First-Time Homebuyers Guide

Vault’s Viewpoint on Buying a Home

• Buying a home is a huge monetary commitment, and homebuyers need to ensure they’re financially healthy enough to take it on.
• Homeownership can be a key way to build wealth.
• Programs and resources exist to help many first-time homebuyers with making that initial home purchase more affordable.

The Perks of Being a First-Time Homebuyer

Although we’re seeing a little bit of market correction right now, home values generally appreciate over time. As a result, investing in a house usually offers a solid way to grow your money.

Plus, finance experts call homes “forced savings vehicles.” Essentially, you have to pay your mortgage to avoid losing the house. As you do, you build up equity in your property. Equity is the amount of money you could pocket if you sold your house today.

Because your equity grows as you pay back your mortgage, you’re building wealth over time. And your agreement with your lender forces you to continue building that wealth.

For a first-time homebuyer, this benefit is particularly notable. Rather than handing over a rent check full of dollars you’ll never see again, the non-interest portion of what you pay toward your mortgage comes back to you in equity.

On top of all of that, buying a house for the first time makes you eligible for access to a wide range of benefits. Federal, state and local programs can help, as can programs from nonprofits. From down payment assistance programs to benefits lenders offer to new buyers, you have a lot of options you can explore.

What Counts as a First-Time Homebuyer?

Most programs use the definition from the U.S. Department of Housing and Urban Development (HUD). HUD states you count as a first-time homebuyer as long as you haven’t owned a principal residence in the last three years. So it doesn’t have to be your first time.

You can also be considered a first-time buyer if you’ve bought more recently than that, but it was with an ex-spouse. HUD considers you a first-timer if you’re now a single parent or displaced homemaker and you’ve only owned with your former spouse while you were married.

Plus, how you define “house” creates some wiggle room. If your house wasn’t affixed to a permanent foundation or didn’t meet building codes and couldn’t be brought up to code for less than the cost of building a new house, you count as a first-time homebuyer.

First-Time Homebuyer Programs

No first-time homebuyer guide would be complete without exploring the benefits that come with owning for the first time (or at least the first time in the last few years). As you figure out how to buy your first home, money is a huge piece of the puzzle. These programs and perks can help you make this major purchase more affordable:

• Down payment assistance programs: As a first-time homebuyer, you have access to a wide range of options to help with this lump-sum cost. For example, many states offer forgivable loans you can apply toward your down payment, while states, nonprofits and financial institutions offer down payment assistance grants.
• Fannie’s Mae’s loan programs: Congress established Fannie Mae in 1938. Today, the company offers loan programs to help new and repeat homebuyers. That includes HomeReady loans. While not reserved specifically for first-time buyers, HomeReady can be helpful for getting into your first home because it requires just 3% down. Similarly, Fannie Mae offers loans that allow first-time buyers to finance 97% of the home’s value, which means you only need a down payment of 3%. While HomeReady comes with income eligibility requirements, the 97% financing option doesn’t.
• Freddie Mac loan programs: Established a few decades after Fannie Mae, Freddie Mac offers similarly advantageous loan programs. HomeOne, for example, gives first-time homebuyers an option to put just 3% down. Low-income borrowers can also explore its Home Possible program, which delivers another 3% down payment option.
• Preferential treatment of IRA distributions. Normally, pulling from your individual retirement account (IRA) before age 60 comes with a 10% penalty. But if you use the money to buy, build or rebuild a first home, you can take out up to $10,000 penalty-free.
• Lender-offered perks. Some lenders offer special programs for first-time homebuyers, which come with benefits like a slightly lower interest rate or fewer closing costs.
• Support from nonprofits. Lower-income homebuyers can explore working with groups like Habitat for Humanity, the Neighborhood Assistance Corporation Of America (NACA) and the National Homebuyers Fund (NHF). These nonprofits all have programs designed to help people get into homes for the first time.
• State-specific programs. HUD maintains a page that links to different state’s homebuyer support programs. Clicking on your state will take you to the relevant state HUD site so you can explore what’s on offer based on where you want to buy.

Be advised that a lot of these programs come with income limits. Make sure you qualify for any option you’re considering before you dive in with the required paperwork.

A Step-by-Step Look at the Homebuying Process

From down payment assistance programs to the option to pull from your retirement savings, a lot of support exists to make homeownership attainable to new buyers.

But money is just one piece of the puzzle. To help you understand how to buy your first home, let our first-time homebuyer guide show you how to move from where you are now into your new place.

