First-time homebuyer guide: 10 steps to get you started

A wide range of programs, incentives and experts are available to help first-time homebuyers navigate the process. (Shutterstock)

The first time you try something, you’re bound to make mistakes. But mistakes buying your first house can cost you dearly for years to come. Fortunately, you don’t have to go it alone. 

First-time homebuyers have access to a wide range of programs, incentives and experts to help navigate the homebuying process. Housing counselors through the U.S. Department of Housing and Urban Development can guide you, and most state housing finance agencies offer down payment assistance and homebuyer education to help you get into your first house. 

As you get started, this step-by-step guide can help you avoid mistakes and buy your first home with confidence.

Don’t make the mistake of only getting one quote for a mortgage rate. Credible makes it easy to compare mortgage rates from multiple lenders.

• Step 1: Decide if homeownership is right for you
• Step 2: Get your finances in shape
• Step 3: Set your budget
• Step 4: Save for a down payment
• Step 5: Get a mortgage pre-approval
• Step 6: Choose a real estate agent
• Step 7: Home shop
• Step 8: Make an offer
• Step 9: Lock in a mortgage rate
• Step 10: Close on your new home
• What to know about first-time homebuyer programs

Step 1: Decide if homeownership is right for you

Owning a home has been a pillar of the American dream for decades, and for good reason. Homeownership brings financial benefits like stable monthly payments and tax deductions, and intangibles like the ability to put down roots in your community. 

But now may or may not be the right time for you to take the leap and buy your first home. Ask yourself these questions before you go any further:

• How’s my credit? As you think about buying a home, now is the time to get a read on your credit score. Most loan programs have a minimum credit score you must meet to qualify for a mortgage. Knowing your score will let you know which programs you might qualify for, or tell you that you need to spend some time boosting your score before pursuing homeownership.
• How much do I have saved for a down payment and closing costs? With most mortgages, you’ll need to pay a percentage of the home price upfront — usually at least a few thousand dollars. Most loans also come with closing costs, which are fees you’ll need to pay before you can take ownership of the home. Figure out how much you can spend on a down payment and closing costs at this stage. As you evaluate, don’t forget to leave some cash in reserve for emergencies after closing.
• How long will I live here? Buying and selling a home can be expensive, so you might get the most return on your investment by staying in your new home for a while. If you’re planning to move in the next year or two, you may want to consider renting instead.
• Is my income stable? Buying a home is a long-term commitment. Objectively consider your job situation, and evaluate whether you’re likely to keep earning the same amount of money, or more, into the future.

Step 2: Get your finances in shape

Depending on what you figured out in Step 1, you might have some work to do. If you found your credit score to be fair or poor, it takes time to build it up. 

The best way to boost your credit score is to focus on paying all your bills on time and in full every month. The most important factor in determining your credit score is your payment history. Paying down debt and avoiding applying for new debt (like a new credit card) can also help improve your credit score.

What credit score do I need for a mortgage?

Different loan programs have different credit score requirements to qualify. Typically, though, these are the minimum credit score requirements for common loan types:

• Conventional loans: 620 (some lenders may require 660 or 680)
• FHA loans: 580 (with a minimum down payment of 3.5%) or 500 (with a 10% down payment)
• VA loans: No minimum credit score (but only for military service members, veterans and surviving spouses)
• USDA loans: No minimum credit score (but only for low- to middle-income families buying homes in certain rural areas). Some lenders may impose a minimum credit score requirement.

Step 3: Set your budget

Take a close look at your monthly income and expenditures, and evaluate how much you can reasonably afford to spend on your new home. Just because you might be able to qualify for a mortgage of a certain amount, doesn’t mean you can comfortably afford the monthly payments on it. 

A common guideline is to stick to a mortgage of two or three times your household income. If your income is $75,000 per year, that would mean a mortgage between $150,000 and $225,000. 

Another way to look at it is to keep your monthly mortgage payment — principal, interest, taxes and insurance — under 25% to 28% of your monthly gross income. With a $75,000 salary, your monthly gross income is $6,250. This rule of thumb would mean a mortgage payment below $1,563 to $1,750.  

