Buy your first house with your eyes wide open<\/p>\n\n\n\n
Outsmart the world\u2019s most common financial trap! From BiggerPockets CEO Scott Trench and podcast co-host Mindy Jensen, learn how your home purchase can destroy your wealth\u2026 or generate even more. <\/p>\n\n\n\n
![\"\"](\"https:\/\/www.biggerpockets.com\/blog\/wp-content\/uploads\/2021\/03\/first-time-home-buyer.jpeg\" "\\"\\"")
\n <\/div>\n <\/div>\n<\/div>\n\n\nStep 1: Make Sure You\u2019re Ready To Buy a House<\/h2>\n\n\n\n
If you\u2019ve ever watched a pilot prepare for takeoff, you\u2019ve seen the routine. Dozens of switches, clicks, presses, gauge checks – all done in precise order, each step with a specific purpose. What looks overwhelming to us is second nature to them. They\u2019ve relentlessly prepared for this moment.<\/p>\n\n\n\n
Our financial readiness section will get you just as ready as the pilot to take off toward purchasing your ideal home<\/a>.<\/p>\n\n\n\n If you\u2019re currently a renter, then you\u2019re accustomed to spending a sizable chunk of cash each month for a roof over your head. Home buyers should know that having a mortgage isn\u2019t much different, but don\u2019t be fooled – it\u2019s not a one-to-one comparison<\/a>.<\/p>\n\n\n\n A homeowner is responsible for expenses that a renter never even considers. What if the washing machine breaks? What if a pipe bursts? A renter makes a phone call; a homeowner breaks out the checkbook. <\/p>\n\n\n\n You\u2019ll also need savings beyond your first and last month\u2019s rent to buy a home. A $300,000 house could require $25,000 upfront between the down payment needed to buy the house<\/a>, points, and closing costs. So it\u2019s important to be prudent. You\u2019ll want enough to cushion first-year expenses, which can be staggering.<\/p>\n\n\n\n How much should you plan on putting down on your first home<\/a>? This crucial question is the crux of your readiness check, as it\u2019ll be the largest upfront bill in the homebuying process.<\/p>\n\n\n\n The old adage says you need 20% down but very few homebuyers actually meet this mark. Most put down less than 10% and some, less than 5%. But even at sub-5%, once you add closing costs and additional expenses, you need a large chunk of cash before buying a home.<\/p>\n\n\n\n And of course, you need to consider how much of a house – in dollars – you\u2019re buying. You may already have a glimmer of a price range, but your potential lenders have their own ideas about how much house you can afford<\/a>. And when you go to get prequalified for a mortgage, they\u2019ll be happy to tell you the limits of your borrowing capacity.<\/p>\n\n\n\n If you still need to save for a down payment, make a timetable with the help of a thorough budget, including monthly inflows and outflows, to see how much time you\u2019ll need to reach your savings target.<\/p>\n\n\n\n Depending on your location and other qualifications, there are several down payment assistance programs<\/a>. But keep in mind that even if you use one of these loan programs, you should still have sufficient savings for surprises and disasters.<\/p>\n\n\n\n Are you in a position to pay down your other debts, like student loans and credit cards? Have you already done so? Can you build a contingency fund? If so, how quickly? Do you have an emergency fund<\/a>? If you\u2019re a few years away from being ready to buy a home, it\u2019s all about goal-setting today. We can light up the runway, but it\u2019s your plane to fly.<\/p>\n\n\n\n Pay attention to your broader savings. Before you start house hunting, your budget levels need to be crystal clear. Do you have enough cash upfront to buy a home in your price range, including all closing costs? Will you have ample savings left to cover the myriad expenses you\u2019ll incur as you transition to homeownership? An out-of-the-blue $2,500 HVAC repair bill shouldn\u2019t threaten your ability to pay your mortgage on time.<\/p>\n\n\n\n Before you start looking for your dream home or shopping for a mortgage, you can calculate how much house you can afford. Having an idea of where your price range is will ensure you\u2019re looking for houses in an area you can afford to live. The bank is going to look at a variety of factors when determining how much to loan you and what your interest rate will be. You can use these factors yourself to get an idea of what the bank will loan you:<\/p>\n\n\n\n There are two different measures of debt-to-income<\/a> (DTI) that your lender will calculate, so you might as well use them too. These numbers estimate how much you can comfortably pay each month – not just toward the mortgage balance but also the other expenses that come with a mortgage. Mortgage payments are also referred to as PITI, or:<\/p>\n\n\n\n DTI ratios are calculated by dividing your:<\/p>\n\n\n\n Here\u2019s an example:<\/p>\n\n\n\n In this scenario, your front-end DTI would be 33.3%, and your back-end DTI would be 46.7%. Generally, the accepted ranges are:<\/p>\n\n\n\n The closer both numbers get to the 20% to 30% range and the further from the 40% or higher range, the better the terms you\u2019ll be able to receive on key things like the interest rate and down payment amount.