Step 1: Decide if You’re Ready

Buying a home is a major financial commitment. To see returns on the money you shell out in the form of a down payment and closing costs, experts recommend staying in the house for at least five years.

In other words, you’re ready to buy if you have a reasonably solid medium-term outlook. If you feel stable in your career, you have any debt under control and you don’t foresee any location changes coming your way, it might be a good time to buy.

Step 2: Ask Yourself: How Much Mortgage Can I Afford?

Deciding you’re ready to buy is one thing. Determining if you can afford to buy is another — especially with the high home prices and mortgage rates we’ve been seeing lately.

Unless you have hundreds of thousands of dollars of cash on hand, buying a house means getting a mortgage (also known as a home loan).

To decide if they want to offer you this sizeable amount of financing, lenders evaluate factors like:

• Your credit score
• Your income and its consistency
• How much money you can put down
• How much other debt you have, especially compared to your income (your debt-to-income ratio)

Taking steps now to improve your mortgage eligibility can help you get a loan and could lead to a lower interest rate.

The less other debt you have, the better, so work on paying off credit cards, student loans or any other type of debt.

Also check your credit score so you know what lenders will see when they look at yours. To give you an idea of where that score should be, HUD reports that first-time homebuyers have an average credit score of 716. It’s possible to buy a house with credit worse than that, but you’ll usually have fewer loan options and they’ll come with higher interest rates.

Step 3: Explore Your Mortgage Options and Choose One

There are many types of mortgages to choose from, including the Fannie Mae and Freddie Mac home loans. You might also want to look into loans backed by the Federal Housing Administration (FHA). FHA loans allow for lower credit scores. If you put 10% down, you can have a credit score as low as 500.

The FHA isn’t the only federal agency standing behind loans. The U.S. Department of Agriculture (USDA) backs loans for borrowers who buy in rural or agricultural areas. These loans don’t require a down payment. Similarly, the Department of Veterans Affairs (VA) backs no-down-payment mortgages for veterans and active-duty military members.

As you look at your loan choices, you might also want to consider paying for mortgage points. These allow you to pay your lender a lump sum on the front end in exchange for a lower interest rate. Usually, points cost 1% of the home purchase price and lower the interest rate by 0.25%.

Here are a few steps you can follow to evaluate your home loan options:

1. Start by doing some internet research on your mortgage choices. Make a list of ones that look good to you. Be sure to check for any eligibility criteria, like income caps. Note that a lot of loan programs are offered by multiple lenders. You can find FHA loans, for example, from mortgage institutions across the country. So go beyond identifying loan programs you like, pinpointing the best mortgage lenders who would offer them to you.
2. Narrow down your list to your top contenders. We recommend having at least three lenders on your list.
3. Get a personalized interest rate quote from all of your chosen lenders. Most will have a number you can call or a form you can fill out on their site to get an interest rate quote tailored to your specific borrowing scenario.
4. Compare annual percentage rates (APRs) from all the lenders that give you a quote. The APR expresses the yearly cost of the loan, which means it factors in interest plus any fees. Comparing APRs gives you a way to get a clearer idea of how much you’ll truly need to pay for the loan, including any fees the lender might be trying to hide.
5. Once you know you’re ready to start home shopping in earnest, apply for preapproval with the lender who offered you the lowest APR. Many home sellers won’t even consider an offer without this proof that you can get the financing you need to buy their house.

Step 4: Find an Agent

The preapproval letter from your lender gives you a definitive budget of how much house you can afford. Armed with that, you’re ready to start house hunting.

The real estate agent you choose to guide you through this process makes a big difference. A true expert will advocate for you, potentially helping you get a better house for less money. So don’t just choose the first agent who crosses your path. Vet at least a few to find the right fit for you.

Step 5: Find a House

Once you choose an agent, talk with them about your wishlist for your ideal home. It can be helpful to rank your priorities so that your agent knows what’s most important to you. This allows them to tailor their guidance accordingly.

At this point, the real estate agent should tee up listings for you to review and showings you can visit. That said, you don’t have to take an idle role if you don’t want to. Most listings in 2024 get published online, so doing your own internet sleuthing might help you uncover your dream home.

Step 6: Make an Offer

When you’ve fallen in love with a house, it’s time to make an offer on it. Your agent should guide you through the process here.

You may want to include a personalized letter telling the seller what you love about their house. In some cases, that personal touch can be enough to sway them to choose your offer over another competing one.

