First-Time Homebuyer Guide

Updated: September 30, 2022

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    If you’ve been thinking about buying your first home, now could be a great time to take the plunge.

    You might be ready to put that monthly rent check toward something that can appreciate in value, something of your own.

    But today’s first-time homebuyers may also face challenges like increased competition, student loan debt, and a limited credit history.

    Luckily, these factors don’t have to come between you and your first home. If you know how to navigate them, you may land a home you love without breaking the bank.

    Between the current economic environment and housing market trends, this could be a great time to take the leap from renter to homeowner. Read on to find out how you can make this year your home buying year.

    first time homebuyer guide first time home buyer guide

    The First-Time Homebuyer Advantage

    Who qualifies as a first-time homebuyer? Someone purchasing their very first home, sure, but also someone who has not owned a principal residence in the past three years.

    First-time homebuyers often have access to down payment assistance and flexible qualification requirements.

    FHA loans are popular with first-timers, thanks in part to a down payment as low as 3.5%. A lender like SoFi, though, allows just 3% down for qualifying first-time homebuyers. (In either case, mortgage insurance, added to the monthly payment, will be required.

    Most conventional mortgages require private mortgage insurance (PMI) when the down payment is less than 20% of the loan. PMI may be canceled after you have gained sufficient equity, usually 20%. Borrowers who procure a home loan backed by the Federal Housing Administration on or after June 3, 2013, pay mortgage insurance premiums (MIP) for the life of the loan if the down payment was less than 10%; if more than 10%, MIP will last 11 years.)

    💡 Recommended: First-Time Home Buyer Programs

    How Do I Know When I’m Ready to Buy a Home?

    Buying your first home is a huge investment, but that doesn’t mean it’s a purely financial decision. You may be seeking more space for your home office or your growing family. Maybe you’re craving the community aspects of suburbia or the buzz of a vibrant, walkable city. Or maybe you’re just ready to achieve that major milestone of becoming a homeowner.

    That said, start with the question “Am I financially ready to buy?” before factoring in the emotional reasons. Here are four signs you may be ready to buy.

    1 Your budget is big enough to cover the down payment, mortgage payments, property taxes, homeowners insurance, and any maintenance fees. This mortgage calculator can help you visualize how much you can save on your mortgage with different down payments.

    2 You plan on staying put for a while, giving your home a chance to appreciate in value.

    3 You have good credit, which may lead to better loan terms.

    4 Rents in your area are higher than what a house payment may be. Or maybe you’re just tired of renting. Check out our Buy or Rent quiz to see where you stand.

    From this list, two important factors are 1) how long you plan to stay in your home 2) the ratio of home prices to rents. So how long is long enough? Using an online rent vs. buy calculator can help you estimate the break-even point when it might make sense to invest in a home.

    Now you can consider the emotional perspective.

    Do you crave the autonomy of owning your own place? Are you dying to have control over paint colors and tile choices? Do you yearn for your own garden and maybe a yard for the dog or the child?

    But: Are you willing to live without your landlord (and their midnight visits to fix your broken heater)? Are you ready for a lot of responsibility?

    Steps for the First Time Home Buyer

    Checking a few boxes early can prepare you to act fast when the home you want goes on the market. Here are five steps to set up your home buying experience.

    1. Review Your Credit Reports

    Since your financial history is a factor in getting approved for a mortgage loan (and snagging the best loan terms possible), it’s important to know what your credit report from each of the three main credit bureaus says about you.

    You can look at your credit reports for free at annualcreditreport.com and catch any errors that may affect loan terms lenders will offer you. Two common reporting errors are late payments and incorrect balances due on open accounts.

    If you find an error, you can file a dispute with both the credit bureau and organization that provided the information to the bureau. Correcting misinformation and waiting for any adjustment to your credit score can take time, so it helps to start this step as early as possible.

    Credit reports do not show credit scores or credit score updates, but there are several ways to monitor credit scores.