<\/p>\n\n\n\n Your credit dictates how trustworthy you have been with borrowing in the past. It helps a lender decide how much they will comfortably lend you as well as how much interest they will charge you in order to feel comfortable with your repayment risk. This is a particularly important metric to pay attention to.<\/p>\n\n\n\n The FICO score to qualify for minimum down payment levels – especially through the Federal Housing Association<\/a> (FHA), the broadest first-time buyer program – is 600 and above. FICO considers 620 to 650 \u201cgood to fair\u201d credit. Be sure to check out our loans page<\/a> to find out the best lender options for you based on your credit score.<\/p>\n\n\n\n If your scores aren\u2019t where they need to be, it\u2019s time to scale back your plans and focus your efforts on establishing a good credit score to buy a house<\/a>.<\/p>\n\n\n\n The topic is so important we\u2019re covering it twice. Returning to our discussion of down payments<\/a>, keep in mind that this will be one of the biggest checks you ever write and the first payment on the largest sticker price you\u2019ve ever paid!<\/p>\n\n\n\n Government-backed mortgage facilitators like the FHA allow most first-time homebuyers (defined by the lender as individuals who haven\u2019t owned a home in three years or more) to put 10% or less down. A qualified first-time home buyer can put as low 3.5% down – a game-changer for homeownership. There\u2019s a world of difference between having $10,000 in savings for a home and $30,000. It could take many years to save up the difference.<\/p>\n\n\n\n Often, a first-time homebuyer will consider FHA loans. In 2018, more than 80% of FHA-backed loans were issued to first-time homeowners!<\/a> But the government doesn\u2019t guarantee these loans for free. They require all first-time homebuyers to purchase two types of mortgage insurance: <\/p>\n\n\n\n Just having the down payment won\u2019t cut it. You\u2019ll also need 2% to 5% of the home\u2019s purchase price for closing costs and 1% to 3% set aside in a contingency fund to keep from pulling your hair out the first year of ownership. <\/p>\n\n\n\n Our recommended baseline: Plan on saving 10% of a home\u2019s price upfront, even if you\u2019re using a low-down-payment loan.<\/p>\n\n\n\n Step 4: Choose a Mortgage<\/p>\n\n\n\n So, here\u2019s a quick rundown of the core structure of a mortgage<\/a>. A lender decides to give you an enormous loan, lots of time to pay it back, and a fairly low-interest rate. Do they do this out of the kindness of their hearts? <\/p>\n\n\n\n Spoiler alert: They do not.<\/p>\n\n\n\n They do it because the house you buy serves as collateral for that enormous loan. If you don\u2019t make your payments, the lender will foreclose on your home and take ownership. Yes, a mortgage carries a low rate and is a good deal in that regard – but make no mistake, your lender has a backstop.<\/p>\n\n\n\n Mortgages can vary in length, have fixed or variable interest rates, and either require a lot of cash upfront or not much at all. But in all of these scenarios, the property is collateral. When you take out a mortgage, you take a big bill and spread it out over a long time. You (or you and your partner if buying a home jointly) rely on the strength of your income(s) to make yourself appealing to a lender.<\/p>\n\n\n\n Each month, payments are made toward that big bill, including some money going to all those PITI categories.<\/p>\n\n\n\n Here\u2019s what you should know about mortgages so you can choose the one that\u2019s best for you and your financial situation:<\/p>\n\n\n\n Conventional mortgage loans<\/a> are not insured by the federal government and typically require larger down payments. Nonconventional loans are insured by the federal government and generally allow down payments of 10% or lower. However, a conventional mortgage with less than a 20% down payment typically requires private mortgage insurance (PMI)<\/a> until the purchaser accumulates at least 20% equity in the home.<\/p>\n\n\n\n A conforming mortgage is a loan that falls below the max allowed by government-backing entities, like Freddie Mac and Fannie Mae. Loans that come in above the federal maximum, which is maintained by the Federal Housing Authority, are considered nonconforming.<\/p>\n\n\n\n In 2023, the maximum allowed for a conforming loan<\/a> is $726,200, with special stipulations for certain areas of the country where most home values are 115% above this max level. In these areas, the ceiling is raised to 150% of the max amount, or $1,089,300.<\/p>\n\n\n\n Jumbo loans are conventional loans for amounts above the federal conforming loan limits. Jumbo loan lenders typically require borrowers to provide proof of assets worth at least 10% of the home\u2019s purchase price. They also require higher incomes and credit scores.