How To Financially Prepare As A First-time Home Buyer

Owning a home is great but it is a big purchase, not just because houses are big items but because of the price. Especially now, with house prices increasing and slightly higher interest rates, having all of your financial ducks in a row is imperative so this big achievement doesn’t become a big nightmare.

I bought my first house in my early 30s, I also sold that house and am currently in the process of buying my second house. While this doesn’t make me an expert on home purchases I do have some personal experience with what worked best in my situation.
First-time home buyers hand holding key, front door blurred in background.
(I am not a financial expert. All information is based on my own personal experience and research. This information is not meant to be financial advice and is just for educational purposes. This post includes some affiliate links. Should you click an affiliate link and make a purchase I may receive a small commission at no extra cost to you.)

In this blog post, I’ll be sharing those personal learnings with you along with some other tips I’ve gathered from other first-time home buyers I know.

Pay off all your debt

From stories I’ve heard this is a mistake many people make. Typically when you buy a house you’re getting a mortgage which is debt. That house payment is then coupled with the consumer debt they have such as student loans, credit cards, medical debt, or car loans.

From personal experience, it’s less stressful if you only owe your house payment. When I bought my first house I had paid off my car a few years prior so I only had my house payment. 

Not having consumer debt when you buy your home is helpful because you’ll be able to save up for the down payment fast, you’ll have more money to put towards paying off the mortgage quicker, and you’ll be able to better cover your mortgage payment if unexpected situations or expenses pop up.

Determine how much house you can afford

Most guidance when it comes to a budget for buying a house is that your house payment or cost should be 30 - 25% or less of your take-home pay. That means the total cost of the mortgage principal, mortgage interest, HOA, and home insurance should fit within the 25-30% range.

The 25 - 30% range is typically best if you have no debt because you don't want almost half of your paycheck going to payments. If you have debt it may be helpful to aim for a lower percentage.

Staying within that range gives you wiggle room to be able to also save up for home repairs and not become house-poor to where your house payment is a burden.

Save up for the down payment

Once you know what you can afford to buy, it’s time to save for the down payment. Most financial experts and other home buyers recommend having a down payment that is between 10-20% of the purchase price.

Shooting for 20% is the better financial option because it allows you to avoid PMI (private mortgage insurance). PMI isn’t insurance for you, it’s for the lender but it costs you money each month. I put down a little less than 10% on my first house and had to pay PMI. I wish I had put down more because it cost me money during the time I owned the house.

Additionally, you have more built-in equity in the home from the start and you owe less to the lender making it that much easier to pay off the mortgage quicker.

Depending on your income, financial situation, and home prices in your area, saving a 10% or 20% down payment can take a couple of years or more. So don’t worry if your timetable doesn’t match the timetable of others.

If you’re looking for tips on how to save money check out these other articles

Determine your must-haves and wants

When buying a house it’s good to know what you want in a house and what you need. This is helpful to know because some of the things you want may only be found in houses outside of your budget and you don’t end up disappointing yourself by looking at houses you can’t afford.

Knowing your needs and wants also helps you figure out what you’re willing to compromise on and what you’re not. One of my must-haves for my first house was an attached garage so I didn’t look at or consider homes that didn’t have a garage or had one that was unattached. While this list may change as you look at more and more houses and realize what you compromise on it’s good to have a starting point.

Start a sinking fund for home repairs

In addition to saving up a down payment, you’ll also want to have some money set aside for home repairs. Unless you’re buying a brand new house you will most likely have to make some type of repairs when you first buy your house. Saving for something like this is sometimes called a sinking fund which I talk more about in my post What Are Sinking Funds And How To Set Them Up.

Sometimes you can negotiate that the seller covers the costs either by making the repairs prior to closing or reducing the sales price. If that doesn’t happen you’ll be on the hook and some repairs can’t wait till you’ve been able to save up enough money.

Check for first-time homebuyer programs

If you’re buying your first house you may be able to find a program that will offer financial and educational assistance to first-time home buyers. These programs vary state by state, county by county, and city by city so it’s best to check with your realtor or a local home lender to see what’s available.

Sometimes these programs suggest or could require you to put down less than 10-20%. If that’s the case I would pass on them. It’s better, in the long run, to put down more than less when buying a house as you have more equity in the home from the start and can avoid PMI as I mentioned before.

Also, before committing make sure you understand what is required to get the assistance and not have to pay it back.

Find a realtor

Yes, you will want to use a realtor. The good news is it doesn’t cost you anything because the seller typically pays the realtor fees. The benefit of using a realtor, especially when you buy your first house, is they can navigate you through the process, get a good selling price for you, and point you toward houses you won’t know about or perhaps even consider on your own.

If you’re looking for a realtor check out my blog post How To Find The Best Realtor For You.

Get pre-approved for a loan

Once you know how much house you can afford, have saved up your 10-20% down payment, and found a realtor, it’s time to find a lender and get pre-approved for a mortgage. 

Getting pre-approved will help you determine if you need to adjust your budget based on current interest rates. Plus, it will help you be able to quickly move forward with an offer if you’ve found a house you like.

Word of advice, don’t go with what the lender says you can afford, go with what you know you can afford. This is where determining beforehand what you want to pay comes in handy. You want to ensure the monthly payment isn't too much of your take-home pay. So don't get pressured into taking out a larger loan than you can afford.

What are your financial tips for buying a house?