12 First-Time Homebuyer Questions You Should Ask
If you’ve never purchased a home before, it’s smart to make a list of first-time homebuyer questions to ask for this important financial milestone. Having answers to these questions can help you decide whether it’s the right time for you to become a homeowner.
1. Am I ready to own a home?
Financially speaking, you may be ready to buy a home if you have a good credit score, cash saved up for a down payment and closing costs, and a stable income. But there are other first-time homebuyer questions to consider as well:
- Do you have the bandwidth and budget to stay on top of home repairs and maintenance? Are you ready to be the person to deal with a leaky roof, clogged shower drain or replace a broken refrigerator? Don’t forget you’ll be the one footing the bills, too — usually to the tune of 1% to 4% of the home’s value each year.
- Do you value the lifestyle that comes with being a homeowner? Let’s face it, owning a home is a huge undertaking, and in many cases buying is actually more expensive than renting. If you don’t value the intangible benefits homeownership offers — like stability, the freedom to paint your walls whatever color you want or the ability to add multiple pets to your family — homeownership might not be right for you.
Read more about whether it’s better to rent or buy a house.
2. How long do I plan to live in this home?
It’s important to match your desire to own a home with your life plans. And, if you’re taking out a no- or low-down-payment mortgage, it becomes even more important.
- If you purchase a home and move out before the home’s value increases enough to cover your purchase costs, you won’t make a profit — and you may very well lose money. It’s likely to take you five to 10 years to turn a profit on a home purchase, though the larger your down payment, the sooner you’ll break even.
- If you buy a home with no down payment, you won’t have any equity in your home at first. If you’re forced to sell your home quickly, you may not have enough equity to cover the 5% to 6% you’ll typically pay real estate agents to sell your home.
Experiment with different down payment amounts, sales prices and closing costs using a rent versus buy calculator to determine if buying makes financial sense based on how long you plan to live in your home.
3. Can I afford a home?
A general rule of thumb is that you can afford a home if your total monthly debt — including your mortgage payment — makes up 43% or less of your before-tax income. Mortgage lenders call this your debt-to-income (DTI) ratio.
For example, if you earn $5,000 per month, then your total monthly debt (including your new house payment) shouldn’t exceed $2,150 per month ($5,000 x 43% = $2,150).
What you should know about DTI ratios
The 43% DTI ratio rule may be a good measure of the lender’s definition of affordability, but it’s a mistake to borrow the maximum amount a lender will approve you for. Make sure your mortgage matches your actual monthly budget. When you’re preapproved for a mortgage, lenders don’t consider your:
- Electricity, water or gas bills
- Car insurance premiums
- Monthly grocery bill
- Tennis camp, violin lessons, tutoring costs or other extracurricular expenses
- Savings plans for retirement
- Future medical bills, like braces or an unexpected injury
4. Is my credit good enough to buy a home?
This question is especially important if you need a mortgage, because your credit score helps determine whether you’ll be approved for a loan, as well as what interest rates you can access.
- A higher credit score often leads to a smoother loan approval, a lower interest rate and a cheaper monthly payment. Conventional loan lenders typically require a minimum 620 score, but they’ll likely reward you with a lower interest rate if your score is 780 or higher.
- You can qualify for a home loan with a credit score as low as 500 if you choose an FHA loan, which is backed by the Federal Housing Administration (FHA). You’ll need to make at least a 10% down payment to qualify with a score that low, however.
5. How much money do I need to buy a home?
You’ll need enough money to cover your down payment and closing costs. Closing costs alone typically come to 2% to 6% of your loan amount — and you’ll likely still need additional funds to cover moving costs.
What you should know about down payments
Your down payment is an upfront lump sum you pay to a mortgage lender to buy a home. Standard loan programs allow you to make a minimum down payment ranging from 0% to 3.5%.
| Loan program | Down payment minimum | Percentage of closing costs that the seller can pay |
|---|---|---|
| Conventional | 3% | 3% (up to a 10% down payment) 6% (10% to 25% down payment) 9% (25% or more down payment) |
| FHA | 3.5% | 6% |
| VA | 0% | 4% |
| USDA | 0% | 6% |
How your down payment affects whether you need PMI
You’ll need private mortgage insurance (PMI) if you make less than a 20% down payment on a conventional loan. The insurance covers your lender, not you, and claims are only paid if you default on your mortgage and the lender has to foreclose on your home.