<\/p>\n\n\n\n While the federal government doesn\u2019t issue mortgages directly, it does insure them, making it less risky for lenders to issue these loans. As a result, these loans have a less-stringent credit score and down payment requirements – and thus can be great options, especially for a first-time homebuyer.<\/p>\n\n\n\n Most first-time buyers find that FHA-backed loans<\/a> are the most attractive option. With a minimum credit score requirement of 580, a first-time home buyer can put just 3.5% of the home\u2019s price as a down payment. FHA-backed loan limits vary by county but for 2023, they start at $472,030 for single-family dwellings in lower-cost areas and go up to $1,089,300 in higher-cost counties. A full breakdown of U.S. limits by county can be found on the U.S. Department of Housing and Urban Development<\/a> website.<\/p>\n\n\n\n In addition to the FHA, the Veteran\u2019s Authority (VA) and the U.S. Department of Agriculture (USDA) also back mortgage loans. VA loans<\/a> are available to military personnel and their families. They often require no down payment and closing costs can potentially be paid by the seller or be rolled up into the loan itself.<\/p>\n\n\n\n USDA-backed mortgage loans<\/a> are available in rural areas for low- and middle-income buyers and may also not require a down payment if you meet the income limitations.<\/p>\n\n\n\n This is the most common mortgage structure. Fixed-rate mortgages<\/a> are just that: fixed in place with an interest rate that doesn\u2019t change over the life of the loan. Most fixed mortgages are 15-, 20-, and 30-year payback periods. The main benefit to the borrower here is that you know exactly what your mortgage payment will be each month.<\/p>\n\n\n\n If you plan on living in a home for seven to 10-plus years – which is pretty average for many homebuyers – a fixed rate is probably the best route. You\u2019ll build equity a bit slower than with variable-rate loans, and you\u2019ll pay slightly higher interest over the long run, but the predictability of mortgage payments and the sense of security from locking in a set interest rate are immensely attractive.<\/p>\n\n\n\n These loans have an initial period with a fixed interest rate, which is generally lower than the rate you\u2019d get on a fixed-rate loan, but then after a few years, they switch to a variable rate based on market conditions.<\/p>\n\n\n\n If you think you may only live in your home a few years before moving, maybe a variable-rate mortgage is a good bet. Your goal here would be to sell or refinance before – or soon after – the variable phase of the interest rate sets in. This way, you avoid any adverse situation where market interest rates fluctuate wildly and your interest payments potentially spike higher.<\/p>\n\n\n\n Government-backed loans are offered on both fixed and variable-rate terms.<\/p>\n\n\n\n Before you walk into your first meeting with a real estate agent, you\u2019ll want to prove – both to yourself and to all interested parties – that you have the income, credit score, and budget for a home. In short, every homebuyer should be prequalified and preapproved<\/a> for a loan before shopping for the perfect place.<\/p>\n\n\n\n A mortgage preapproval tells real estate agents working on behalf of sellers that you will likely be approved for a loan. It means your offers will be taken more seriously – and could even lift you above the pack.<\/p>\n\n\n\n Both prequalification and preapproval<\/a> are steps on the way to lender approval. Typically, the prequalification phase comes first, while the preapproval – a more intensive process – is the next step. Before you put in your first offer, aim to be preapproved.<\/p>\n\n\n\n During prequalification<\/a>, you\u2019ll submit financial records to the lender to provide a picture of your total net worth – your assets, income, and current debts – as well as your credit score. So long as you don\u2019t buy a big-ticket item or take out a new loan, you\u2019ll most likely have no issues getting the funding you seek. Many lenders do prequalifications and preapprovals over the internet.<\/p>\n\n\n\n Every mortgage lender has its own stipulations for loan qualifications, but many are after similar clients. Here\u2019s the dream borrower, in the eyes of the lender:<\/p>\n\n\n\n But don\u2019t worry. You don\u2019t have to be a lender\u2019s perfect dream in order to get a mortgage. Most FHA-backed loans can be had for a FICO score of 580 or more while still taking advantage of the sub-10% down payment minimums.<\/p>\n\n\n\n You will want to fall below 31% of front-end DTI in order to qualify for standard mortgages. And you\u2019ll want a back-end DTI no higher than 42%, especially if seeking approval for an FHA-backed loan. There are cases of back-end DTI levels up to 50% being approved from FHA-insured lenders, but these come with higher interest costs and insurance premiums to be paid.<\/p>\n\n\n\n As you progress closer to, \u201cyes, I\u2019m ready to buy a home!