Tips for First-Time Home Buyers

Buying a house for the first time is super exciting. And wild. A home is the biggest purchase you’ll ever make!

If you’re still feeling some pressure in the market, that makes sense. Home prices aren’t going up like crazy like they were a year or two ago, but there’s still a lot of competition for nice homes. Not to mention, interest rates are about 2% higher than they were a year ago—and this can cut into your buying power.

You might be tempted to rush into a purchase before things get any crazier. But slow down! Trust me, you guys, it’s worth buying your first home the right way. That means finding one that works with your money goals—not against them.

You may be thinking, Yeah, that’s great, Rachel. But I don’t know how to buy a house for the first time. Where do I start?

I’m glad you asked! I put together a first-time home-buyers guide with 14 tips for future homeowners. Now, I know 14 tips sounds like a lot. But this is a big deal, and you want to do it right. Put these tips into practice so your first home is a blessing, not a burden.

A Guide for First-Time Home Buyers: 14 Tips

1. Pay off all debt and build an emergency fund.
2. Use the 25% rule to see how much house you can afford.
3. Save a down payment.
4. Save for closing costs.
5. Avoid the worst mortgages for first-time home buyers.
6. Know the best mortgage for first-time home buyers.
7. Pick a lender you’re comfortable with.
8. Get preapproved for a loan before house hunting.
9. Find a trustworthy real estate agent.
10. Get clear on needs versus wants.
11. Start looking for a house.
12. Make an offer on a house (within your budget).
13. Pay the deposit and start the mortgage process.
14. Close the deal.

Preparing to Buy Your First House

Before you can start looking for your dream home, you’ve got to do some legwork so you’re in a good position to buy. Let’s start right here.

Okay, when you asked for first-time home-buyer tips, you probably didn’t expect to hear about paying off debt. But it’s hands down the most important.

Owning a home is much more expensive than renting, even if your monthly house payment will be less than your current rent. When you’re a homeowner, you’re responsible for covering everything. And trust me, maintenance and mishaps add up fast!

Before you even think about buying your first home, keep renting so you can get debt-free and save an emergency fund of 3–6 months of expenses. Then your money won’t be tied up in monthly payments and you’ll have cash to cover unexpected costs.

Avoiding Debt as a First-Time Home Buyer

Once you’re debt-free, I want you to stay that way. (Minus the mortgage. More on that in a minute.) So even though you’re excited about decorating your apartment, new furniture can wait.

See how much house you can afford with our free mortgage calculator!

I’m a spender, so I know that’s easier said than done. But it’s okay to let a room sit empty until you can afford to furnish it. Stick with the good money habits you learned while getting out of debt. Your future self will thank you.

Before house hunting, determine how much house you can afford. Your monthly housing costs—including principal, interest, property taxes, home insurance, private mortgage insurance (PMI) and homeowners association (HOA) fees—should be 25% or less of your monthly take-home pay.

For example, if you bring home $6,600 a month, your maximum house payment is $1,650. Now imagine you get a 15-year fixed-rate mortgage at 6% interest. If your property tax is 1.10%, HOA dues are $100, homeowners insurance is $1,500 per year, and PMI is 0.5% (for down payments below 20%), here are some home prices you could afford:

• $152,000 home with 5% down ($7,600)
• $160,000 home with 10% down ($16,000)
• $185,000 home with 20% down ($37,000)
• $209,000 home with 30% down ($62,700)

P.S. I got these estimates from Ramsey Solutions’ free mortgage calculator. Try plugging in your own numbers to see other home prices that work with your budget.

The best down payment is an all-cash offer. Nearly 1 in 4 buyers pay cash for their houses.¹ But if that isn’t reasonable for your first house, aim for a 20% down payment. That way, your lender won’t make you pay for PMI. PMI is insurance that protects your lender (not you) if you fail to make payments—so try to avoid this nonsense.

If 20% is still out of reach for you as a first-time home buyer, a smaller down payment of 5–10% is okay too.

After you’ve figured out your house budget by following the 25% rule, you really have to get serious about saving for a down payment. The more you save, the more house you can afford. It’s hard work, but having a big down payment can be a game changer when you start shopping.

It’s kind of a bummer, but you should plan to pay 3–4% of the cost of your home for buyer’s closing costs.² Some sellers might agree to pay part of of the buyer’s closing costs to sweeten the deal, but that’s not as common as it was years ago. 

