empty rooms for a little while. But your future self will thank you! And if you find yourself thinking, Oh well, I’ll just put it on credit—stop right there! You want the good money habits you learned while getting out of debt to stick, which means you’ve got to stop repeating bad ones.
2. Use the 25% Rule to Know How Much House You Can Afford
Before you get emotionally attached to a beautiful house, check your monthly budget to determine how much house you can afford. Make sure your monthly housing costs (including HOA fees, taxes, insurance, etc.) are going to be no more than 25% of your monthly take-home pay.
For example, let’s say you bring home $6,600 a month. Multiply that by 25% to establish your maximum monthly house payment of $1,650. But don’t forget that property taxes and homeowners insurance factor into that monthly payment. So, based on a 15-year mortgage with a 4% fixed interest rate, a 1.14% property tax rate and a homeowners insurance policy that costs $1,200 per year, here are the home options you can afford:
- $195,000 home with a 10% down payment ($19,500)
- $225,000 home with a 20% down payment ($45,000)
- $253,000 home with a 30% down payment ($75,900)
- $288,00 home with a 40% down payment ($115,200)
Remember, these are just estimates. Use our mortgage calculator to try other combinations and find the right mortgage amount, interest rate and down payment for your budget. And since property tax rates and the cost of homeowners insurance vary, check with your real estate agent and insurance company for estimates to calculate how much house you can afford.
3. Save a 10–20% Down Payment
If saving up to pay cash for the total price of a house isn’t reasonable for buying your first home, at least save for a down payment of 10–20% or more. A 20% down payment gets you out of paying for private mortgage insurance (PMI), which protects the mortgage company in case you can’t make your payments and end up in foreclosure. PMI usually costs 1% of the total loan amount, and you’ll be charged that 1% every year. So it can really add a lot to your monthly mortgage payment.
The Worst Mortgages for First-Time Home Buyers
If a 20% down payment seems out of reach, first-time home buyer programs that offer single-digit down payments may sound tempting. But don’t use them! These options will cost you more in the long run. And remember—if it seems like a deal for you now, it’s because it’s an even better deal for your lender in the end.
Here are some low-to-no down payment mortgage options to avoid:
- Adjustable-Rate Mortgages (ARMs): ARMs might seem great with a low initial interest rate, but they allow lenders to adjust the rate to transfer the risk of rising interest rates (and monthly payments) to you.
- FHA Loans: You may be able to get an FHA mortgage with as little as 3.5% down, but you have to pay a mortgage insurance premium (similar to PMI) for the life of the loan. That’s thousands of dollars that won’t go toward paying off your mortgage.
- VA Loans: VA loans allow veterans to buy a home with no down payment. But if the real estate market shifts, you could easily owe more than the market value of your home. These loans also carry a bunch of fees and usually charge interest rates that are higher than those for conventional loans.
The Best Mortgage for First-Time Home Buyers
I only recommend a 15-year, fixed-rate conventional mortgage with a 10–20% down payment. Here are the reasons why:
- A 15-year term does create a higher monthly payment, but you’ll pay off your mortgage in half the time. That means in 15 years, you completely own your home and can put what you’d spend on the next 15 years of house payments toward building wealth and giving. Not to mention, a 15-year term lets you have a lower interest rate and save tens of thousands of dollars in interest.
- A fixed-rate conventional loan keeps your interest rate the same for the life of the loan, which protects you from the increasing expenses of rising rates.
How a 30-Year Mortgage Compares
If you’re considering a 30-year mortgage for your first home because of the lower monthly payment, please, don’t do it. When you look at the math on a 15-year versus a 30-year, you’ll realize you pay a whole lot more money on a 30-year mortgage in the long run. Like tens of thousands of dollars more.
Look at it like this: Let’s say you want to buy a $225,000 house with a 20% down payment. That means you need a mortgage for $180,000. Here’s how the cost differences break down between your 15-year and the 30-year mortgage options.
15-Year at 4%
30-Year at 4.5%
Number of Payments
Total Interest Paid
Total Amount Paid
Now, that’s $88,676 in savings with a 15-year fixed-rate mortgage—not to mention you’ll be payment-free 15 years sooner. I mean, nearly $90,000 in savings—hello!
4. Don’t Forget to Save for Closing Costs
Along with your down payment, you’ll also need to pay for closing costs. On average, closing costs are about 3–4% of the purchase price of your home.2 Your lender will give you a specific number so you know exactly what to bring on closing day. These fees pay for important steps in the home-buying process, including:
- Home inspection
- Credit report
- Homeowners insurance
Let’s see how this plays out with our example of a $225,000 home. If you multiply $225,000 by the higher 4% closing cost average, you’ll find that you need $9,000 for closing costs. Now, let’s add that to your 20% down payment of $45,000. Together, the two equal $54,000, which is about what you’ll need to save to pay for the down payment and the closing costs on your first house.