\u201d it\u2019s vital to inventory your life. Look at your career path – will you stay in the same location for the next several years? After taking out a mortgage, it may be several years before an opportunity to sell the home for a profit arises.<\/p>\n\n\n\n Building equity in your home<\/a> is slow going the first few years, which may be surprising to some homebuyers. Most of your monthly payments go to interest, not principal. What if you have to move for a job sooner than expected? You\u2019ll also have less equity than expected. So in some ways, expecting equity is a fool\u2019s errand.<\/p>\n\n\n\n Life can unfold in utterly unpredictable ways. But before deciding to buy a home, be as diligent as possible. This exercise might invigorate your resolve if you\u2019re rarin\u2019 to go – but if the exercise stokes a lot of anxiety, then maybe it\u2019s best to hold off for now.<\/p>\n\n\n\n Finally, it\u2019s time to start house hunting. You know that you want a house, you know how much house you can afford, and you\u2019re preapproved and prequalified for a loan, and now you\u2019re ready to leap. Use these tips to help you when you start shopping for your next home<\/a>: <\/p>\n\n\n\n There are plenty of real estate agents out there, but they\u2019re not all created equally. It\u2019s OK to talk to a few agents before you decide on one you want to work with. Ask them questions about their sales history and interest in real estate to gauge how helpful they might be. Let them know what you\u2019re looking for and see if you hear back or if they\u2019re finding properties that interest you. <\/p>\n\n\n\n Surprisingly, you may contact an agent and never hear back from them, while others may send you a few property ideas but never follow up. Make sure you provide the agent with details on what you want and what you can afford so they can locate properties that suit your needs and your budget.<\/p>\n\n\n\n Taking the time to find the right real estate agent can help you reduce the time it takes to locate the right home for you. An agent who is truly working for you will make your life much easier.<\/p>\n\n\n\n When shopping for a home, you\u2019ll want to look at lots of properties. It\u2019s not likely that you\u2019ll find that one perfect home with absolutely everything you want, especially if you lack patience. More realistically, you\u2019ll have to sacrifice at least a couple of your desires to get something that meets your needs. By looking at several houses, you\u2019ll get a better idea of what it is you can and can\u2019t live without.<\/p>\n\n\n\n For example, maybe you want a place with a large backyard that\u2019s fully fenced. However, after looking at several places, you realize the yard maintenance will take more time than your schedule allows for, so you sacrifice that desire early on. Instead, you can now focus on something else you know is a must-have, like a garage where you can park during the cold winter months.<\/p>\n\n\n\n The more homes you walk through, the more you know exactly what you want in one. Be prepared to wait for the home you want to come on the real estate market or for it to fit your budget. But once you find it, you\u2019ll know.<\/p>\n\n\n\n Make an offer<\/p>\n\n\n\n You\u2019ve found a house that you love, talked things over with your agent, and are ready to approach the seller with an offer<\/a>. You\u2019re a mental tiger, prepared to go through a couple rounds of offers and counter-offers. It\u2019s natural to be excited when narrowing in on a home that you really like. You might be in love. But don\u2019t let personal attachment get in the way of the nuts and bolts of the homebuying process or you\u2019ll most likely be disappointed. The time to pop the Champagne is when the keys are in your hand, not a moment sooner.<\/p>\n\n\n\n Expect to make several offers before one is finally accepted – around 60% of people make multiple offers. Be ready for this. Better yet, assume it will be the case so you won\u2019t be dejected when your first offer is rejected. This is a negotiation. And like all negotiations, there is a strategy.<\/p>\n\n\n\n One way to make your offer stand out is to offer a good-faith deposit, also known as earnest money. Your agent should be able to guide you on the benefits of an earnest money deposit<\/a>, which is sometimes required by the seller and sometimes offered in good faith, hence the name. Earnest money is, well, earnest. It\u2019s a sign to the seller that you want their house. <\/p>\n\n\n\n Typically, earnest money ranges from 1% to 3% of the home\u2019s price. And no, it doesn\u2019t go directly into the seller\u2019s pocket, regardless of the outcome. If the deal falls through, in most scenarios, the earnest money deposit returns to you<\/a>. Earnest money is held in escrow until closing day and is put toward the closing costs of the home purchase.<\/p>\n\n\n\n When you know the house you want to buy, you can contact your lender. Because you\u2019ve already been preapproved, the loan process should move along more rapidly, but the lender will need information on the home. After they have the home\u2019s details, you\u2019ll be ready to move to the next step in buying a home. This period is called escrow.