Buying a home is a key milestone in growing your net worth. As a naturally scarce asset, real estate grows in value over time while creating opportunities for passive rental income. There are also impressive tax benefits of real estate investing, which help reduce your tax burden and allow you to grow your wealth faster.
But the process of buying a home is complicated, especially for first-time buyers who aren’t familiar with the buying process.
With these first-time home buyer tips, you can learn what to expect from the process. And go into your first real estate purchase with confidence.
First-Time Home Buyer Tips
Here are the top seven things to know for first-time home buyers.
1. The First Step in Home Buying is to Clarify Your Needs and Goals
Why do you want to buy a house?
Do you want a place to raise a family? A tangible asset for financial security? Both? Maybe your goal is to become a millionaire through real estate investing. If your goal is to buy real estate for investment purposes, but you don’t necessarily want to be tied to a property, you can learn how to invest in real estate without buying property. Getting clear on your goals will inform your purchasing decisions.
Here are a few questions that can help you clarify your needs and goals.
How long do you want to own the home?
Will you live there yourself or rent it out?
If you’re going to rent it out, will it be year-round or seasonal? And how will you attract renters?
What type of home will work best for you (a condo, townhouse, or single-family home)?
Which neighborhood would suit you best?
How much space do you need?
Do you need outdoor space as well?
How important is proximity to amenities like parks, transportation, and schools?
Which features are on your must-have list?
Do you have any deal breakers?
What is your budget?
Your needs and wants may change as you work through the home buying process and learn more about your finances and what is available in your local market.
But, by establishing your needs and goals first, you will have some direction as you move forward.
2. Get Your Finances in Order
Buying your first home is entirely dependent on your ability to afford the down payment and qualify for a home loan to finance the rest. So your personal finances are crucial.
But what exactly do you need to do to get financially ready to buy a home? Let’s break it down.
Check Your Credit Score
Through sites like AnnualCreditReport.com, you can get a free copy of your credit report. This will tell you what your credit score is so you can see how close you are to having qualifying credit. Most lenders require a score of at least 620 (or as little as 580 for an FHA loan - more on that in a bit). The higher your credit score is, the better your interest rate will be. And this is important because your interest rate plays a big part in calculating your monthly mortgage payment amount.
Your credit report will also tell you if you have any black marks, like late payments or accounts in collections, on your credit history. If you have any negatives on your report, try contacting the company that noted the issue to see if there’s anything you can do to get it removed from your report. Sometimes you can simply pay off an old debt to instantly improve your credit score!
Pay Off Your High-Interest Debts
Before you buy a house, you want your debts under control. You might not be able to pay off your student loans, but you should at least pay off the debts with high interest rates. This means paying off your credit cards and paying back any personal loans. You might also want to consider paying off any auto loans.
Boost Your Savings Account
To buy a home, you’ll need cash for:
The down payment. The old standard is 20% of the purchase price, but that is simply not possible for many first-time buyers. So today’s buyers with good credit can qualify for as little as 3% down. If you have some credit issues, you might need to put 10% down. Important: if you put less than 20% down, you’ll need a Private Mortgage Insurance (PMI) policy, which will add to your monthly mortgage payment.
Closing costs. Closing costs typically come to 3-6% of the purchase price. This is in addition to the down payment.
Moving expenses. Buyers tend to underestimate the cost of the moving truck and/or movers.
Any urgent repairs or renovations at the new house.
An emergency fund. Once you’re a homeowner, you’re responsible for maintenance and repair costs. So when the air conditioner needs to be repaired or replaced, you need to have the money available to pay for that.
3. Understand Your Financing Options
How are you going to pay for your first house?
Mortgage loan options are toward the top of our list of what to know when buying a house for the first time, because getting the right mortgage can save you a small fortune. In all likelihood, you’re going to use one of the four main types of mortgage loans to purchase your home.
Four Primary Types of Mortgage Loans
Consider this your crash course in mortgage loan types:
1. Conventional Loans
This is the most flexible loan type, and it works for a wide range of buyers.
Down payments of as little as 3%
Requires good credit (at least a score of 620 for most lenders)
Can be used for primary residences, second homes, and investment properties
2. FHA Loans
These were created specifically for first-time buyers (although repeat buyers can also apply for FHA loans today).
As little as 3.5% down
Typically requires fair credit (at least a 580)
Can only be used for a primary residence (but you can use it for a multi-family property of up to 4 units as long as you live in 1 of them)
3. USDA Loans
These are only available for properties in rural areas.
0% down payment available
Typically requires fair to good credit
Can only be used for a primary residence (no multi-family or investment property options)
4. VA Loans
These are available only to qualified military service members, veterans, and their spouses.
0% down payment available
Typically requires fair to good credit
Can only be used for a primary residence (but you can use it for a multi-family property of up to 4 units as long as you live in 1 of them)
No PMI required
Other Financing Options
There are a few financing options that work in conjunction with your primary mortgage. These include:
First-time homebuyer assistance plans. State and local agencies offer grants to make homeownership more accessible to first-time buyers
Mortgage pre-approval is when a lender reviews your credit history and financials to determine if you qualify for a home loan, how much you can borrow, and what interest rate they can offer you.
If you want to find the best mortgage rates and terms, it’s critical to shop for the right mortgage lender. You might even enlist the help of a mortgage broker who can match you up with a suitable lender.
Getting pre-approved before starting your home search gives you two major advantages:
It tells you how much you can borrow so you stick to an appropriate price range, and
When you’re ready to make an offer, having a pre-approval letter makes your offer more appealing by confirming to the seller that you can qualify for a loan to close on the house.
