First-time homebuyer's guide: Everything you need to know in 2024

In a nutshell

If you're gearing up to buy your first home, get ready for a bit of a ride. But don't worry — it's all part of the adventure. Understanding the ins and outs is key to making sure your journey to homeownership is smooth sailing.

• Understanding the real estate market dynamics and consulting with a local real estate agent can help you decide whether now is a good time to buy a home.
• Before starting the homebuying process, make sure you are financially ready and establish a budget by checking credit scores, saving for a down payment and closing costs and calculating your debt-to-income ratio.
• Explore different mortgage options, including conventional loans, FHA loans, VA loans, USDA loans and jumbo loans, to find the one that best suits your financial situation and preferences.

Decide if now is the right time to buy a home

Buying a home is a significant commitment, and it's crucial to gauge the real estate market before deciding when to make that commitment. Determining whether it's a buyer's or seller's market can help you anticipate home prices, seller preferences and ideal locations to consider.

In a buyer’s market, more properties are for sale than potential buyers looking to purchase them. This imbalance in supply and demand creates lower property prices. Buyers have more negotiating power, and sellers will offer concessions to attract buyers.

On the other hand, a seller's market has more potential buyers competing for a limited supply of properties. The high demand and low supply can lead to increased prices, and sellers also have the edge in negotiating.

Knowing how the market works is helpful, but when to buy depends on your situation. People often buy when it's good for sellers and sell when it's suitable for buyers. But there's more to think about than just the market.

You might also want to think about potential tax advantages, the chance to build equity and the sense of stability that comes from owning your own home and being part of a community.

Take a look at your finances

Buying a home is a big deal — it is likely the largest purchase you’ll ever make. And if you don't have the cash on hand, getting a home loan is required. That's why it's important to make sure you're in good financial shape and ready to handle a mortgage.

Before you dive headfirst into the homebuying process, take a second to check your credit score and organize your finances. You'll want to make sure everything is in order before you start hunting for your dream home.

Credit score

Lenders look at your credit score to see how you've handled debts before and then determine what terms and rates they can offer. There's usually a minimum score you must meet to even be considered for a loan.

Take conventional loans, for instance; they usually ask for a score at or above 620. Meanwhile, FHA loans are offered to lenders with a score ranging from 500 to 580, depending on the down payment. If your score falls short of these targets, don't worry, you might still qualify, though you might need to increase your down payment or pay a slightly higher interest rate.

Debt-to-income ratio

Another key thing lenders look at is your debt-to-income ratio (DTI). This is the proportion of your monthly income that goes to paying off your existing debts. To figure it out, just add up all your monthly debt payments and divide that by your total monthly income before taxes and deductions.

Now, when it comes to DTI, standards can vary. Most lenders prefer to see it below 35 to 36%, but there is a bit of flexibility. Some mortgage lenders might accept DTIs up to 43 to 45%, and certain FHA-insured loans even allow a 50% DTI.

Here’s an example. If you're paying $2,500 each month for your mortgage, $400 for a car loan and $200 for other debts, that adds up to $3,100 in monthly debt payments. Now, if your monthly income before deductions sits at $9,000, your debt-to-income ratio is 34% ($3,100 represents 34% of $9,000).

Down payment

When securing a mortgage for your dream home, keep in mind the additional expenses you'll encounter. Alongside the down payment, typically starting at 3% of the home's price for a conventional mortgage, you'll need to budget for closing costs. On average, these costs typically represent 1.87% of the home's value, but they can vary significantly by state, according to data from AssuranceIQ. It’s also worth mentioning that if your down payment falls short of 20%, you may also be required to pay for private mortgage insurance (PMI).

Given the potential for these expenses to add up quickly, it's essential to have the necessary cash on hand for a smooth transaction. However, if saving proves challenging, remember that first-time homebuyer assistance programs are available to provide support.

Budget

Once you've checked your credit score and confirmed your readiness to apply for a loan, it's time to determine your ideal monthly mortgage payment. A home budget calculator can help you determine how much you can afford.