<\/p>\n\n\n\n During escrow, you, the seller, the lender, and the agent will move through the rest of the steps in the homebuying process. When the home goes into escrow, no one else can make an offer on the home, but you\u2019ll have a chance to back out of the deal if something is amiss.<\/p>\n\n\n\n To finalize the loan and make sure that you\u2019re buying a home in good condition, the bank will require an appraisal to determine the value of the home. They\u2019ll also want a home inspection to learn whether any major repairs or maintenance issues need to be addressed. <\/p>\n\n\n\n Both of these are standard, but you can prepare for them with these details:<\/p>\n\n\n\n A home appraisal is done by a third-party professional who considers things like a home\u2019s condition, age, upgrades, neighborhood, and more to provide a fair value of it. Lenders don\u2019t want to loan you more money than a place is worth, so they often require the home appraisal to make sure they\u2019re helping you purchase something that is of the value it\u2019s claimed to be.<\/p>\n\n\n\n Some appraisers may be able to do a quick appraisal from a remote location but many want to see the home in person to determine its worth. How long the appraisal takes depends on where the home is located, as rural locations are harder to get to and may have fewer appraisers nearby. <\/p>\n\n\n\n Typically, the buyer will pay for the appraisal because they\u2019re the ones getting the loan. The cost can be anywhere from a couple hundred dollars to over a thousand. A contingency is often written into the real estate agreement that the purchase is based on the appraisal. This means a buyer can back out of the deal if the home appraises at a lower price than it\u2019s selling for. Your agent should be able to recommend an appraiser who you can work with. <\/p>\n\n\n\n Cash buyers may be able to forgo the appraisal if they want the deal to move more quickly, but the process helps give you peace of mind that what you\u2019re buying has the value you believe it does.<\/p>\n\n\n\n A home inspection can be incredibly stressful. The goal of the home inspection<\/a> is to make sure that all the major systems and structures in your prospective home are in working order. A home inspector evaluates things<\/a> like the plumbing, electrical wiring, HVAC, roofing, exterior walls, fireplaces, pools, and basement.<\/p>\n\n\n\n Testing is also generally done for harmful elements like mold, radon, and asbestos that may be lingering within the property. The inspector will follow a checklist and make note of any systems that may need early repairs or aren\u2019t in functioning order.<\/p>\n\n\n\n You\u2019ll want to be present during the inspection, so make every effort to coordinate schedules with the inspector and be there to ask questions and hear their thoughts as you walk through the home together. And if you\u2019re seeking an FHA-backed loan, expect a more thorough FHA inspection<\/a>.<\/p>\n\n\n\n Don\u2019t take any \u201cpre-inspected\u201d label on a house at face value – pay to have your own done. This is a common homebuyer mistake! And definitely don\u2019t let anyone bully you into thinking \u201cyou don\u2019t need to get a home inspection<\/a>.\u201d A home is the biggest of big-ticket items! This level of due diligence is essential.<\/p>\n\n\n\n You can expect a home inspection to run you anywhere from $250 to $400 – possibly more if the home tops 2,000 square feet or if you\u2019ve requested extra inspections, such as sewer, radon, or mold. Average home values by ZIP code and square footage are the biggest drivers of higher fees for home inspections.<\/p>\n\n\n\n If a repair does lower the value of the home, you\u2019ll need to negotiate with the seller for repairs or a closing credit. Your agent will know what\u2019s standard in your local market, so work with them on an appropriate response.<\/p>\n\n\n\n Almost all states include home inspection contingencies in the standard real estate sales contract. So, if an offer is made in good faith that the home is in working order but the inspection turns up repairs that the buyer wasn\u2019t aware of, the buyer can cancel the bid or request a home inspection negotiation round<\/a> to determine how to resolve the issue(s).<\/p>\n\n\n\n This could involve going back to the seller and requesting specific repairs directly or a cash stipend or reduction in the mortgage to account for the repair cost that will be paid by the buyer.<\/p>\n\n\n\n It\u2019s common for a homebuyer to accidentally skip this step until a last-second rush before closing. Scouting homeowner\u2019s insurance<\/a> ahead of time can make the closing go quickly.<\/p>\n\n\n\n Your lender might pitch you their preferred insurance provider, but this might not be your best deal. Your best deal might be found by bundling home insurance with the company that handles your auto insurance.