Here’s an example of closing costs:

$300,000 home x 3% = $9,000 closing costs

That’s a big chunk of change—on top of your down payment—but I promise you can do it! Tackle these savings with intensity. You can even put retirement savings on hold for a short time to save for a home.

Buyer’s closing costs cover things like inspection and appraisal fees, loan origination and processing fees, property taxes, title insurance, and homeowners insurance. But don’t think sellers get off the hook, either. They have to pay a real estate agent commission (typically 6% of the sales price split between the listing agent and the buyer’s agent).

 Choosing a Mortgage

You might be thinking, Wait, Rachel. I haven’t even found a home yet!

But remember the old expression, “You snooze, you lose.” If you try to get a last-minute loan, you could miss out on your dream house. So it’s smart to line up your mortgage before you start house shopping.

A huge benefit to being a first-time home buyer is that you’ve never fallen for an awful mortgage—and you don’t have to!

Many first-time home-buyer loans only make you put a little money down, but they cost tens of thousands of dollars more in the long run. Don’t fall for it! Remember—if it seems like a good deal for you right now, then it’s an even better deal for your lender in the end.

Types of First-Time Home-Buyer Programs, Loans and Grants

Avoid these low-to-no down payment mortgage options:

• Adjustable-Rate Mortgages (ARMs): ARMs sucker you in with a low initial interest rate. But then your lender raises your rate and your mortgage payment goes up. No, thanks!

• Federal Housing Administration (FHA) loans: FHA loans are popular for first-time home buyers with not-so-great credit because you can put as little as 3.5% down. FHA loans seem great at first, but they have thousands of dollars of sneaky fees. They require you to pay a 1.75% mortgage insurance premium (MIP) up front and an annual premium between 0.15% and 0.75% often for the life of the loan.³

• Veterans Affairs (VA) loans: VA loans let veterans buy homes with no down payment or PMI. But they usually charge high interest rates and include fees up to 3.3% of the purchase price.⁴
• United States Department of Agriculture (USDA) loans: USDA loans are for people who live in rural areas. USDA loans don’t require a down payment, but they include additional premiums with an initial fee of 1% and a 0.35% annual fee.⁵
• Down Payment Assistance (DPA) loans: Some cities and states offer low- or no-interest loans to help people with lower incomes afford a down payment. Be careful though. DPA loans could get you stuck living in a home you can’t afford with little or no equity—which could be a big problem when you go to sell your house.

Since all of these first-time home-buyer programs have additional costs that don’t help you pay off your home, the best mortgage option for a first-time home buyer is a 15-year fixed-rate conventional loan.

I only recommend 15-year fixed-rate conventional mortgages. Here’s why:

• Quicker payoff time: With 15-year loans, the monthly payments are higher than 30-year loans. But you’ll pay off your mortgage in half the time. Plus, most 15-year loans have a lower interest rate, saving you tons of money.

• Locked-in interest rate: A fixed-rate loan keeps your interest rate the same over the life of the loan so you pay less interest and always know what to expect.

Total Cost Breakdown

I’ve thrown around a lot of percentages and numbers. So, here’s a side-by-side comparison of the differences between a 15-year fixed-rate conventional loan and a 15-year FHA loan for a house priced at $300,000. To keep things simple, I left out property tax, homeowners insurance and HOA dues.

15-Year Fixed-Rate Loan for $300,000 House

	FHA Loan	Conventional Loan
Down Payment	$10,500 (3.5%)	$60,000 (20%)
Base Loan Amount	$289,500	$240,000
Interest Rate	6.25%	6.25%
Monthly Payment	$2,576 (includes 0.4% MIP payment)	$2,058
Total Mortgage Insurance Premiums	$15,133 ($5,066 up-front MIP + $10,067 annual MIPs)	None (You don’t need private mortgage insurance if you put 20% down.)
Total Interest	$155,795	$130,407
Total Cost	$470,928	$430,407

A conventional loan with a 20% down payment could save you about $40,000 over the life of the loan! Plus, the payment on the conventional loan is $500 less—leaving you a lot more money in your budget for other expenses and financial goals.

How a 30-Year Mortgage Compares to a 15-Year

I’ll just say it: 30-year mortgages may have a lower monthly payment, but they cost more in the long run. Like tens of thousands of dollars more.

Imagine you want a $300,000 house with 20% down. You need a mortgage for $240,000. Even if the 30-year loan and the 15-year loan offered the same interest rate (unlikely, since 30-year rates are almost always higher), the 30-year mortgage still costs more.

