10 Essential First-Time Homebuyer Tips

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Facing the many decisions that come with purchasing a house for the first time can be stressful, especially when you know your choices will impact your financial life for decades. But if you’re here, you’re already on the right track — educating yourself early so you can take strategic steps, ideally starting months before you go house hunting.

These 10 essential tips will guide you through each critical phase of the homebuying journey, helping you avoid costly mistakes, save thousands and make your first home purchase with confidence.

1. Give yourself time to save up your down payment

When: Consider four to 10 (or more) years ahead of purchasing

In today’s market, the median down payment among first-time homebuyers is 9%. On a median-priced home, that means a down payment of $36,972. Building up these necessary savings can be a big hurdle for first-time homebuyers. It takes patience and consistency while you’re in the saving phase.

It’s also important to keep your down payment funds in the bank (not under your mattress or in a safe at home, and likely not in an investment account, which can be too risky for short-term savings goals). The minimum amount of time you can have money in a bank account and still use it for a down payment is typically 60 days — but it’s smart to aim for three months, which can help avoid delays in your closing. Gift funds can be deposited closer to the home purchase, though you’ll typically need to document them with a gift letter.

Reality check: How long it really takes to save for a down payment

Today a homebuyer with a middle-class income who’s purchasing a median-priced home will likely need at least four and a half years to save up their minimum down payment. If they want to make a median-sized down payment, they’ll need more than 12 years. Based on a homebuyer with a household income of $80,610 and annual savings rate of 4.6%, who chooses to make a 3% to 9% down payment.

2. Check your credit early

When: Six months to one year before you apply for a mortgage

Your credit score has a huge impact on the mortgage interest rate lenders will offer you. Check yours long before you apply for a mortgage, and see if there’s anything you can do to boost it to 780 or higher. If you can, you’ll get the lowest mortgage rates and easiest path to approval. But even if you can’t boost your score to that level, try to get it as high as possible. Some mortgage types require a relatively low minimum credit score — 500 in the case of FHA loans, for example — but in general, the higher your credit score, the lower the rate you’ll qualify for.

Three quick strategies that may help increase your score:

Pay your bills on time. Late payments pull your scores down quickly.
Pay off your card balances. Keep in mind that it may take 30 to 45 days to update your credit report after you’ve made a payment, so plan to pay off or reduce your credit card debt ahead of house hunting.
Don’t open new credit accounts. Applying for new credit cards, retail store cards and loans may ding your score, so avoid any credit applications leading up to and during the homebuying process, including throughout closing.

Don’t know your credit score? Get your free score on LendingTree Spring today.

Getting a mortgage after bankruptcy or foreclosure

Let your loan officer know if you’ve had a bankruptcy or foreclosure. You’ll have to wait one to three years to get a government-backed loan after bankruptcy, and longer — typically four years — to get a conventional loan. The waiting period after a foreclosure is seven years for a conventional loan and two to three years for a government-backed loan.

3. Research down payment assistance

When: Before you choose a lender

You may be eligible for down payment assistance (DPA), depending on your income and the location of the home you’re buying. There are many available programs, and their details can be complex. Still, the payoff is simple: You’ll receive money to put toward your down payment and potentially closing costs. Some programs will require you to repay the DPA funds through monthly payments, but they’re typically low and in many cases you won’t have to repay it at all.

A great place to start is Down Payment Resource, a website that helps you find DPA programs in your area.

Tip: Find DPA programs before you choose a lender

Not all loans work with all DPA programs — so if you’ve identified a DPA program that suits your needs, make sure you ask prospective lenders whether they’ll take it before you commit. You may need to shop with a few extra lenders if you’re applying for a specific DPA program in your area.

4. Know your first-time homebuyer mortgage options

When: Before you begin to shop for homes

Picking the right mortgage option could make the difference between a quick preapproval and a frustrating loan denial. Here are common mortgages for first-time homebuyers:

Conventional loans. Lenders follow rules set by Fannie Mae and Freddie Mac to approve conventional loans. The Fannie Mae HomeReady® and Freddie Mac Home Possible® loans are designed for first-time homebuyers, and borrowers may qualify with down payments as low as 3% and credit scores as low as 620. Income limits will apply.
FHA loans. Backed by the Federal Housing Administration, FHA loans require only a 3.5% down payment with credit scores as low as 580, and even allow for scores as low as 500 with a 10% down payment. At the same time, FHA mortgage insurance premiums are usually more expensive than conventional private mortgage insurance (PMI) and can’t be avoided regardless of your down payment amount. Still, there are no income limits on FHA loans.
VA Loans. Current military service members, veterans and eligible surviving spouses may be eligible for no-down-payment loans guaranteed by the U.S. Department of Veterans Affairs (VA). VA loans don’t require mortgage insurance or a minimum credit score, though many lenders set their credit score minimums at 620.
USDA Loans. The U.S. Department of Agriculture (USDA) backs loans that don’t require down payments for consumers looking to buy in rural neighborhoods. However, income limits apply, and the home must be located in a USDA-designated rural area.