<\/p>\n\n\n\n First, any insurance company will want to see that you have a low or no-claims history, whether for your car or rental. A good history can help you save 15% to 25% on the cost of a homeowner\u2019s policy. Given that average home insurance policies cost $1,000 to $2,000 per year, based on things like geography, home features, and the size of the home, these savings add up.<\/p>\n\n\n\n If you\u2019re a couple of years away from buying but are actively saving, take out a renters insurance policy now. Premiums are low almost everywhere in the United States – less than $1 per day, typically – and having a couple of years of claim-free history as a renter can easily pay you back two to three times in savings when you decide to buy a home. <\/p>\n\n\n\n Get a couple of rate quotes on homeowners insurance early on while you\u2019re still looking at properties. Once you\u2019ve made an offer, go back to your preferred insurance provider with the specifics. Loop them in on the home inspection information once that part is completed, and you\u2019ll be able to get a final rate quote that likely won\u2019t change after closing.<\/p>\n\n\n\n A homebuyer should know the difference between property protection and liability protection. Most homeowner policies contain both types.<\/p>\n\n\n\n Property protection covers the physical structure of the home, including attachments to the house, in-house appliances, plumbing, and electrical. The dollar amount of property protection is based on the replacement costs if damaged or destroyed, also known as the dwelling insured value. Your policy should have coverage for other structures, like sheds and garages. And let\u2019s not forget about the items in your home – a third level of property protection will cover personal property for you and your residing family members.<\/p>\n\n\n\n The liability protection features of a homeowner\u2019s policy cover what may happen to things or people while on your property. Claims could come from injuries to a person or someone\u2019s property that occur on the policyholder\u2019s land.<\/p>\n\n\n\n Geographic areas more prone to floods, fires, and earthquakes tend to have extra protections written into homeowners\u2019 policies, making them more expensive than the national averages. These disaster insurance protections<\/a> may go by the term \u201cadditional property coverages\u201d or \u201cendorsements,\u201d and they may or may not be required by your lender. Be sure to read your initial mortgage offering documents carefully for details or contact your lender directly to seek any clarifications if you are looking in an area with a higher claims history for certain natural events.<\/p>\n\n\n\n As you start to close on your new home, make sure to set aside time to review all your pertinent documents one last time. You\u2019ll also want to do a final walkthrough of the home to check that all repairs were made to your satisfaction. This is your last chance to make sure closing costs are what you expected and that everything is as expected with your future home. <\/p>\n\n\n\n Three days before closing you\u2019ll have in your possession all of the fine print and costs that you\u2019ll be expected to pay. Review the closing disclosure<\/a>, initial escrow disclosure, the promissory note, which describes your legal obligations in taking out a mortgage, and the full mortgage loan document. Make sure that none of the terms have changed. You\u2019ll want to understand the following before finalizing your new home purchase<\/a>:<\/p>\n\n\n\n The average home buyer spends between $3,000 and $7,000 on closing costs<\/a>. However, buyers in metros with average home prices above $350,000 can spend over $7,000 quite easily, because the average closing costs range between 2% and 7%. The number varies based on factors like the type of mortgage loan, the state in which the transaction takes place, and the lender you\u2019re working with.<\/p>\n\n\n\n A lender is required to provide a borrower with a loan estimate (LE) document within three days of the lender receiving the mortgage application. The LE shows the lender\u2019s best estimate of the total cost breakdown of the loan, including all closing costs. Three days before the closing date, the lender must provide a closing disclosure (CD), which will show all the cost estimates from the LE – and the final closing costs – indicating where any changes occurred between the LE and final closing.<\/p>\n\n\n\n CD rules have been advocated for effectively by the Consumer Financial Protection Bureau, or CFPB. They discuss the LE and closing disclosure more on their consumer website<\/a>.<\/p>\n\n\n\n There aren\u2019t typically going to be any major changes between the LE and the CD, but if there are, be sure to contact your lender ASAP to ask about the discrepancies.<\/p>\n\n\n\n Closing costs are obviously a big expense, and there can be a lot of motivation to drive them down. You\u2019re already forking over a big chunk of your savings – why stack on more costs?