If you’re lucky, the seller accepts your offer and you can move forward. But that hasn’t necessarily been the norm in recent years. Relatively low housing inventory has increased competition for the homes that are available. You could find yourself in a bidding war, or you might learn the seller went with another offer altogether.

Don’t get discouraged. Buying a house takes persistence, especially when the market is hot like it has been in the last few years. Keep looking at houses and submitting offers when they fit your parameters and your budget.

Step 7: Get Accepted and Close

Even if you didn’t succeed with your first offer, if you keep trying, you should eventually have success.

Once a seller accepts your offer, it’s time to hammer out all of the details—and there are plenty when a home is changing hands.

You need to go back to your mortgage lender and turn your mortgage preapproval into the mortgage itself. This is usually the slowest part of the mortgage process, but it buys you time to do your due diligence in other areas.

You can—and should—get a home inspection during this time to make sure you fully understand the condition of the property you’re buying.

Once you have your financing ready, you and the seller sit down at the closing table. In 2024, this might be a digital table rather than a real one. You both sign all of the paperwork transferring the house to you, and you sign your mortgage, telling your lender to cut the seller a big check.

As a first-time homebuyer, you should know that none of this is free. Your lender will likely charge you to originate (basically, create) your mortgage. You’ll need to pay to have the home’s title searched, ensuring that the seller legally owns it and can transfer ownership cleanly to you. You’ll also need to pay an escrow company, which is a neutral third party that holds money as it moves from your lender to the seller.

All told, you should be ready to pay somewhere between 2% to 6% of your home’s purchase price in closing costs, and that’s on top of your down payment.

Here’s the good news. Typically, the seller pays your real estate agent’s commission, so that’s one piece you don’t need to worry about.

Once you close on the house, you get the keys and can start enjoying life as a homeowner.

Tips for First-Time Homebuyers

This first-time homebuyer guide should give you a better feel for what buying a house will require. Taking some extra steps now can help you get a leg up as you navigate the process.

To help you best figure out how to buy your first home, put some effort into the following areas:

Education

The hours you spend informing yourself about your home financing options can pay off. Freddie Mac reports that getting mortgage rate quotes from at least two lenders saved borrowers an average of $600, and getting four quotes or more can save you $1,200 or more each year.

Similarly, the Consumer Finance Protection Bureau (CFPB) says that shopping around can save you $100 a month. Doing your best to understand and compare your options sets you up for financial success. If you want to give yourself a good foundation of homebuying knowledge, you can also take an online course, like HomeView, the one offered by Fannie Mae. Put in the work to really understand your options before you start looking at houses.

Home Inspections

These usually aren’t required, but you should absolutely take this step before you dive in with a house. Find a certified home inspector and have them evaluate the property. That expert can tell you if there are hidden problems, like old plumbing, a shifting foundation or faulty wiring.

Knowing about any issues—especially ones that are expensive to repair—helps you keep homeownership costs down for at least a few years. A home inspection will usually run you about $400.

Don’t Forget About Insurance

Most lenders won’t offer a mortgage unless you get homeowners insurance to safeguard the house, so budget for that. The amount you’ll need to pay depends on the value of your home, where it’s located and other unique-to-you factors like the possessions you store in your house.

That said, a map of homeowners insurance cost averages by state can get a better idea of what you’ll need to pay. And if you plan to put less than 20% down, be prepared to pay private mortgage insurance (PMI). This generally adds $30 to $70 to your monthly payment for every $100,000 you borrow.

Remember That Maintenance Can Get Expensive Fast

When something breaks in a place you rent, you can call your landlord. Once you own, making repairs is your responsibility. If your down payment and closing costs will exhaust your cash resources, you’ll be in a difficult situation if, say, your water heater breaks.

As you save up for a down payment and closing costs, save up for home maintenance too. This can cost hundreds of dollars a year. The Census Bureau recently analyzed maintenance spending in older homes and found that homeowners spend a median amount of $540, and new owners spend a median amount of $3,900.

Provided, that data applies to homes built in 1950 or prior, but it goes to show that the early days of homeownership are some of the most expensive. Many first-time homebuyers invest money in the early days to get the home into a state that feels comfortable and livable to them.

Equipped with all of this information, you should be ready to undertake research into your home loan options. Putting in the work there helps first-time homebuyers save significant money over the life of their loan. And that sets them up to enjoy homeownership with as little financial stress as possible.