If you’re applying for an FHA loan, you’ll pay two types of FHA mortgage insurance regardless of your down payment amount.
VA and USDA loans don’t require mortgage insurance. However, most VA loan borrowers do have to pay a VA funding fee, while the USDA charges two types of guarantee fees for USDA loans.
6. Should I get a 15-year or a 30-year mortgage?
Your loan term is the length of time you’re given to pay off your mortgage. Because they offer the lowest monthly payments, 30-year mortgages are the most popular choice. A 15-year mortgage cuts that payoff time in half, saving you thousands of dollars in interest compared to a longer term — but the tradeoff is that you’ll have a much higher payment. If you can afford that payment, though, there’s an added bonus: 15-year mortgage rates tend to be lower than 30-year mortgage rates.
7. Fixed rate vs. adjustable-rate mortgage: Which is better?
When fixed mortgage rates are high, it may be worth it to look at an adjustable-rate mortgage (ARM). ARM rates are generally lower than fixed mortgage rates during an initial “teaser” period that lasts between one month and 10 years. However, once the initial period ends, your rate and payment could go up (or in some cases go down) when the rate adjusts.
8. Which first-time homebuyer mortgage is best for me?
| Loan program | May be a good fit if: |
|---|---|
| Conventional fixed-rate mortgage |
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| Conventional adjustable-rate mortgage (ARM) |
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| FHA loan |
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| VA loan |
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| USDA loan |
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Down payment assistance programs
Local and state housing agencies often offer down payment assistance (DPA) programs, though the exact programs will vary based on where you live. You may be eligible for both down payment and closing cost assistance depending on how much you make, the area you’re buying in and any other criteria set by the DPA program you apply for.
9. What documents do I need to qualify for a loan?
Most lenders will ask for the following documents to verify your information when you apply for a home loan:
- Recent pay stubs for a one-month period
- Last two years’ W-2s and/or tax returns
- Most recent two months’ worth of bank statements
- Letters of explanation and documentation for special circumstances (such as divorce, bankruptcy or foreclosures in your history)
- Copies of your driver’s license to verify your ID and current address
- Two years’ worth of employment contacts and addresses
10. Should I get preapproved or prequalified?
If you’re not quite ready to buy, a prequalification may be all you need. You’ll have a conversation with a loan officer and provide your best guess about your income, credit score and down payment savings. You’ll receive a prequalification letter that can help you develop a budget and begin searching for houses.
On the other hand, a mortgage preapproval is best if you’re serious about buying in the near future. The lender will vet your financial information and, if you’re preapproved, issue you a preapproval letter. Having a preapproval in hand shows sellers that you’re a serious buyer when you want to make an offer.
11. How do I get the best mortgage rates?
You’ll get the best mortgage rate by shopping and comparing loan estimates from at least three to five different lenders. Be sure to collect your rate quotes on the same day (since rates change on a daily basis), and don’t be afraid to negotiate with lenders.
Learn more about how to comparison shop for a mortgage.
12. What should I expect during the first-time homebuying process?
Most first-time homebuyers will follow these steps during the mortgage process:
- Get a mortgage preapproval. You’ll fill out an online application, the lender will vet your finances and, if everything looks good, they’ll issue a preapproval letter with details about the estimated loan amount and interest rate you qualify for.
- Find a real estate agent. Ask co-workers, friends and family members for real estate agent recommendations. A good agent understands the local market, helps negotiate a competitive offer and guides you through the homebuying process.
- Order a home inspection. Once you find a home, your real estate agent will usually suggest that you get a home inspection. Even if your lender only requires a home appraisal, a home inspection is worth it to check on all of the working parts of the home you’re buying to reveal any repairs that should be made.
- Gather your paperwork for closing. Lenders may need updated pay stubs and bank statements to clear your loan to close, and may ask for letters of explanation or other required documents prior to closing. Respond quickly to documentation requests to avoid delays.
- Prepare for closing. Your lender must provide a closing disclosure three business days before your closing date. Review the figures and notify your loan officer of any changes before you get to the closing table. You should also schedule a walk through of the home before your closing to make sure it’s move-in ready.
- Once your loan records, get your keys. After you sign your closing documents, the lender reviews them and sends funds to complete your purchase. Once the title company receives the funds, they send them to the seller and transfer ownership to you, officially making you a homeowner.