Remember, homeownership involves expenses beyond the mortgage, including property taxes, homeowners insurance, utility bills, maintenance and repairs. Rresearch rates in your neighborhood for accurate estimates.

Explore mortgage options

You may think of a mortgage as a one-shot purchase, but it's more like a buffet of financial options you can access depending on your financial circumstances.

Here are a few ways to finance your home purchase.

Conventional loans

These are loans offered by private lenders like banks or credit unions. While lending criteria vary, conventional lenders typically ask for a credit score of around 620 and a down payment of 3%. Just keep in mind that if you're putting down less than 20%, you'll also need to set aside some cash for private mortgage insurance (PMI), which bumps up your monthly bill.

FHA loans

The Federal Housing Administration backs FHA loans and generally offers lower down payment requirements and assistance for eligible applicants. For individuals with a credit score of 500 to 580, a 10% down payment is required. If your credit score is above 580, you can qualify with just a 3% down payment.

VA loans

VA loans are available for veterans, active-duty service members and surviving spouses. To secure a VA loan, you must meet your lender’s credit, income and other requirements. While VA loans don't specify a minimum credit score, lenders usually use it to decide your interest rate.

USDA loans

USDA loans, or rural development loans, are tailored to help rural and suburban homebuyers with modest incomes buy a property without needing a down payment. These loans aim to make housing more affordable in rural communities nationwide. To be eligible, your desired property must be situated in a rural or suburban region. Unfortunately, properties in urban or metropolitan areas do not qualify for USDA loans.

Jumbo loans

If you need a bigger loan than the conforming limit ($766,50 in 2024), you can apply for a jumbo loan. You'll usually need a credit score of at least 720 to qualify and a down payment of 10 to 30%. Some lenders might accept scores as low as 700.

Fixed rate vs. adjustable rate mortgage

In addition to different mortgage types, your lender might offer you the choice between a fixed-rate and adjustable-rate mortgage. Let's break down each option:

• Adjustable-rate mortgage (ARM): With this type of mortgage, your interest rate remains constant for an initial period, typically five, seven, or 10 years, before it adjusts based on market conditions. While ARMs often start with lower rates, be cautious of potential fluctuations in your monthly payments.
• Fixed-rate mortgage: With a fixed-rate mortgage, your interest rate stays constant throughout the loan term, which simplifies your budgeting. Though the initial rate might be slightly higher than an ARM, the consistent rate offers peace of mind.

Apply for a mortgage

Once you've settled on the loan type that suits you best, it's time to secure a preapproval — a crucial step before diving into the loan application process. Obtaining a mortgage preapproval provides clarity on the value of homes within your financial reach.

However, a mortgage preapproval isn't merely a formality, it's a game-changer for homebuyers. It demonstrates your commitment to sellers and can be a prerequisite for accessing property viewings. In some instances, realtors may withhold house tours until you've secured a preapproval.

To expedite your preapproval application, gather essential documents such as tax returns, proof of income and employment history spanning the last two years. Additionally, ensure you have critical paperwork on hand, including bank statements, investment account statements and credit card balance statements.

A word of caution: While you're on the hunt for a home and negotiating, it's smart to be careful about your credit score. Try not to open new credit cards, take out more loans, splurge on big purchases that could change your debt-to-income ratio.

Now, when it's time to pick out the best mortgage for you, having options is key. Get to know the different types of loans and lenders out there from the get-go. Chatting with a home lending advisor can help you find the right mortgage that fits your needs.

Shop for a home

After you've locked in your preapproval, the exciting journey of house hunting begins. A trusted real estate agent can be an invaluable partner, offering expertise, experience and support at every turn. It's crucial to find an agent you trust, one who is thorough, honest and well-versed in the market.

Real estate agents can boast extensive knowledge of the local market, including current trends, property values, neighborhoods and amenities. Their professional insights can help you make informed decisions about where and when to buy. Furthermore, they'll skillfully negotiate on your behalf to secure a favorable contract with the seller.

