Getting ready to buy your first house can be daunting. Credit scores, down payments, and mortgages are all on your mind. Here's a guide to help you get ready to make one of the biggest purchases of your life.

Buying your first home can be one of the most exhilarating — and stressful — moments of your life. But armed with the right information, you can shop for a house, apply for a mortgage, and close the deal with confidence.

Step 1: Determine how much house you can afford

The first thing to do before buying a home is to make sure it’s the right time to do so. Generally speaking, owning a home pays off financially if you will live in it for at least five years. Otherwise, there’s nothing wrong with renting. Your actual numbers may vary, but you can play with scenarios using our rent vs buy calculator.

You might disagree, but I don’t believe you should treat your home as an investment. Yes, hopefully it will appreciate over time. But you should buy it because you want a home, not an investment.

That means you should never stretch to buy your primary residence thinking you can take cash out or flip it for a quick profit in a few years. Only buy a house that you can afford today!

Although it may not always be feasible if you live in an expensive real estate market, try to keep your total housing payment under 30% of your gross monthly income. When you spend much more than that on your mortgage, you risk becoming “house poor” — you might live in a beautiful home but find it difficult to save or even cover other monthly expenses.

Step 2: Prepare your finances for the mortgage process

The last thing you want to do is find your dream home only to discover you’re not financially qualified to buy it. To guarantee you’re financially ready to buy your first home, you’ll need good credit, cash to close, and a verifiable income.

Check your credit

Hopefully this isn’t a a surprise, but getting a mortgage requires a good credit score. It’s a good time to check your credit reports for errors and possibly invest in a few months of a daily credit score monitoring service.

A fast way to improve your score by a few points is to pay down credit card balances and stop using them for two months before you apply for a mortgage. Also, you’ll want to avoid applying for credit (for example, a new credit card or car loan) until after you’ve closed on your new home.

If you’re buying a home with a spouse or other co-buyer, your mortgage lender will likely consider both buyers’ credit scores in the application process. That’s not to say you’re necessarily doomed if one person’s credit isn’t as good, but don’t count on things going off without a hitch just because one buyer has a stellar score.

Finally, remember that improving your credit score significantly can take at least six months, so get started if you need to!

Save cash for a down payment and other expenses

In addition to making sure your credit score is in order, you’ll also want to consider the cash you’ll need to make buying your first home a reality. Of course there’s your down payment — typically between 3.5% and 20% of the purchase price.

As you save money for your down payment, avoid the temptation to invest in the volatile stock market with money you hope to use in the next year or two. While you might be tempted to try to earn a greater return on your money than an online saving account paying 1%, the greatest risk is not having your money available when you’re ready to buy a house.

As you save, don’t underestimate how much money you’ll need — you might be surprised at how much cash you’ll need for closing.

Get your documentation in order

Finally, if you’re close to putting an offer on a home, begin to collect documents that you’ll need to verify your finances on the mortgage application: paystubs, W-2’s, bank statements and, if you have freelance or self-employment income, copies of your last two tax returns.

Step 3: Go shopping for a mortgage

Too often, home buyers leave mortgage shopping to the last minute and watch their dream home go to another bidder who had financing in order. Mortgage pre-approval is a free and non-binding process that presents you as a serious, qualified buyer when buying your first home.

Today’s mortgage rates:

Mortgage types

Comparing two mortgages can be confusing. There are fixed-rates and adjustable rates, or ARMs, which are priced very differently. You can take out a mortgage for 30 years or as little as five years (interest rates are typically higher the longer the term of the loan).

Most buyers should look at fixed-rate mortgages and, indeed, the 30-year fixed rate mortgage is the most common kind of loan, by far. Still, it doesn’t hurt to become familiar with how mortgage rates work and the different kinds of loans that are available.

You may also want to run some scenarios through a mortgage calculator to see how different terms and rates will affect your monthly payment.

Mortgage fees

To make matters worse, mortgage lenders charge fees that aren’t necessarily reflected in the interest rate. There can be fees for appraising the home, checking your credit, and preparing documentation.

In some cases, you may be offered the option to pay “points” at closing that will reduce your interest rate. Points are essentially prepaid interest. This can be a tricky decision, but it can make sense if 1) you can afford to put down the extra cash and 2) expect to carry the mortgage for many, many years.

It can be a good habit to compare mortgage rates online regularly.

Private mortgage insurance (PMI)

If you put less than 20% down, your lender will likely charge you a monthly premium for what’s called private mortgage insurance, or PMI. Private mortgage insurance protects the bank in the event you default on your loan and the value of your home declines significantly.

Where to get mortgage rates and pre-approval

The only wrong way to get a mortgage is to walk into your local bank, ask for a loan officer and accept whatever rate she gives you without ever shopping around.

You can compare rates with any number of leading online mortgage lenders or find a local mortgage broker who will shop your application to multiple lenders on your behalf.

I often also recommend using the site, LendingTree to quickly get four or five competing mortgage rates from different banks. These rates will be more accurate than the ones you see in advertisements and websites because banks provide real rates based upon your credit profile and the location and value of the home you want to buy. Learn more about getting mortgage quotes and pre-approval from LendingTree.

Don’t forget about the homeowners insurance

One of the very important things you’ll also need to do during the mortgage process is secure homeowners insurance for your property.  You might be shocked to know the amount of variables included in determining the cost of your policy (like the style of your home, it’s roof, how close you are to a fire department etc.) so it’s important to spend some time in finding a policy that you’re comfortable with and one that doesn’t break the bank.

Buying Your First Home? Make Sure You're Financially Prepared With These Steps - Young Alfred

Young Alfred is a homeowners insurance search engine of sorts that has partnered with 40 insurance carriers to help you shop around.  After completing a short questionnaire about your future home, they’ll find provide you the best options available.  Pick a policy, let them do the heavy lifting in terms of getting the policy completed and then get ready to sign on the solid line.  It’s not dotted anymore.

Young Alfred currently operates in all 50 states.

Buying Your First Home? Make Sure You're Financially Prepared With These Steps - PolicygeniusLike Young Alfred, Policygenius also lets you shop around between several different insurance providers and compare quotes in order to ensure you’re getting the best deal possible.

Policygenius also provides tons of helpful educational resources so that you can make an informed decision about what level of coverage is best for you. Once you’re ready to purchase an insurance policy, you can do so quickly and easily through Policygenius’ website, with their team of licensed experts there to help every step of the way.

Buying Your First Home? Make Sure You're Financially Prepared With These Steps - Liberty Mutual

If you’re looking for an insurance policy from a traditional provider, Liberty Mutual is a great choice. The company offers homeowners insurance with competitive rates and features an easy online application process.

As an added bonus, if you purchase multiple types of insurance through Liberty Mutual, like renters or flood insurance, you can bundle these policies together in order to get a discount. But that’s definitely not the only discount Liberty Mutual offers – you’ll find everything from new roof discounts to paperless policy discounts and claims-free discounts. 

Summary

Buying your first home is exciting, but there’s a lot to think about before you start looking. Start by getting all your finances in order, and using online tools to compare mortgage rates, and manage your credit score.

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About the author

David Weliver
Total Articles: 303
David Weliver is the founder of Money Under 30. He's a cited authority on personal finance and the unique money issues he faced during his first two decades as an adult. He lives in Maine with his wife and two children.