    2. Figure Out Your Budget

    While lusting over homes online and at open houses, it’s helpful to explore just how much house you can afford. A home affordability calculator can help you estimate the cost of purchasing a home and the monthly payment.

    That’s where mortgage pre-qualification comes in. After providing just a few pieces of information online or by phone, a lender will estimate the loan amount you could receive. That unofficial number will help you look for homes in your range.

    3. Save for a Down Payment and Closing Costs

    Saving money for a house is about more than you might think. It might start with a down payment and closing costs, but it can also include costs like, moving expenses, buying new furniture, sprucing up the landscaping, and even that first stock-up trip to the grocery store after you move in.

    And while the decision to buy might be easy, the actual buying process can require discipline, mental fortitude, and a lot of stick-to-itiveness. So grab a calculator and start drawing your financial picture.

    4. Pick the Right Mortgage Type

    Once your search begins in earnest, one of your first decisions will be what kind of mortgage loan you want to take out. The usual options are fixed rate, adjustable rate, and adjustable rate with an interest-only payment option.

    Comparing ARMs vs. fixed-rate mortgages will show that both have pros and cons, but the key is to choose the best option for your particular situation.

    Fixed-Rate Mortgage Loans

    >> In a nutshell: Fixed-rate mortgage loans offer greater stability over the long term.

    A fixed-rate mortgage has an interest rate that stays the same for the entire life, or “term,” of the loan, regardless of any fluctuations in the broader economy. Fixed-rate home loans offer greater stability and predictability in the long run than their adjustable-rate counterparts.

    That’s the upside. The downside is that, generally speaking, fixed-rate home loans have a higher interest rate than most introductory rates on adjustable-rate mortgages (ARMs).

    Of course, the rate you receive from a lender will depend on several variables, including your credit score.

    For many borrowers, the advantages of a fixed-rate mortgage outweigh the higher interest rate. This is especially true for homebuyers who are planning to stay put for a longer period of time.

    SoFi offers fixed-rate mortgages with a variety of loan terms. The rate you receive upfront will stay the same for those years, even if rates rise during that time frame.

    Bottom line: If you are planning to own your home for a long time and want to avoid the uncertainty of a variable interest rate, consider a fixed-rate loan.

    Adjustable-Rate Mortgages

    >> In a nutshell: ARM loans offer lower initial rates, but more risk.

    An ARM is so named because the interest rate can fluctuate over time. ARMs often start out with a fixed rate that is adjusted after an initial period, typically three to 10 years, based on current rates.

    For example, if you have a 7/1 ARM, the “7” represents seven years of the initial fixed rate; the “1” represents the frequency of rate change after that. So in this case, the rate would change once a year after the initial seven-year fixed-rate period.

    Why would anyone want a mortgage loan with a rate that changes over time? Because borrowers who choose ARMs tend to secure lower initial interest rates than those who opt for fixed-rate loans. Plus, your ARM could be less expensive over a long period than a fixed-rate mortgage if interest rates remain steady or move lower.

    But of course you’re taking the risk that an increase in interest rates will lead to higher monthly payments in the future.

    Bottom line: If you are risk-tolerant and your priority is finding a lower initial interest rate for a more temporary living arrangement, you might consider an adjustable-rate mortgage.

    Interest-Only Mortgages

    >> In a nutshell: Initial interest-only payments start low but do not reduce the principal balance. The rate and payment eventually rise.

    As the name suggests, interest-only mortgages give you the option to pay only the accrued interest on the loan each month for a period of time, often five to 10 years. After the interest-only period expires, the loan converts to a standard structure, when both principal and interest are paid monthly.

    Interest-only loans, not commonly offered to first-time homebuyers, are usually ARMs with a 30-year term. Let’s say you see a 5/1 interest-only ARM. The rate may be fixed for the initial five years, but the loan may offer an interest-only payment option for up to 10 years. After 10 years, the loan will likely fully amortize with both principal and interest payments for the remaining 20 years of the loan term.

    Because you only pay the interest that is accruing on the mortgage, the initial monthly payments are substantially lower than if you were also paying toward the principal. After the ARM and/or interest-only period ends, mortgage payments go up, sometimes substantially.