But neither of these methods takes into account any other debts or ongoing expenses you may have. Keep in mind that homeownership costs more than just your monthly mortgage payment. You’ll also need to factor in the costs of moving expenses, utilities and maintenance, as well as closing costs and your down payment.

A mortgage calculator can help you get an idea of your monthly payment for a certain loan amount and interest rate.

Step 4: Save for a down payment

A down payment is an initial amount of money you put toward your home when buying it. Your mortgage covers the rest of the purchase price, so the larger the down payment you’re able to make, the smaller the mortgage will be. A large down payment gives you immediate equity in the property and helps you qualify for more types of loan programs. But a low down payment can make it easier to buy your first home sooner.

If you can afford to make a down payment of 20% or more of the home price, you can generally avoid private mortgage insurance (PMI) — a type of protection for the lender you pay for each month if you make a smaller down payment.

How much down payment do I need?

Just like credit scores, down payment requirements vary by loan program. 

• Conventional loans: At least 3% (but you’ll pay PMI with a down payment under 20%)
• FHA loans: 3.5% (with a credit score above 580) or 10% (with a score between 500 and 579)
• VA and USDA loans: No down payment required

Step 5: Get a mortgage pre-approval

While you’ve determined how much mortgage payment you can afford, you’ll want to know how much you’re likely to qualify for before getting too far into house hunting. 

You can do this by getting a mortgage pre-approval. A lender will look at your assets, income, credit history and credit score, and give you a tentative offer of how large a mortgage you can take out and at what interest rate. This is usually not a firm commitment to lend; you’ll need to document all your income and assets down the line through a formal application to be approved. However, a mortgage pre-approval gives you a general idea of the price range you’ll be looking in. 

With Credible, you can quickly generate a pre-approval letter and compare lenders to get a competitive interest rate.

Different types of mortgages

When you apply for a mortgage pre-approval, your potential future lender may give you several loan options to review. Here are a few of the more common loan types:

• Conventional — This is the most popular type of mortgage. These are issued by private lenders and aren’t part of a government program. Conventional loans tend to cost less than other options but can be more difficult to qualify for.
• Jumbo — Jumbo loans are a type of conventional loan for high-cost homes. These loans cover homes of up to $1 million to $2 million and may require a higher credit score or down payment to qualify.
• FHA — These loans are insured by the Federal Housing Authority to help first-time homebuyers and other families afford a home. You can qualify for an FHA loan with a lower credit score than other options, even with a small down payment. But you’ll pay a mortgage insurance premium, which increases your costs.
• VA — These loans through the Department of Veterans Affairs are a benefit to military service members, veterans and surviving spouses, offering mortgages with no down payment and no credit score requirement to people who qualify.
• USDA — USDA loans (through the U.S. Department of Agriculture) are geared toward low- to middle-income families buying homes in rural areas. These loans also have no down payment requirement or minimum credit score.

Why comparing rates is a must

At this point, it’s a good idea to get mortgage offers from multiple lenders. You can get prequalified from several different lenders without affecting your credit score. 

The loan amount and interest rate you’re offered can vary significantly from lender to lender. Even a small difference in interest rate can equate to thousands of dollars in savings over the life of a 30-year mortgage. As you evaluate mortgage offers, keep these things in mind:

• Loan amount — You’ve already determined what monthly payment you can afford, so you’ll want to find a lender that can offer you the mortgage that fits it.
• Interest rate — The interest rate you’re offered has a huge impact on your monthly payment and the full amount you’ll pay for the home over time.
• Type of loan offered — Some lenders may prequalify you for a conventional loan, while others may prequalify you for an FHA loan. Make sure the offer you’re looking at is for the type of mortgage you want.
• Rate lock policy — Most lenders allow you to lock in a mortgage rate after your application, meaning your rate won’t change even if market rates fluctuate before closing. See how long the rate lock period is for, and whether your lender gives you the option to float your rate down if rates decrease after you apply.

Step 6: Choose a real estate agent

Real estate agents can be valuable assets to help you look for a home and then navigate the process of making an offer and sealing the deal. These agents are typically licensed by the state you live in and have experience with all the legal minutiae of home purchase transactions. Their real estate advice can help you find the right home and close on the deal.

Real estate agents typically get paid by commission, or a percentage of the sales price. While this percentage is negotiable, the standard rate is 6%, split between the buyer’s agent and seller’s agent. The home seller typically pays the commission.  