<\/p>\n\n\n\n Negotiating closing costs is definitely possible<\/a>. Often, a homebuyer has the option to \u201croll up\u201d some or all of their closing costs into the mortgage loan itself. This certainly seems attractive. (Out of sight, out of mind, right?) But it\u2019s not optimal. You\u2019ll pay more over the life of the mortgage – sometimes 10 times as much as the amount you save upfront. This extra cost comes in the form of higher interest payments or a higher interest rate.<\/p>\n\n\n\n One little trick to save you a few bucks is scheduling closing for the end of a calendar month. That lowers the prepaid interest charges that may appear on your final closing cost tally. However, if you\u2019re within one to three months of your property taxes being due for the year, your lender may require you to place the entire tax bill into escrow at closing, which could offset any prepaid interest savings.<\/p>\n\n\n\n When we talk about \u201cmortgage points<\/a>\u201d in a real estate setting, these are amounts equal to 1% of the outstanding balance, or principal, of the mortgage itself. Each percent is a point. Closing costs and origination fees charged by the lender for processing your loan are generally calculated on a points basis, as are discount points that lenders offer to borrowers.<\/p>\n\n\n\n Borrowers can \u201cbuy\u201d discount points from the lender in exchange for a lower interest rate. Yes, you pay more cash upfront at closing, but you\u2019ll save more money down the road while also building equity faster. Depending on your lender, overall creditworthiness, and the type of mortgage you get, you may have mortgage discount points available to you.<\/p>\n\n\n\n Typically, the interest rate drops by 25 basis points – or 0.25% – for every discount point purchased by the borrower. And here\u2019s the best part: Discount points are tax deductible! <\/p>\n\n\n\n However, if you are considering an adjustable-rate mortgage, be warned: Discount points generally apply only to the beginning period of the adjustable-rate mortgage when the interest rate is fixed. Any lowered interest rate comes off the table once your mortgage interest changes due to market conditions.<\/p>\n\n\n\n These are optional discount points offered to homebuyers who want to lower the upfront out-of-pocket costs. \u201cPay more over time, less at closing,\u201d is the mantra here.<\/p>\n\n\n\n Be very wary. Lender credits may seem like a great deal to lower your initial bill. But consider this simple example: <\/p>\n\n\n\n A 30-year, $250,000 fixed mortgage at 4.5% interest and just one lender credit (one point) of $2,500 at closing time will mean you pay over $10,000 more for the mortgage over the 30-year life of the loan.<\/p>\n\n\n\n Origination points are generally unavoidable. These fees are charged by lenders for initiating and originating the loan itself. By shopping around, you may find lower origination fees with one lender over another, but you\u2019ll definitely pay something. Origination points can be paid either in a lump sum upfront or over time as part of your monthly payments.<\/p>\n\n\n\n A key point to remember is that lenders are obligated by law to not raise the origination points from the time you receive your loan estimate to the final number you see on the closing disclosure. Make sure to watch this figure like a hawk from beginning to end. And if your credit scores are strong and your DTI is low, you may even be able to negotiate a little discount here before closing day.<\/p>\n\n\n\n You\u2019ve got the keys to your new home, popped the Champagne, and begun your adventure. Now prepare for success. You\u2019ve already built some equity in your new home via your down payment, and you\u2019ll be adding to your equity as you make monthly payments.<\/p>\n\n\n\n In the first few years, don\u2019t think about your home as an \u201cinvestment that produces a return,\u201d even though that\u2019s true in the long run. Yes, you can add value to your home through renovations and repairs and by making regular payments or prepayments on the mortgage. Value can even be added if the market revalues your geographic area higher.<\/p>\n\n\n\n Building equity takes time. Be prudent about renovations during the first one to two years – you don\u2019t want to drain your savings and you definitely want to keep your emergency fund flush enough to handle random events that may crop up your first year in the home.<\/p>\n\n\n\n If you\u2019ve enjoyed doing \u201cshort form\u201d 1040 filings your whole life, prepare for doing the long-form taxes as a first-time home buyer<\/a>. This allows you to itemize home-related deductions. You\u2019ll lose the standard deduction taken when filing the short form, but most homeowners find that they get more benefits from itemizing.<\/p>\n\n\n\n Pay attention to your annual Form 1098. It breaks down your total interest paid toward your mortgage over the past year and is sent to you by your lender or financial institution in January following the tax year.<\/p>\n\n\n\n A great starting point for tax prep is to read through the IRS Publication 530<\/a> before filing your taxes the first time after buying your first home.