    Interest-only loans are typically a good fit only for borrowers who expect to be able to cover those higher payments in the future. Or, if you’re buying a home as a short-term investment or you move frequently, an interest-only ARM may work.

    5. Be Frugal in the Months Before Buying a Home

    Plan on extra scrutiny of your finances and spending habits. Most lenders will question sharp swings in your savings account balance. Increases in revolving debt can be seen as red flags that may hurt your ability to get approved for your home of choice and the loan programs or terms you are eligible for.

    6. Choose a Mortgage Lender

    Until a few years ago, there wasn’t a lot of clarity around what different mortgage lenders were offering. Borrowers typically compared lenders on interest rate alone, then embarked on a frustrating, paperwork-heavy application process.

    Luckily, today you have more tools to use and information to draw from. And the rise in online and marketplace lenders has fueled improvements in process, service, and cost.

    If you want to avoid getting stuck with a not-so-great lender, take the time to shop around. Ask:

    • Does the lender offer competitive interest rates?
    • Does the lender offer loan terms and products that suit my needs?
    • How much of the process is online vs. on paper or in person?
    • How quickly can the lender close once I’m under contract?
    • What type of origination and other fees am I responsible for?
    • What other benefits does the lender offer, if any?

    No matter your mortgage needs, SoFi is here to help.

    Consider your financial goals and your long-term plans, then choose a mortgage that best supports those goals.

    Learn more

    7. Get Pre-Approved for a Mortgage

    Unlike pre-qualification, which gives you a rough idea of how much money you can borrow, mortgage pre-approval is a formal step, when a lender verifies things like credit history, income, debt, and assets.

    Having all your paperwork organized in advance can be a big help. Lenders typically ask for W-2s from the past two years, your two most recent bank statements and pay stubs, proof of assets, and two years of tax returns. Those who are self-employed will need to document stable work and payments.

    A pre-approval letter, typically good for 90 days, states that a lender is tentatively willing to lend you a specific sum for a mortgage. The letter shows sellers that you’re a serious buyer who has been vetted. That means you’re ready to act when you find that dream home and agree on a price.

    A pre-approval letter is not a guarantee, though. Final loan approval rests with mortgage underwriting.

    8. Choose an Experienced Real Estate Agent

    With all the apps and information available online today, you might think that buying a home is as easy as picking your favorite place and extending an offer. The truth is that without an experienced real estate agent, you may soon find yourself neck-deep in negotiations, legalities, and paperwork.

    Most homebuyers take on a buyer’s agent to represent their interests. That real estate agent’s share of the commission is usually covered by the seller. If the home is for sale by owner, ask the sellers if they are willing to cover the commission of the buyer’s agent.

    As a first-time homebuyer, it really helps to have a pro on your side. A good real estate agent can also help you save money if they know the area values well and can give you negotiating advice.

    9. Start Shopping for Your Home

    By researching neighborhoods where you might want to purchase a property (both in-person and online), first-time home buyers can get a better sense of what living in their future community could look like.

    Once the neighborhoods are whittled down the official house hunt can begin. For 55% of buyers, the most difficult step in the home buying process was finding the right property. Some had to undergo a considerable process before making the final purchase, with most searching for 10 weeks and seeing a median of nine homes first.

    Once you’ve found a home you love and the offer is accepted, it’s tempting to want to move in as quickly as possible. But the inspection and closing need to happen before you get your hands on the keys.

    10. Get a Home Inspection

    Regardless of how perfect a home may seem during a casual walk-through, a home inspection can identify issues that could require expensive repairs down the line. Lenders don’t require an inspection, but including a home inspection as a contingency clause when you present your offer is considered a smart idea.

    Finding an Inspector

    If the sellers accept your initial offer with the inspection contingency, the next step is to hire a professional home inspector. You have two options: Ask your real estate agent for a referral or hire one yourself. You can search for an inspector who is affiliated with either the American Society of Home Inspectors or the National Association of Home Inspectors.