	15-Year at 6.25%	30-Year at 6.25%
Number of Payments	180	360
Monthly Payment	$2,558	$1,978
Total Interest Paid	$130,407	$291,981
Total Amount Paid (including $60,000 down)	$430,407	$591,980

You’ll save $161,573 with a 15-year fixed-rate mortgage—and you’ll be payment-free 15 years sooner. I mean, hello!

Some lenders care more about making a profit than helping people become a homeowner. When you’re starting to shop for your first house, talk to at least three lenders. Compare their interest rates, fees and customer service to find the best one for your finances and peace of mind.

If you’re debt-free, you need a lender who doesn’t require a credit score. (Because you don’t have one anymore—yay!) So look for one who does manual underwriting, like Churchill Mortgage.

It pays to get preapproved for a loan (not just prequalified). Preapproval is when your lender verifies your financial information and gives you a letter saying how much money you can borrow.

Preapproval shows sellers you’re serious, and you can use your letter to get ahead in a competitive market.

Just know, some lenders may preapprove you for a bigger loan than you can afford. But you don’t have to borrow that much—or look at houses that are too expensive!

 

Looking for a House

Finally, we’re to the fun part! Follow these first-time home-buyer tips to start looking for your new house.

One of the most important things you need to buy a house for the first time is a good real estate agent who will help you find the right home and navigate the buying process.

I always recommend working with a real estate agent. If you’re not sure where to start, connect with a RamseyTrusted agent.

Let’s be honest: Most of us aren’t very good at telling the difference between what we need and what we want. So, what can you do to change that?

Know what motivates you.

It’s easy to think you need a super nice house because your parents had one . . . but they worked for 30 years to get it. Or maybe you grew up in a less-than-perfect home, and you want a better one so you’ll feel like you’ve finally “made it.”

When we take time to learn why we spend money the way we do, we can better understand what we need in a house—and what we can do without.

Be content.

When we compare ourselves and our stuff to others, we’re struggling with contentment. Contentment can make us rich—and it can keep us from making bad money decisions. When you’re grateful for what you already have, it’ll put your house hunt into perspective.

Talk to people.

Your real estate agent has helped dozens of first-time home buyers. They can help you figure out your needs and wants, set realistic expectations, and show you houses that check off the boxes on your wish list.

If you’re single, talk to a trusted friend who will point out your blind spots if you’re missing important details or dreaming a little too big. And if you’re married, now’s the time to get to know your spouse better! Be honest about what you both need and want in a home so you can find a place where you’ll both be happy. Consider things like neighborhood, number of bedrooms and bathrooms, school district, and lot size.

Be realistic.

As a first-time home buyer, you don’t have equity in an existing house, and you may not have a ton of savings either. A swimming pool and three-car garage probably won’t make the needs column for your first house. So you may have to make some sacrifices to stay within your budget. For instance, you may have to buy a house that needs fixing up or a smaller place where your kids share a room.

That’s okay. It’s tempting to think your first home is your forever home, but for most people, it isn’t. You need a house to fit this season of life—and you can always sell it and upgrade later. Keep your perspective and your cool.

Make a list.

Some things really may be nonnegotiable for you—whether they’re needs or wants. Maybe you need to live close enough to commute to work every day. Maybe your pets need a fence. Or maybe you want to live in a good school district for your kids.

List 3–5 things your house absolutely must have. (And yes, it’s okay to put a want or two on this list.) Then, write down the nice-to-haves that could be the cherry on top of your first home. And make sure to share your list with your real estate agent.

Okay, you’ve got your shopping list in hand, and now it’s time to go house hunting. Here’s how it’s done.

Get ideas online.

Find homes you like online and send them to your real estate agent. Then, they can use the multiple listing service (MLS) to find more homes that check off the boxes for you.

Home buyers don’t have access to the MLS, but your real estate agent can use it to help you view the most properties for sale in your market. They can even help you find great deals on homes before they’re listed. It’s almost like shopping undercover, and I’m here for it.

Research neighborhoods for the best fit.

Instead of running around the whole city looking for a house, narrow down your search to just a few areas. Remember, real estate prices are all about location, location, location. More desirable neighborhoods will have higher-priced homes, so don’t fall in love with a neighborhood you can’t afford. A good real estate agent can help you find the house and the neighborhood of your dreams.