5. Mortgage preapproval isn’t optional

When: Before you begin to shop for houses

Once you’ve done the legwork to get your finances ready for homeownership, it’s time to start the mortgage preapproval process. Most sellers won’t even accept an offer without a preapproval letter, so don’t skip this step.

The terminology around preapproval versus prequalification can be confusing — some lenders use these terms interchangeably, while others see them as distinct processes. All you really need to focus on is making sure the lender issues you a letter that states how much they’re willing to lend you.

Neither a preapproval or prequalification letter is ever a guarantee you’ll be approved for a loan, but it’s enough to give you — and potential sellers — the confidence you need to move forward with the homebuying process.

6. Create a house-shopping budget that includes a financial cushion

When: Before you begin shopping in earnest

The preapproval letters you receive from lenders will help you set a realistic cap on how much house you can afford, but remember: The preapproval letter will reflect the maximum you qualify for based on your loan application. You may need to adjust that amount down if it doesn’t leave enough room in your budget for the rest of your living expenses. Ask yourself these questions:

Do you have a buffer for home maintenance expenses? Experts recommend setting aside 1% of your home’s value to cover unexpected repairs and ongoing maintenance. Fixing that rainy-day roof leak or summertime air conditioning breakdown will be your responsibility as a homeowner.
Have you set a maximum housing expense budget? Come up with the maximum monthly mortgage payment you can afford ahead of time that leaves some wiggle room in your budget.
Do you have mortgage reserves? Some loan programs require mortgage reserves — cash that’s set aside to cover your mortgage payments for a set number of months in case of unforeseen financial difficulties. Lenders may require reserves if your credit score is low or you have a lot of debt compared to your income.

7. Make as large a down payment as you can

When: At closing

First-time homebuyers often believe you need to put 20% down to buy a house, but there are a number of programs that require only a 3% (or even 0%) down payment. However, putting down a larger down payment gives you several advantages:

A lower mortgage payment
A better interest rate
More buying power (which allows you to buy a more expensive home)

If you’ve already put all of your spare savings toward your down payment, you can still boost it with these strategies:

Ask for gifts

You could ask family and close friends for a gift for some or all of your down payment and closing costs

Use your 401(k) or IRA

You may be able to take out a low-interest loan from your 401(k) to use toward your down payment. Keep in mind, however, that if you lose your job or leave to take a new one, you may have to repay this loan in full. You can’t borrow from an IRA, but you may consider withdrawing up to $10,000 from a Roth IRA to pay for a first-time home purchase, which will be tax- and penalty-free as long as you’ve had the account for at least five years. First-time homebuyers also may withdraw up to $10,000 from a traditional IRA without paying the 10% early distribution tax — though you’ll still owe income taxes.

8. Comparison shop to save thousands

When: Once you’re ready to buy

Borrowers who shop for a mortgage could save more than $80,000 on average over the life of their loans, according to LendingTree data. Contact mortgage brokers, banks and even your local credit union to see what they offer.

Make sure to gather quotes on the same day. Rates change daily, so if you complete all of your loan applications on the same day, you’ll be able to make a clear comparison when reviewing your loan estimates. Look at them side-by-side to see which lender offers you the best interest rate, the lowest fees and the most competitive APR.

9. Lock in your interest rate

When: Once you’ve been approved for the home loan

When you’ve found a specific home to buy and you’ve applied for a mortgage, you can lock in your rate — which is especially important if mortgage rates are on the rise. Make sure you understand the terms of the rate lock, including:

How many days your rate will be locked
Your lock expiration date
The cost of locking in the rate

10. Don’t be afraid to negotiate the home price

When: Before closing/after home inspection

There are a number of ways to negotiate a home price with a seller, and it’s a common strategy. 63% of homebuyers have haggled over the purchase price, according to a LendingTree survey.

Talk to your real estate agent about any of these negotiation strategies:

Ask for the seller to make repairs. If there are crucial repairs needed on the home, you can ask the seller to cover them.
Ask for closing cost credits. Depending on the type of loan you take out, you may be able to get the seller to pay a portion of your closing costs, which can add up to 6% of the sales price.
Negotiate for a lower price. If the seller won’t pay closing costs, you can request a reduction in the sales price.
Be prepared to walk away. An unreasonable seller may not be worth the headache. If the seller won’t budge on closing costs or repairs, it may be time to restart your home search.

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