Step 7: Home shop

Now for the fun part. Your real estate agent can help you find homes in your price range in the areas where you’d like to live, or you can search yourself on sites like Zillow and Redfin. Before you fall in love with a particular house, though, keep a few things in mind: 

• Price — Make sure the home you’re zeroing in on is the size and price range you need and can afford.
• Condition of the home — Note whether you’ll need to spend money on renovations or repairs soon after closing, and factor that into your budget.
• Location — You want the home to be a long-term commitment, so make sure the house you’re looking at is convenient to your work. And consider the quality of local schools, safety of the neighborhood and whether the area and home match your lifestyle.
• How long you’ll stay in the home — If you think you might need to move again soon, you might be better off renting rather than buying.

Step 8: Make an offer

Once you’ve settled on the home you’d like to buy, it’s time to make an offer. Again, your real estate agent will be an asset for this process. Your offer will need to be in writing, and many states have a standard offer-to-purchase form to complete. Your offer will include the proposed purchase price, as well as items like:

• Due diligence money — This money compensates the seller for allowing you to inspect the property and have it appraised ahead of closing. The offer will also generally spell out the due diligence period in which this must be done.
• Earnest money — This is money you put down to show the seller you’re serious about buying the property. It’s generally applied to the purchase price at closing.
• Closing date — This is the proposed date the sale will conclude.

Keep in mind, these items are all negotiable. The seller may come back with a counteroffer, and you’ll have to decide whether the new terms are acceptable to you. If the seller rejects your offer, you get the earnest money back and won’t have to pay the due diligence fee.

When your offer is accepted, it’s time to formally apply for a mortgage. Hopefully at this point, you’ve already been pre-approved, so a lot of the early steps have been completed. The lender you’ve chosen will give you instructions on how to proceed to the full application. Generally, you’ll need to provide a trove of documents that prove your income and assets, including:

• W-2 forms
• Bank statements
• Tax returns
• Pay stubs
• Investment account statements
• Employment history

All these will go to the loan underwriters, who will determine if you qualify for the loan. In the meantime, you’ll get a Loan Estimate within three days of completing a mortgage application. The Loan Estimate will include the interest rate, expected closing costs and monthly payment for the mortgage.

During this period, your lender will typically order an appraisal for the home to make sure it’s worth the amount you’re paying for it. You should also hire a professional home inspector to evaluate the home and determine if there are any major issues with the home that would increase your costs. 

Step 9: Lock in a mortgage rate

Typically at this point, you can also lock in a mortgage rate. When you lock in a rate, your lender commits to giving you that rate at closing, even if rates rise between the time you lock in yours and the closing date. 

Rate locks are generally for 30 or 45 days, which will usually get you to closing. But you may be able to negotiate a longer lock period if you think you’ll need more time. If rates go down, some lenders may offer you the ability to lower your rate for a fee. 

Step 10: Close on your new home

When your application is approved, property appraised and home inspected, it’s time to close on the purchase. A few days before closing, your lender will send you a Closing Disclosure, which outlines the amount of money you’ll need to close on the home. This should be roughly the same as the Loan Estimate. If things have changed significantly, you’ll need to find out why. Your lender or real estate attorney will give you instructions on how to prepare the money needed for the down payment and closing costs.

The closing itself is often done at the real estate attorney’s office, and you and the home seller will gather to sign all the paperwork that formally transfers ownership of the home. Once everything is completed, you’ll get the keys to your new home.

Finding a mortgage rate that works for you is an important step in buying your first home. Credible makes it easy to compare mortgage rates from multiple lenders.

What to know about first-time homebuyer programs

Numerous first-time homebuyer programs are available to help you afford your first house. Many of these come through state housing finance agencies, which you can find through the National Council of State Housing Agencies. 

Programs may include special mortgage loans with low interest rates and low closing costs geared to low- and middle-income families, or mortgage tax credit certificates that can help you save money in taxes once you’ve bought your home. You’re also likely to find down payment and closing cost assistance programs, which can be grants or zero-interest loans.

Your lender may be able to direct you to a program that fits you best. You can also look through resources offered by the Federal Housing Authority or use its guide to local housing programs to help you find them.