Most home buyers would rather compromise on a home’s condition and size than on the quality of the neighborhood.⁶ Now, your real estate agent can’t talk about crime rates, schools or demographics. (That’s real estate steering, and it’s illegal.) But they can tell you where to find that information for yourself.

You can also look up local schools and calculate your new commute times to see what they’re like. If you can, visit the neighborhood at different times to check traffic and noise levels and see if people are comfortable being outdoors.

Once you choose the neighborhoods you like, attend some open houses. Looking at homes for sale—even if they’re not perfect for you—helps you learn about the area.

Think long term.

Like I said, you probably won’t live in your first home forever, so don’t buy the most expensive house on the block. Future buyers who are shopping in a $200,000 neighborhood won't want a $300,000 home. But if you buy in the neighborhood’s low price range, you’ll have more room to build home value.

Pay attention to what’s happening in the community too. Are home prices rising or falling? Are businesses booming or closing? You want a home that’ll be a good investment in the long run.

Be patient.

Finding the right house takes time. More than likely, you’ll look at several houses. You may even make several offers before one gets accepted. And that’s just part of the process.

So keep dreaming about all the exciting possibilities that are open to you right now. Be patient and proud of the fact that you’re willing to wait for the right house—not settle for the wrong one.

Buying a House for the First Time

You finally found a home you love, and you’re ready to buy it. Congratulations! But you have a few more steps before you can call it home sweet home.

It can be hard to know how much you should offer for your first house. That’s when you rely on your real estate agent’s expertise.

Ask them to help you make a competitive offer that’s within your budget and close to the home’s value. Don’t make an impulsive offer you can’t afford just to beat out the competition.

Stick to your budget.

If you set your budget at $350,000, I can almost guarantee a $400,000 dream house will catch your eye. And then you’ll want to start fudging the numbers on your budget. Don’t give in to the temptation to buy a home you can’t afford!

If you buy that budget-busting dream home, it’ll become a nightmare. Your house payment will turn right into a source of constant stress, and every time the house needs some type of repair (and it will), you’ll feel like it’s the end of the world. This is called being house poor, and I don’t recommend it.

After your offer is accepted, you’ll pay a type of deposit called earnest money. Then, talk to your lender to get the ball rolling on approving your mortgage.

Once the seller accepts your offer, you can close on the house. The average closing process takes 43 days.⁷ During that time, your real estate agent will help you handle the remaining steps of buying the house, and they’ll let you know about any roadblocks.

Get a home inspection and appraisal.

Home inspectors can help you spot potential problems so you can fix them—or walk away from a bad deal! If you still want the house, the appraiser will assess its value. Then you can use the appraisal to try to negotiate a better price.  

Buy homeowners and title insurance.

Lenders require you to buy homeowners insurance, which pays to repair or rebuild your house after a disaster.

Title insurance protects your home from claims against the property or questions of ownership—like the last owner’s unpaid tax bill or long-lost grandson who claims he inherited your house. It sounds crazy, but it happens. And it’s why title insurance is worth every penny!

Take out a mortgage.

Once you and the seller agree to move ahead with the deal, it’s time to return to the lender and get a mortgage. They’ll walk you through this process. But I can’t say it enough: Don’t let them talk you into borrowing more than you can afford! Stick to the 25% rule. Period.

Be patient as your lender finalizes your loan documents.

There’s a ton of paperwork that goes into getting a mortgage, and as you’re waiting for closing day, you’re going to get antsy to get into your new house. Try to be patient!

Do the final walk-through.

Right before you finally buy your first home, you’ll get to walk through it and make sure everything’s as it should be. This is also your last chance to back out of the deal if something’s wrong, so pay close attention here and be thorough.

Sign all the papers (but read them first).

Your hand is going to get tired from signing all your docs on closing day. It’s tempting to mentally check out and stop paying attention to what you’re signing, but you’re legally responsible for any papers you sign. Try to read every document carefully and ask your real estate agent to explain anything you don’t understand so you don’t end up in hot water. In other words, read the fine print!

Ready to Get Started?

Whew, you made it! We covered a lot of ground, but you probably still have some questions.  

That’s why you need a good real estate agent to guide you through the first-time home-buying process.

Want to meet an agent you can trust? Connect with a RamseyTrusted agent. RamseyTrusted pros are top-performing agents who will help you find a home that fits your needs and budget.

These pros are the best! Find a RamseyTrusted agent today.