Buying Your First Home

Summary

Whether working with a tight budget or exploring home ownership for the first time, understanding the basics can help you feel more confident and prepared.

How Much Can I Spend?

The first step in deciding if you’re ready to buy a home is establishing a realistic budget to help determine how much house you can afford. Begin by listing your income and monthly expenses (other than rent). This will give you a clearer idea of how much you can comfortably allocate toward a mortgage payment. A general rule of thumb is to keep your mortgage payments around 30% (or less) of your gross monthly income.

Interest rates can impact your buying power and how much you spend or save in the long term. Higher rates will mean higher monthly mortgage payments; lower rates can mean more purchasing power. If you suspect rates will increase, getting pre-approved for a loan can lock in lower rates before they rise.

Keeping an eye on the Federal Reserve interest rates and inflation rates can be beneficial, but the market can be highly unpredictable and should not solely determine whether you begin the home-buying process. There can be many benefits and opportunities to refinance later to lock in a lower rate or shorten the loan.

Once you have an amount in mind that you can afford to spend on housing, a simple online mortgage calculator can help estimate a suitable price range for a home.

What Costs Should I Prepare for?

When thinking about a home purchase, don’t forget to consider how much you may need to have available for a down payment. You may be required to pay for private mortgage insurance (PMI) if you put down less than 20% on a conventional loan. Also, it is wise to have a healthy emergency fund built up and set aside. As a soon-to-be homeowner, you want to be prepared for unexpected home maintenance and expenses.

Be sure to factor in additional annual costs such as property taxes, homeowners’ insurance, and general maintenance. First-time homebuyer grants and assistance programs, many of which are state-sponsored, can provide financial relief. Be sure to research available options or ask your lender for guidance.

Closing costs are typically 2-5% of the home’s price and can sometimes be rolled into the loan. If not, they will need to be paid when you close on the house.

What Are My Loan Options?

Every lender will perform a credit check, which results in a “hard inquiry” on your credit report and may slightly affect your credit score. However, it’s still wise to shop around for the best loan rates. If you apply with multiple lenders within a short window (typically 45 days), these are usually treated as a single inquiry for credit scoring purposes.

Conventional loans are the most frequently used type of loan and are available for borrowers with varying financial circumstances and needs. The most common types of conventional mortgage loans include:

• Fixed-Rate Loan: The interest rate stays the same over the pre-determined life of the loan.
• Adjustable-Rate Mortgage (ARM): The interest rate can change over the life of the loan.
• Government-backed loans may offer more flexibility in certain circumstances. For example:
• VA Loans: Available to active-duty and former military personnel.
• FHA Loans: Designed for buyers with lower credit scores or smaller down payments.

Keep in mind that in competitive real estate markets, sellers may view certain loan types (such as FHA or VA) less favorably, potentially impacting your offer’s appeal.

When Should I Buy?

It can be hard to anticipate the right time to look for a home and to determine when to get pre-approved for a loan. For the housing market, seasonality can impact the cost and options in your area.

• Spring and Early Summer: These are typically the busiest months. There’s more inventory (homes for sale), but also more competition. Sellers may be higher, and bidding wars are more common.
• Late Summer and Fall: Inventory begins to thin out, but so does buyer competition. Sellers may be more motivated to close quickly before the holidays.
• Winter (especially December–February): This is the slowest season. Fewer homes are listed, but buyers may find better deals, especially if a house has been sitting on the market for a while.

Where Should I Buy?

Always assess the neighborhood and future development potential of any area you’re considering. Properties in up-and-coming areas may offer better long-term and resale value. It’s also critical to perform thorough inspections as you tour the home and while researching other listings in the area. Check local flood zone maps and consider getting a foundation inspection for older homes.

During home tours, look out for:

• Horizontal cracks in walls (vertical cracks are not considered as bad)
• Signs of water damage, especially in basements or additions
• Doors that don’t close properly (a possible sign of foundation settling)
• Areas that look recently sealed and may not be disclosed

These are only a couple of items. Be sure to ask your agent for their recommendations, as they have likely had more experience and have seen many properties in all conditions. Being observant during viewings can help you avoid costly repairs and long-term problems.

Buying a home should be an exciting time, but you want to ensure you have done the proper planning before you put in any offers. In the long run, buying an affordable house that leaves room in your budget for maintenance and other unexpected expenses will help put you in a much more solid financial position.