12 First-Time Homebuyer Questions You Should Ask
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If you’ve never purchased a home before, it’s smart to make a list of first-time homebuyer questions so you’re ready for this important financial milestone. Having answers to these questions can help you decide if it’s the right time for you to become a homeowner.
- 1. Am I ready to own a home?
- 2. How long do I plan to live in this home?
- 3. Can I afford a home?
- 4. Is my credit good enough to buy a home?
- 5. How much money do I need to buy a home?
- 6. Should I get a 15- year or a 30-year mortgage?
- 7. Fixed rate versus adjustable-rate mortgage: Which is better?
- 8. What’s the best first-time homebuyer mortgage for me?
- 9. What documents do I need to qualify for a loan?
- 10. Should I get preapproved or prequalified?
- 11. How do I get the best first-time homebuyer mortgage rates?
- 12. What should I expect during the first-time homebuying process?
1. Am I ready to own a home?
You may be ready to buy a home if you have a good credit score, money saved up for a down payment and closing costs and make a stable income. However, answering this question requires more than just a knowledge of home loan types, down payments and credit scores. Home repairs and maintenance become your responsibility as a homeowner. Are you ready to get that leaky roof fixed, unclog that kitchen sink or replace that broken dishwasher?
If you’re tired of worrying about security deposits for pets or rent increases every year and want to paint the walls in your home whatever color you wish, you may be ready for homeownership. Homeownership provides tax benefits that renting doesn’t, which is good news if your income is on the rise due to promotions or bonuses.
Your monthly payments will build equity in a home you own, instead of a home your landlord owns. And when you pay off your mortgage, you officially own a home that you can pass onto future generations.
2. How long do I plan to live in this home?
This may be an easy question to overlook, but it’s important, especially if you’re taking out a no- or low-down-payment mortgage. Home equity is the difference between your loan balance and the value of your home — and if you buy a home with no down payment, you won’t have any equity in your home at first. A sudden job loss or transfer might force you to sell your home quickly, and you may not have enough equity to cover the 6% you’ll typically pay real estate agents to sell your home.
Experiment with different down payments, 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 in the mortgage lending world is you can afford a home if your total debt — including your monthly mortgage payment — makes up 43% or less of your before-tax income. In lender language, this is known as 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 may not match your monthly budget needs. When you’re preapproved for a mortgage, lenders don’t consider:
- How much your electricity, water or gas bills are
- How much you pay for car insurance
- What your monthly grocery bill looks like
- Soccer camp, ballet lessons, tutoring costs or other extracurricular expenses
- Savings plans for retirement
- Future medical bills, like braces or an unexpected injury
A DTI over 40% could cost you more if you’re applying for a conventional loan after August 1, 2023. Fannie Mae and Freddie Mac, two agencies that set rules for conventional loans, will be adding a fee ranging between 0.25% to 0.375% of your loan amount if your DTI ratio is over 40%.4. Is my credit good enough to buy a home?
This question is especially important if you need a mortgage. You can qualify for a home loan backed by the Federal Housing Administration (FHA) with a 10% down payment and a minimum 500 credit score. However, the approval process may be difficult and you’ll pay a much higher interest rate than you would with a higher credit score.
A higher credit score often leads to a smoother loan approval, and a much lower interest rate and monthly payment. Conventional lenders typically require a minimum 620 score, but they’ll likely reward you with a lower rate if your score is 780 or higher.
The 780 benchmark for the best conventional loan rates is part of the conventional loan changes mentioned above. The credit score changes take effect May 1, and will affect borrowers as follows
- Borrowers with low down payments and credit scores between 680 and 779 will be assessed a slightly higher fee compared to the old pricing system
- Borrowers with low down payments and credit scores between 620 and 679 will be assessed lower fees compared to the old pricing system
The bottom line:
- You’ll still get a better rate with higher credit scores
- You’ll still pay a higher rate with a lower credit score – just not as high as it would have been before the changes
5. How much money do I need to buy a home?
You’ll need enough money to cover your down payment and closing costs, depending on the loan program you qualify for.
What you should know about down payments
Your down payment is an upfront lump sum you pay to a lender to buy a home. Standard loan program minimum down payments range from 0% to 3.5%.
Loans backed by the U.S. Department of Veterans Affairs (VA) and the U.S. Department of Agriculture (USDA) don’t require a down payment. Conventional loans aren’t insured by any government agency and typically require at least a 3% down payment. FHA loans are available with down payments as low as 3.5%. Most of these programs permit the seller to pay some or all of your closing costs (commonly called a seller concession).
Here’s a side-by-side snapshot of the program, down payment requirements and percentage of your loan’s closing costs that can be paid by the seller.
| Loan Program | Down payment minimum | Percentage of closing costs that can be paid by the seller |
|---|---|---|
| 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% | 4% |
What is PMI and do I need it?
You’ll need private mortgage insurance (PMI) if you make a down payment of less than 20% on a conventional loan. The insurance covers lenders, 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; VA and USDA loans, meanwhile, don’t require mortgage insurance. However, eligible military borrowers may pay a VA funding fee that offsets the cost of home loans backed by the VA, while the USDA charges two types of guarantee fees for USDA loans that work like FHA mortgage insurance.
What you should know about closing costs
Closing costs typically run between 2% and 6% of your loan amount. They often include one-time lender and title fees related to getting approved for a mortgage, as well as the ongoing costs of your home such as property taxes, homeowners insurance and homeowners association (HOA) fees.
You can negotiate the following types of closing costs
- Lender fees including origination, application, underwriting and document prep fees
- Title fees including title insurance and escrow costs
- Discount points, which are used to buy down a lower rate
How do mortgage points work?
If you have extra cash in the bank or the seller is offering to pay some of your closing costs, you may want to buy mortgage points to get a lower rate. One point equals 1% or your loan amount, and can be used to “buy down” your interest rate.
6. Should I get a 15- year or a 30-year mortgage?
Your loan term is the length of time it takes to pay off your mortgage. 30-year mortgages are popular because they offer the lowest payment spread out over 30 years. A 15-year mortgage cuts that payoff time in half, saving you thousands of dollars interest compared to a longer term. — though the tradeoff is a much higher payment. But if you can afford that payment, there’s an added bonus: 15-year mortgage rates tend to be lower than 30-year mortgage rates.
7. Fixed rate versus 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 teaser rate period ends, your rate and payment could go up (or in some cases go down) when the adjustable-rate period begins.
8. What’s the best first-time homebuyer mortgage for me?
There are many loan programs to choose from, and the best one for you will depend on your personal financial situation. The table below provides an overview of who typically benefits from each type of loan program.
| Loan program | May be a good fit if: |
|---|---|
| Conventional fixed-rate mortgage |
|
| Conventional adjustable-rate mortgage (ARM) |
|
| FHA loan |
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| VA loan |
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| USDA loan |
|
Down payment assistance programs
Local and state housing agencies often offer down payment assistance (DPA) programs that 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 the information when you apply for a home loan:
- Recent paystubs 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, 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 just kicking the tires on your homebuying plans, a prequalification may be all you need. You’ll have a conversation with a loan officer and provide your best guess about income, credit score and money you have for a down payment.
A mortgage preapproval is best if you’re serious about getting into the homebuying arena. The lender vets your financial information, and your preapproval letter tells a seller that you’re a solid buyer for their home when you make an offer.
11. How do I get the best first-time homebuyer 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 quotes on the same day (since rates change on a daily basis), and don’t be afraid to ask the seller to pay your closing costs or buy down your interest rate.
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.
GET 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 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 usually 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. Review the figures and notify your loan officer of any changes before the closing day. 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.