Buying a house for the first time is super exciting—and wild! The process can take some time, and you’ll probably have lots of ups and downs along the way. After all, a home is probably the biggest purchase you’ll ever make.
Pay off all debt and build an emergency fund.
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.
Why? Because owning a home is expensive—trust me, maintenance and mishaps add up fast. It’s hard to maintain margin in your budget when you’re paying the costs of homeownership on top of your debt payments, and that’s a recipe for stress. So, before you even think about buying your first home, pay off all your consumer debt using the debt snowball method. You should also save an emergency fund of 3–6 months of expenses to cover unexpected costs.
Use the 25% rule to figure out how much house you can afford.
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. It may seem like a small number, but here’s the deal, you guys: If more than a fourth of your paycheck goes to your house each month, your house payment can easily turn into a source of constant stress. And every time the house needs some type of repair (which will happen), you’ll feel like it’s the end of the world. That’s called being house poor, and it’s no fun. So don’t do it! Set your budget and stick to it.
Aim for a 20% down payment.
Once you figure out your house budget, it’s time 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.
How much? You should shoot for a 20% down payment so your lender won’t make you pay for private mortgage insurance (PMI)—insurance that protects your lender (not you) if you fail to make payments.
If 20% is out of reach for you as a first-time home buyer, a smaller down payment of 5–10% is okay too. Just be ready to pay PMI, which costs anywhere from 0.46–1.5% of your total annual loan balance. Here’s another thing: Your state may offer a down payment assistance program for first-time home buyers, but it’s usually best to stay away from those since they typically offer that “assistance” in the form of extra debt. Unless your state’s program offers a grant that you don’t have to pay back, don’t use it.
Save 3–4% for closing costs.
You should also plan to pay for buyer closing costs, which cover things like inspection and appraisal fees, loan origination and processing fees, property taxes, title insurance, and homeowners insurance. Closing costs for buyers tend to be about 3–4% of the cost of your home, not including the cost of a real estate agent. Some sellers might agree to pay part or all of the buyer’s closing costs to sweeten the deal, but every situation is different. So make sure you plan ahead. Source
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