Here's how to make the most of house hunting with a real estate agent:

• Define your criteria: Kick off by outlining your must-haves and preferences for a home, covering aspects like location, size, budget and amenities. Clear communication with your realtor about your priorities will streamline your search.
• Browse listings: Your realtor will scour the market for properties that match your criteria, presenting you with a curated selection of listings.
• Schedule viewings: Once potential properties are identified, your realtor will arrange viewings so you can personally explore each home. Take note of features, condition and overall ambiance to help narrow down your choices.
• Take notes and compare: After touring multiple properties, collaborate with your realtor to assess and compare the strengths and weaknesses of each option. Consider factors such as location, condition and price before making your decision.

By partnering with a knowledgeable real estate agent and following these steps, you can navigate the house hunting process with confidence and clarity, ultimately finding the perfect place to call home.

Make an offer

When you've set your sights on a house, the next step is to craft an offer. Here's how you can capture the seller's attention and solidify a contract:

• Figure out how much you're comfortable offering for the house: Your realtor can provide insights based on local comparable sales and market conditions, enabling you to establish a confident offer price.
• Put together an offer package. It's not just about the money: You’ll want to include other items in your offer such as a purchase agreement. This is a letter from your bank saying you're preapproved for a loan and any conditions or contingencies you need to make the deal work.
• Provide earnest money as a deposit: Typically 1 to 3% of the offer price, earnest money demonstrates to the seller you’re serious about the purchase of the home. Your realtor can assist in determining the appropriate amount and guiding you through the submission process.
• Navigate the negotiations with the seller: The seller may accept, reject or counter your offer. Your realtor will advocate for your interests and assist in considering counteroffers and making necessary adjustments to reach mutually agreeable terms. Once agreed upon, both parties sign the purchase agreement to finalize the deal.

Secure your mortgage

Once both you and the seller have shaken hands on the deal, it's time to make it official.

Home inspection

Now that your offer is accepted, it's time for an inspection. A professional inspector will meticulously examine every corner of the property, from its structure to its systems, uncovering any hidden issues along the way. Depending on what they find, you might need to discuss repairs or other arrangements with the seller. Typically, a home inspection will set you back between $281 and $403, according to HomeAdvisor.

Securing the mortgage

With the offer locked in, it's time to give your lender the green light to finalize your mortgage. This involves wrapping up your mortgage application, providing any extra paperwork they ask for and going through the hoops to prove you're a reliable borrower. Your lender will also get an appraiser to check that the property's value matches up with your loan amount. Once all's said and done, you'll get a commitment letter spelling out the loan terms, and you're on your way.

Close on your home

Finally, it’s almost time to close on your home. As the big day approaches, you'll team up with your real estate agent and lender to get everything sorted for closing. This means tackling paperwork like the closing disclosure, which breaks down all the details and costs of your loan. Don't forget about arranging homeowners insurance and maybe even arranging some title insurance to keep your ownership rights safe.

Just before the closing, you'll go to the property for a quick check to make sure everything's still in good shape since your offer got the green light. And then comes the big moment: meeting up with the seller, your agents and a bank rep to sign on the dotted line, settle the closing costs, and finally grab those long-awaited keys to your new home.

The AP Buyline roundup: Preparing for your first home

Diving into homeownership for the first time might feel like a big leap. But with a good handle on the market, sorting out your finances and teaming up with a knowledgeable real estate agent, you're on track to buy your first home. Don't forget to check out different loan and lender options and add some backup plans to your offer package.

Frequently asked questions (FAQs)

What’s a good debt-to-income ratio for a mortgage?

Keeping your debt-to-income (DTI) ratio at or below 36% is key for mortgage eligibility, but lender criteria can vary, so always double-check their requirements before applying.

How can I pay closing costs for a mortgage?

You have several options for covering closing costs: save up beforehand, negotiate with your lender or seller for reductions, seek financial aid from government or nonprofit first-time homebuyer programs, or include the costs in your mortgage.

What credit score do I need to buy a home?

Most mortgages require a credit score of at least 620, but if you're looking at government-backed options like FHA loans, you might get away with a lower score.