    Cost

    A general inspection using high-tech equipment may cost about $300. Specialized inspections will add to that.

    What’s Included

    The inspector will typically assess the plumbing, mechanical systems, and the structure of the home.

    The structural assessment is the most important, which covers the foundation, support structures, walls, attic, and roof, is the most important because serious problems may not be visible and structural issues can be the most expensive to repair and may render the home ineligible for standard financing.

    If the home inspector notes any structural problems that may be serious, a notation in the report for further inspection by a structural engineer may be suggested.

    11. Negotiate Home Price and Repairs Based on Inspection

    Once the inspection is complete, you should receive a report within a couple of business days. With this information in hand, you may be able to go back to the seller to negotiate the price of the home and necessary repairs.

    Unless you decide to walk away from the deal, the conditions agreed to by both parties will be added as an addendum to the final contract, and the process can proceed to the final phase if the repairs needed do not raise any “health or safety” issues. If health or safety issues are present, the lender may request that these repairs be completed before the loan closing.

    If repairs cannot be completed by the closing date, it’s possible that a traditional home loan may not be approved.

    Financing does exist for fixer-uppers. The FHA 203(k) loan and Fannie Mae HomeStyle loan may be used for major structural repairs and cosmetic renovations. Funding is placed in an escrow account, and contractors are paid in draws.

    Tip: Home health or safety issues can tank a loan closing.

    12. Get a Home Appraisal

    Most mortgage lenders will require an objective property valuation after the seller has accepted an offer.

    The buyer pays for the appraisal ordered through the lender. The cost averages $350, but a desktop appraisal may cost less.

    13. Start the Closing Process

    The closing process is generally simple for both buyers and sellers.

    • The escrow company/closing agent will calculate legal fees, transfer taxes, and closing costs, as well as coordinate the transfer of ownership via the deed.
    • The lender provides documentation of the loan, including the note, the mortgage, closing fees, and other disclosures.
    • The title company will furnish documentation of clear ownership in the form of a title insurance policy.

    Before closing, you will need to schedule a final walk-through to ensure that any agreed-upon repairs have been completed and the home has been left in satisfactory condition. You’ll receive a closing disclosure three or more business days before the loan closing for review of fees and terms. If everything checks out, you and the sellers will sign the closing documentation.

    After the documentation and all financial transactions have been verified as complete by the escrow company or closing agent, the escrow company will record the change of ownership with the county and you will be given the house keys.

    You’re a New Homeowner! Now What?

    1 Keep Saving

    2 Perform Regular Maintenance

    3 Consider the Housing Market

    4 Don’t Rely on the Sale of Your Home to Fund Your Retirement

    Ready to Get Started? Learn More About SoFi Home Loans

    Buying your first home can be nerve-wracking, but SoFi supports first-time homebuyers every step of the way and offers great fixed-rate mortgage options.

    Shop around and then come home to SoFi, where you’ll find competitive rates and access to a host of SoFi perks. And again, first-time homebuyers who qualify can put just 3% down.

    FAQ

    What do I need to know as a first-time homebuyer?

    A lot, but trying to avoid financial landmines, saving for a down payment or looking for down payment assistance, knowing to compare loan APRs, and finding a trustworthy real estate agent and lender are important.

    How do I finance my first home purchase?

    Other than with a VA, USDA, or NACA loan, or with a grant or forgivable second mortgage, you’ll often need a down payment.

    FHA loans are known for allowing many borrowers to put just 3.5% down, but qualifying first-time homebuyers can get a SoFi loan with an even lower down payment. (Remember that mortgage insurance usually tags along for the life of an FHA loan, and for a conventional loan with a down payment under 20%, until you’ve gained sufficient equity.)

    What are some benefits to buying a home?

    The main financial benefit is the chance to build equity. Other benefits include a sense of autonomy and identifying as a bona fide homeowner.

    Ready to get started?

    Learn more about SoFi Home Loans today.

    We’ll help you discover whether this year is the year you make your dreams of homeownership a reality.

    Get started


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