<\/p>\n\n\n\n Some key takeaways:<\/p>\n\n\n\n In most cases, insurance payments, closing costs, and depreciation cannot be counted as tax deductible.<\/p>\n\n\n\n Because buying a home<\/a> is such a big, life-altering decision, it\u2019s worth taking a thoughtful review of everything that could change in your life and how that would be affected by your purchase.<\/p>\n\n\n\n Becoming a homebuyer means cutting back on lifestyle expenses you could afford before you bought the house. How will cutting back on these things impact you psychologically? How will they impact your partner or kids? It\u2019s a complex topic with lots of moving parts, and nobody can see down the road of future outcomes. But it\u2019s a good thought experiment to conduct nonetheless.<\/p>\n\n\n\n Owning your own home is certainly an investment in the purest sense, but it may not feel like it during the first few years. In fact, it may feel like a burden. At BiggerPockets, we take a holistic view of how homeownership can work. We have a wealth of resources aimed at helping people work toward financial freedom<\/a> from all angles.<\/p>\n\n\n\n Some people want their first home to function as a more practical immediate investment. They purchase property with the intent of renting it out and using the cash flow to build savings while also saving on taxes. Others may find value in buying a very small first home and focusing on the basics, with the intent of flipping it within a couple of years to buy a larger home.<\/p>\n\n\n\n Whether you are just starting to consider the real estate market or already scouting properties by the dozen on your lunch break, the journey to buying a home is filled with emotions. We\u2019ve discussed good reasons to be both excited and nervous about the process. But it\u2019s important to keep your expectations in check, especially when it comes to the timeline for buying a house<\/a>.<\/p>\n\n\n\n Don\u2019t go into the homebuying process expecting to make a quick buck. Don\u2019t go into the homebuying process if you\u2019re going to spread your budget or your cash flow too thin. And don\u2019t do it to impress anyone else.<\/p>\n\n\n\n Your career expectations, your family and partnership expectations, your life expectations – all these can and will change over time. Don\u2019t attach perfect expectations to a home purchase, only to find yourself resentful when those expectations turn out differently.<\/p>\n\n\n\n However, owning your own home is still one of the most quintessential of American dreams. Armed with buying knowledge and strong finances, you can make the best decisions. We are here to support and sponsor that dream for everyone who\u2019s ready.<\/p>\n\n\n\n <\/p>\n","protected":false},"author":1687,"featured_media":139015,"template":"","categories":[],"class_list":["post-137427","guides","type-guides","status-publish","has-post-thumbnail","hentry"],"acf":[],"_links":{"self":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/guides\/137427","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/guides"}],"about":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/types\/guides"}],"author":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/users\/1687"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media\/139015"}],"wp:attachment":[{"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/media?parent=137427"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.biggerpockets.com\/blog\/wp-json\/wp\/v2\/categories?post=137427"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}Realities of buying a home<\/h3>\n\n\n\n
Down payment<\/h3>\n\n\n\n
Emergency\/Contingency funds<\/h3>\n\n\n\n
Step 2: Calculate How Much House You Can Afford<\/h2>\n\n\n\n
Debt-to-income ratio<\/h3>\n\n\n\n
\n
\n
\n
\n
Credit score<\/h3>\n\n\n\n
Step 3: Prepare for the Down Payment<\/h2>\n\n\n\n
\n
Conventional vs. nonconventional loans<\/h3>\n\n\n\n
Conforming vs. nonconforming loans<\/h3>\n\n\n\n
Government-backed loans<\/h3>\n\n\n\n
Fixed-rate loans<\/h3>\n\n\n\n
Variable-rate loans<\/h3>\n\n\n\n
Step 5: Get Preapproved for a Mortgage<\/h2>\n\n\n\n
Preapproval vs. prequalification <\/h3>\n\n\n\n
What are mortgage lenders looking for in borrowers?<\/h3>\n\n\n\n
\n
Will you build equity immediately?<\/h3>\n\n\n\n
Step 6: Start House Hunting<\/h2>\n\n\n\n
Find a real estate agent <\/h3>\n\n\n\n
Look at lots of properties<\/h3>\n\n\n\n
Secure financing<\/h3>\n\n\n\n
Step 7: Have an Appraisal and Home Inspection<\/h2>\n\n\n\n
Appraisal<\/h3>\n\n\n\n
Home inspection<\/h3>\n\n\n\n
Step 8: Shop for Homeowner\u2019s Insurance<\/h2>\n\n\n\n
Homeowner policy features to know<\/h3>\n\n\n\n
Step: 9 Close on Your New House<\/h2>\n\n\n\n
Closing costs<\/h3>\n\n\n\n
Lowering closing costs<\/h3>\n\n\n\n
Points and discounts<\/h3>\n\n\n\n
Lender credits<\/h3>\n\n\n\n
Origination points<\/h3>\n\n\n\n
Setting Yourself Up for Success<\/h2>\n\n\n\n
First-year tax prep<\/h3>\n\n\n\n
\n
Buying a Home Is Great – But Owning an Investment Is Better<\/h2>\n\n\n\n