Buying Your First Home: 5 Things to Know Before You Do (2024)

Certainly, the best time to trade security deposits for a down payment is different for everyone.

But if you're considering ditching the landlord for a mortgage, here are five things you need to know that'll help you figure out if you're ready to buy a home or should keep renting.

#1 Your Down Payment May Not Be the Biggest Hurdle

Let's not beat around the bush: Buying a home requires a substantial financial commitment.

There's the down payment, of course. "On average, you want to have a minimum of 5% to 7% of the cost of the home you're targeting," says Jason Harriman, a REALTOR®with San Antonio-based Heyl Real Estate Group at Keller Williams Realty. Then, add 3% to 6% more for closing costs, which will vary based on where you live and what taxes your state and city require you to pay.

Tip:Keep in mind if you put down less than 20%, you'll pay PMI, private mortgage insurance, which protects the lender in case of default. Usually, it's about $50 to $200 a month. But once you reach a certain threshold on your loan to value ratio, you cancancel PMI.

A healthy credit history is also important. Most borrowers will start to qualify for a mortgage with a minimum score of 620 — but the most competitive interest rates will be offered to those with a score of 700 or above. So if you haven't started practicing those good credit habits yet, it's time to start developing them.

If your credit score is lower than you'd like, external help is on the way. Fannie Mae and Freddie Mac, which guarantee most of the mortgages made in the U.S., have relied on FICO credit scores to understand how likely borrowers are to repay mortgage loans. The organizations will be adding two alternative scoring models that factor in a broader range of payment history data, according to MarketWatch. The alternative models will look at areas like payment of cell phone and utility bills, and rent. As a result, more credit-worthy Americans are expected to have access to mortgages.

Related:Myths About Credit Scores

One of the trickiest hurdles for young adults, so many of whom are lugging around student loan debt, is the debt-to-income (DTI) ratio. Mortgage companies want borrowers to have a certain level of cash flow each month, and that means taking into account how much you're paying out to other lenders. Ideally, a borrower's debt-to-income ratio — how much you pay toward debt each month divided by your gross monthly income — should fall below 36%. (Strictly speaking, a loan is considered able to be paid if the DTI doesn't exceed 43%.) If yours doesn't, think about how you can get that debt needle moving in the right direction.

"The best way to do this is to pay off any unsecured debts like credit cards and personal loans, and keep them as close to a zero balance as you can," says Harriman.

#2 You Probably Will Have to Compromise

Kathleen Celmins, currently CEO and co-founder of a content marketing agency, was financially prepared to manage a mortgage. But once the house hunting began, she quickly realized she was priced out of the homes she had envisioned for herself.

"I originally wanted a single-family home with a yard and in a great neighborhood," she says. But given her price point, the homes she could afford ended up being in, well, not the greatest neighborhoods. "At one point, we looked at a property that was directly behind a strip club," she laughs. "We didn't even go inside."

After several weeks of searching, Celmins realized she needed to find a middle ground. "In my price range, I could get a not-so-great house in a not-so-great neighborhood. Or, I could get a really cute condominium with a gas range and granite countertops," she says. "It was something I compromised on. I gave up a yard for having fancy stuff in my condo."

#3 Be Emotionally Ready for Financial Surprises

When it comes to renting, surprises don't require much emotional investment. The rent goes up? You can move.The fridge ison the fritz? The landlord will send someone over. Home ownership is a bit more hands-on. If the toilet breaks, it's time to start reading Yelp reviews. And if property taxes unexpectedly rise, it's on you to appeal or pay up.

"Myhomeownersassociation fee doubled in the first year I owned my condominium," saysCelmins. "Then myreal estate taxes were reassessed. My mortgage payment went up, and I panicked. I didn't even know that could happen."

#4 A Mortgage Can Be Cheaper Than Rent

Depending on the home you choose and where you live, you may pay a lower mortgage than you paid for rent. But even if you don't, there's still the financial advantage of building equity in your home, instead of lining your landlord's pockets.

#5 Your Lifestyle May Call for Buying Instead of Renting

Many people find a rental can only take them so far. When you're ready to start a family, you're going to want a few extra rooms, and that can get expensive with rising rental rates. A yard also provides a safe place for Junior to play or for a dog to scamper around. And speaking of your dog, the vast majority of renters have trouble finding a place that will allow their pet. Home ownership can end that stress for good.

Then there are the renovations. If you're itching to test out your DIY skills and personalize your space, you're probably ready to own. Landlords who allow property renovations — especially DIY projects — are few and far between.

Buying a first home is a big change — both from a financial and an emotional perspective. Still, for many, home ownership can be one of the most rewarding life choices one can make. "Turns out it's awesome," saysCelmins.

Related:

Avoid First-Time Home Buyer Mistakes with This Checklist
6 Things Everyone Should Do When MovingIn toa New House

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First-Time Buyer is Presented by The National Association of REALTORS®

I am a real estate expert with extensive knowledge in the housing market and the intricacies of buying a home. I have hands-on experience as a REALTOR®, and my insights are grounded in the practical aspects of real estate transactions. Let's delve into the concepts discussed in the article about trading security deposits for a down payment and the key considerations when transitioning from renting to buying:

Down Payment and Closing Costs:
- The article emphasizes the financial commitment required for buying a home, including a down payment of 5% to 7% of the home's cost.
- Closing costs, ranging from 3% to 6%, are also highlighted, influenced by location, taxes, and other factors.
- Private Mortgage Insurance (PMI) is mentioned as a consideration if the down payment is less than 20%, with the advice to aim for a certain loan-to-value ratio to cancel PMI.
Credit Score and Alternative Scoring Models:
- A healthy credit history is stressed, with a minimum score of 620 for mortgage qualification and better interest rates for scores of 700 and above.
- Fannie Mae and Freddie Mac's adoption of alternative scoring models that consider broader payment history, including rent and utility bills, is discussed, potentially expanding access to mortgages.
Debt-to-Income (DTI) Ratio:
- The importance of the debt-to-income ratio (DTI) is highlighted, with a recommendation that the ratio should ideally be below 36% for mortgage approval.
- Tips are provided on improving the DTI by paying off unsecured debts like credit cards and personal loans.
Compromises in Homebuying:
- The article acknowledges that compromises are often necessary, citing an example of a buyer who had to compromise on the type of home and neighborhood due to budget constraints.
Emotional Readiness for Financial Surprises:
- Homeownership is portrayed as more hands-on, with the need for emotional and mental readiness to deal with unexpected expenses like maintenance issues, rising property taxes, or homeowners association fees.
Cost of Ownership vs. Renting:
- The article suggests that, depending on the home and location, a mortgage payment may be lower than rent, and it emphasizes the financial advantage of building equity in a home.
Lifestyle Considerations:
- The transition from renting to homeownership is discussed in terms of lifestyle changes, such as needing more space for a family, a yard for children or pets, and the ability to make renovations.
Long-Term Benefits of Homeownership:
- The long-term benefits of homeownership are highlighted, including potential cost savings compared to renting, building equity, and the ability to personalize and renovate living spaces.

In summary, the article provides practical insights into the various aspects of transitioning from renting to buying, covering financial considerations, credit score management, the need for compromises, and the emotional and lifestyle aspects of homeownership.