One additional bit of first-time home buyer advice: just because you qualify for a certain amount doesn’t mean you should spend that much. If you spend as much as the lender allows, you could find yourself with an uncomfortably tight budget due to high mortgage payments. As a general rule, your monthly payments should be as close to 25% of your gross monthly income as possible.
5. Understand Your Local Housing Market
One of the best tips for buying your first home is to know what’s going on in your local real estate market. Your local market conditions will have a big impact on your buying experience. Consider whether you’re currently in a buyer’s market or a seller's market. If you’re buying a home in a buyer’s market, you’ll have less competition and more negotiating power. But if you’re working with a seller’s market, you’ll be competing with lots of buyers, so you’ll need to be decisive and bring your highest and best offer.
The best way to learn about your local market is through a real estate agent. A good real estate agent has their finger on the pulse of the market and can use that knowledge to inform your home search. Your real estate agent will have a deep understanding of each local neighborhood and will be able to guide you to areas that would be a good fit for you.
Also, real estate agent fees are typically paid by the seller, so you generally don’t have to worry about paying your agent. For all intents and purposes, their service is free to you.
To find a real estate agent, you can ask friends and family for referrals or search local agents online. Invest a little time interviewing multiple agents to find someone you trust to represent your interests.
6. Use Insider Tips to Get Your Offer Accepted
Once you find a home that works for you, you get to make an offer to purchase the home. In a seller’s market, where many buyers are competing for comparatively few homes, you need to be especially aware of what it takes to get your offer accepted.
We have a few offer-related tips for buying your first home.
Act quickly. If you wait, you could miss out.
Offer a reasonable price. Offering a low price because you want to “leave room to negotiate” often backfires. It can offend the seller and make them less likely to want to work with you. Especially if they have other interested buyers. Make an offer with a fair price and fair terms.
Increase your down payment if possible. The higher your down payment is, the less likely the deal is to fall apart because of financing. This helps the seller feel confident in your offer.
Consider an escalation clause. An escalation clause is used to automatically increase your offer price to match competing offers up to a certain dollar amount. This is helpful when you expect competing offers.
Regardless of your local market conditions, if you’re serious about a property, act decisively and bring a reasonable price to the table.
7. Do Your Due Diligence on Your Chosen Property
Once you have a home under contract, you get some time to check out the property before committing to the purchase. During the contract period (typically 30-60 days), while your lender is underwriting the loan, you can complete the following due diligence tasks:
Get a home inspection. This inspection outlines the physical condition of the property.
Order an appraisal. This confirms the value of the property.
Read the seller's disclosures. These will tell you what the seller knows about the property that might impact your decision to buy.
Get multiple homeowner’s insurance quotes. You’ll be required to carry homeowner’s insurance, so you’ll want to know how much the house will cost to insure.
Research the title. A title search confirms that the current owner has the right to sell the property and no other party is known to have any claims on the property.
Having access to all this information empowers you to make a knowledgeable decision about purchasing the house.
Additional First-Time Home Buyer Advice - Do’s and Don’ts
First-Time Home Buyer Don’ts:
Don’t make any financial changes during the buying process. Changing jobs, making a large purchase, or even paying off a large debt, can all void your home loan application and cause your lender to start over.
Don’t forget to change the locks on closing day. You get a set of keys on closing day, but you can’t be sure that’s the only set. For your safety, it’s best to change the locks immediately.
First-Time Home Buyer Do’s:
Keep a home maintenance fund once you buy. You’ll want to keep some cash available for when an unexpected home maintenance issue inevitably comes up.
Pay attention to your home equity after the purchase. Knowing how much equity you have in your home can help you decide when to refinance and when to sell.
Always be saving for your next property. Once you’re bitten by the real estate bug, you’re going to want to learn how to build a real estate portfolio.
Not Ready to Buy a Home but Want to Invest in Real Estate? Consider Gatsby Investment
Are you feeling overwhelmed by all this first-time homebuyer advice? That’s understandable. Buying a home is an intimidating process. But it’s still a smart investment with lots of benefits. And the sooner you can start investing, the better.
Our article about why you should start investing early shows how you can leverage compounding interest to grow your wealth exponentially. But maybe these first-time home buyer tips have you wondering if you’re ready to buy a home. In your case, it might not make sense to buy a home right now, but that doesn’t mean you have to put off investing in real estate!
With Gatsby Investment, you can start investing in real estate now, owning a share of a real estate project, without going through this challenging buying process.
Investing with Gatsby provides several benefits over buying a home on your own.
The purchase process is handled by a team of experts. Our analysts scout hundreds of properties before choosing the one project most likely to produce the best yields.
You don’t need to apply for a loan. Skip the time-consuming hassle of getting approved for a mortgage.
You don’t need good credit. Since you’re not getting a loan, your credit score is a non-issue.
The property is professionally developed/renovated and managed. You don’t need to lift a single tool or collect a single rent check. We take care of everything.
Low minimum investments make investing accessible. We pool funds from multiple investors, allowing you to buy into high-value Los Angeles real estate without excessive capital outlays.
Low minimum investments also allow for easy diversification. You can spread your investment between multiple projects to build an instant portfolio.
Flexible investment periods work with any time frame. Our projects range from around six months to five years, so you can choose the time frame that suits your goals.
Diverse property types. You can invest in a quick single-family flip, a long-term multi-family rental, or something in between. Check out our investment offerings to find a project that meets your goals.
Gatsby makes it easy to get started. Simply create a free account and choose your project(s). You can even monitor the status of your investment from start to finish directly from your online dashboard.
It’s never been easier or more convenient to invest in real estate. Visit Gatsby Investment to learn more.
