Advice on Financing Your First Home

Buying a home remains one of the biggest financial decisions you’ll ever make, and the process can feel overwhelming for those ready to take the leap. If you’re considering homeownership for the first time, it’s helpful to understand what to expect, especially when it comes to financing, downpayments and home loans.

The biggest priorities are deciding how much to spend on your first house and finding the right mortgage type for you. But with advanced preparation and a personalized to-do list, new buyers can easily stay on top of the financing process.

Before visiting a sales office, model home or open house, explore these steps to prepare your finances and get ready for the home buying process. And always seek out a good real estate agent in your local market to help you plan ahead to find your dream house.

Get familiar with the House Hunting Lingo

If you’re a first time buyer, NAHB’s Home Buyer’s Dictionary can help you figure out some of the terms buyers encounter during their first home purchase. With this glossary of home buying terms at your side, you can research the ins and outs of home loans, mortgage payments, interest rate, closing costs and more before you start.

Figure out how much you can comfortably afford for your monthly payments

Remember that in addition to the monthly principal and interest, you will also pay into escrows for property taxes, hazard insurance, private mortgage insurance and possibly a home owners’ or condominium association assessment. You have more knowledge about your living expenses than a mortgage lender. Hold firm with that number and don’t be tempted to agree to an amount higher than what you are comfortable spending. Mortgage calculators are a great way to figure out what your monthly payments would be based on interest rates and downpayment amounts. Calculators can be found on most real-estate-focused websites.

Credit card debt limits what you qualify for from most mortgage lenders. Lenders want to see a total debt service ratio that is less than 40% of your monthly income.

Attend a first-time home buying seminar

For advice on financing your first home talk to a credit counselor who does not work for a mortgage lender. You can research your options without being influenced by someone who has a financial interest in the home or mortgage loan you choose. The U.S. Department of Housing and Urban Development (HUD) provides free housing counseling and seminars to help buyers understand their options. A housing counselor review your financial situation, explain loan terms and help you decide if a specific mortgage is a good fit.

In addition to free housing counseling, HUD offers additional helpful digital resources for first-time buyers, including special financing options and programs.

Explore mortgage programs

Qualifying for a mortgage and saving for a downpayment remain the primary obstacles to home ownership. To address these issues, explore available home buying programs. The Federal Housing Administration (FHA) offers low-down payment mortgage programs geared toward first-time home buyers. The down payment for an FHA loan can be as low as 3.5% of the purchase price. These programs can make homeownership more accessible for buyers who may not have enough savings for a large downpayment.

Select your lender and get pre-approved

When you have done your research and are ready to move on to the next step, visit a lender to understand the loan choices that would be available to you. Comparing lenders is also smart to understand all of your choices. Once you’ve determined the most suitable loan, get pre-approved for it. Since you will already know how much money you can borrow, you will know what price range you should look at and can move quickly while house hunting. Having a preapproval letter also positions you as a serious buyer in competitive markets. A lender’s pre-approval would still be subject to a final verification of your credit and a satisfactory appraisal, but it’s a big step toward becoming a home owner.

If you are a military veteran, the Veterans Affairs Home Loan program may offer significant benefits. While the mortgage itself comes from a private lender, the U.S. Department of Veterans Affairs guarantees a portion of the loan, which can result in more favorable terms and lower monthly payments.