Finance Tips for First-Time Home Buyers

Get your calculator out. It's time to take a deep dive into your finances. 

Find out how much you can afford

It's easy to look at a new pair of shoes or vacation package and know right away whether or not you can afford it. But since your home is probably the most expensive thing you've ever bought or ever will buy, it's hard to look at an asking price and answer the same question. Not only is the number pretty big, there are also a lot of other costs that go into owning a home, like homeowners insurance, taxes, and an emergency fund for maintenance. 

Before you start looking at houses, make a list of all your monthly expenses and then use a mortgage affordability calculator to figure out how much you can afford and how much you'll need for a down payment. 

Plan your down payment 

You've probably heard that 20 percent is the down payment gold standard. Hitting that number is great, but you don't technically need that much to buy a home.

The reason people suggest 20 percent is because that's the threshold where you won't have to pay any extra fees in private mortgage insurance and where your interest rates will likely be lower than if you had less to put down. That being said, there are plenty of reasons for going for it anyway. Depending on where you live, it might be cheaper to buy than rent even if you are paying PMI. Or maybe you're trying to take advantage of low mortgage rates before they start to go up. 

First-time homebuying tip: : Think about whether or not you should buy if you don't have 20 percent to put down.

Make a budget

Unless you have buckets of money laying around, you're probably going to need to get on a serious budget to save for your new home. Your budget needs to take into account everything you spend. That means everything from fancy coffee at Starbucks to your student loan payment. That will help you figure out how much you can afford to spend without giving up everything else in your life (like eating out occasionally and doing something fun on the weekends) and what you have to do to reach your savings goal. 

First-time homebuying tip:  YNAB's Chief Knowledge Officer, Todd Curtis, weighs in on how a budget can help you save for your down payment

Deal with debt

Nobody likes debt. It feels like you're watching hundreds of dollars leave your account every month, but your loan balance seems like it's only moved about a dollar. When you're ready to buy a house that debt is even worst. Not only is it money that you could be putting toward your down payment, it can also prevent you from getting the best loan possible. Lenders are going to look to see how much debt you have and how that stacks up against your income. They call that your debt to income ratio and it has a big impact on how much your lender will lend you and at what rate.

To make it even more complicated there are some debts that are "good", like student loan debt, and some that are "bad", like credit card debt. Your lender will weigh both differently when they're looking at your total financial picture. That's why it's important to pay off as much of your debt as possible before you buy a house. 

First-time homebuying tips: 

Raise your credit 

Hopefully, you've been able to pay back your credit cards and student loans on time and in full every month. Those types of habits are what improves your credit score (and helps keep you out of even more debt). If you've struggled to make those payments, you might be dealing with a low credit score, which can make buying a home more expensive.

There's no set credit score you need to buy a house, but usually, a higher one will let you negotiate for a better rate. That's because a higher credit score shows a lender that you have a history of paying back your loans, which reassures them that you're not a risk. 

First-time homebuying tip: Not happy with your credit score? Start taking steps to improve it

Save for a down payment 

Once you have a budget and a good handle on your debts you'll know exactly how much you need to save for your down payment. Actually doing it is another thing altogether. It's going to mean some sacrificing, like staying in more than you go out, maybe giving up that tropical vacation this summer, and trying to keep your car alive for another year. But it's all going to be worth it when you're living in your very own home and building up some serious equity! There are a few tried and true ways to get started, including:

  • Budgeting apps: Sometimes we think we're doing better with our saving than we really are. A budgeting app can help keep you honest and show you if that "occasional" cup of coffee is actually turning into a daily habit. 
  • Automatic savings plans: Anytime you can put your savings on autopilot, things get a lot easier. Check with you bank and see if they offer an automatic savings plan feature on your online account. You should be able to set an amount to automatically transfer to your savings account once a month. 
  • Envelope method: If you want to get really serious about your saving, go old school. Take out the exact amount of cash you want to spend each month and separate it into different envelopes for things like rent, groceries, and fun. Once the money is gone, you're done spending in that category for this month! 

First-time homebuying tip:  Wondering where all the extra money is going to come from? Cut these 13 expenses to start saving. 

Don't forget to save for closing costs

So many first-time buyers are blindsided by closing costs when they buy their first house. Closing costs cover things like a home inspection, an appraisal, and a title search. 

Knowing that they're necessary doesn't make them any easier to stomach at the end of the buying process. The good news is that you can usually bet on the closing costs being between two and five percent of your total purchase cost. Just remember to factor that in when you're thinking about how much you can afford! 

First-time homebuying tips: 

Get your partner on board

It's not always easy to say no to every happy hour or weekend getaway and it's even harder if your partner isn't on the same page as you. If you're buying the house together it's a good idea to sit down and talk about your goals as a couple and how buying this home fits into your long-term plan. Knowing what's important to your partner and what's not will make it easier to have those conversations about money down the road.

If you're buying the house solo you should still have a talk with your partner. Just let him or her know why this is important to you and ask that they give you support while you're working toward your goal. 

First-time homebuying tip:  Start planning these 14 cheap dates today so you can enjoy your home tomorrow. 

Up next: How to find the right loan

Your bank account and credit score are tip-top shape and now you're ready for that mortgage. Get our tips on finding the right loan for your first home