Tackle saving for your closing costs and down payment with the same amount of intensity I tell people to use when they’re getting out of debt and building a full emergency fund to get it done as fast as possible. In fact, it’s okay to put retirement savings on hold for a short period of time to save for a home—but you’ve got to hustle!
5. Get Preapproved for a Loan Before House Hunting
Once you’re confident you have enough cash saved to pay for closing costs and 10–20% of your home, you’re ready to handle the rest by talking to a mortgage lender.
Get prequalified for a loan and take the extra time to get a preapproval letter before you start your home search. Preapproval shows sellers that you’re a serious buyer, which is a great way for first-time home buyers to get ahead in a competitive market.
To get preapproved, your lender will need to verify your financial information (proof of income, taxes, etc.) and submit your loan for preliminary underwriting. If you live a debt-free lifestyle like I teach, you may need to find a lender who believes in debt-free homeownership and will work with first-time home buyers who have no credit score.
6. Find a Home for Sale in Your Price Range
Most first-time home buyers typically find the home they purchased online or through a real estate agent. Doing both sets you up for success!
Find homes you like online and send them to your real estate agent so they have a good idea of what you’re looking for. Then they can use a multiple listing service (MLS) to find homes that meet your criteria in your desired areas.
An MLS is created, maintained and paid for by real estate professionals, and it can really help first-time home buyers like you to view the largest pool of properties for sale in the marketplace. Real estate agents also provide valuable market expertise and can help you find great deals on homes as soon as (or before) they’re listed.
7. Research Neighborhoods for Best Fit
Be careful not to buy a home based on the property and price alone. According to an NAR survey, home buyers are more willing to compromise on a home’s condition (20%) and size (18%) than on the quality of its neighborhood (6%) and distance from a school (2%).3 So make sure you factor neighborhood quality and location into your decision.
Ask your real estate agent for information on crime rates and the quality of schools around your prospective neighborhoods. Calculate your new commute times to see if they seem manageable. Visit the neighborhood at different times and days to check for traffic conditions and noise levels and to see if people are comfortable being outdoors. Only choose a neighborhood that you and your family feel good about.
Once you’ve narrowed down the neighborhoods, attend a few open houses. Looking at homes that are for sale—even if they’re not a perfect fit for you—is a great way to learn more about the area. When you do eventually find a house you love, you’ll know how your place compares to better or worse homes in that neighborhood.
8. Think Long Term and Be Patient
When it comes to buying, a good strategy is to find the most affordable house in the best neighborhood. If you buy at the bottom of the price range in a good neighborhood, you’ll have more room to build home value. Future buyers who are shopping in a $200,000 neighborhood won't be looking for a $300,000 home.
For instance, let’s say you find a home that’s the only one on the block without wood floors and granite countertops. If you have the cash to make those upgrades, you’ll be able to add instant value to your home!
Make sure to pay attention to home values and economic activity in the area. Are home prices rising or declining? Are businesses booming or closing? You can tell a lot about how valuable a neighborhood is by what’s happening in the community. It may take a little longer to find a home that will be a good investment in the long run, but especially for your first home, it is so worth it.
9. Make a Competitive Offer (That’s Within Your Budget!)
Let’s say you found the home you want and can afford. Since you’re already preapproved for a loan, you’re ready to make an offer. If you’re a first-time home buyer, it may be hard to know how much you should offer. That’s when you can rely on the expertise of your real estate agent.
Ask your agent to help you make sure your offer is competitive but also within your budget and the home’s value. Be careful not to make an impulsive offer that’s higher than you can afford just to knock out the competition. A personalized letter might help your offer stand out among multiple bids in a hot market.
10. Be Prepared for Closing
Once a seller accepts your offer, the closing process will begin. Keep things running smoothly by knowing what to expect when closing on a house. The average closing process takes 53 days, which gives you plenty of time to tackle closing items.4 A real estate agent will schedule the remaining steps from home inspection to final walkthrough, and they’ll keep you informed about any roadblocks.
As you prepare for closing, make sure you read every document and ask your real estate agent to explain anything you don’t understand—especially before you sign the official contract for the home transaction. It’ll be your signature on the documents, so you’ll be the one responsible for anything you sign.
Ready to Get Started?
Your first home is a big purchase—maybe even the biggest one you’ll have ever made up to this point in your life! Because of that, you don’t want to risk messing this up. A real estate professional will take the weight off your shoulders by helping you find a home, negotiate a deal, and see the process through until closing.
Need help finding an expert you can trust with such an important purchase? Check out our RamseyTrusted Endorsed Local Providers (ELP) program. We only recommend real estate agents who close at least 35 home transactions per year or close more home transactions than 90% of the agents in their market. Not to mention our agents must maintain excellent levels of customer service and are personally coached by our Ramsey team.
Trust me, these pros are the best! Find an agent now!