Takeaways
- A mortgage is a financial agreement that provides capital to purchase a home.
- Factors like your credit score, interest rates, and loan terms affect your mortgage.
- Consult your budget for the long-term affordability of your mortgage payments.
- Hiring a real estate and financial planner can help the buying process.
- Saving for a down payment and building an emergency fund is crucial for financial health.
What Is a Mortgage?
Buying your first home is a massive life milestone. The homebuying process can be fun and exciting, especially for a first-time home buyer. But before you get too far down the road looking for a home, it is critical to understand how a mortgage and the home-buying process work.
A mortgage is a financial agreement that provides you with capital to purchase a home and gives the lender the right to take the property if you fail to make the mortgage payments plus interest.[1] A mortgage is basically a loan provided by a bank or financial institution that enables the purchase of different types of real estate. You can buy a condominium, primary house, second home, or other type of real estate. As part of the process, you commit to repay the loan over the term, typically with monthly installments that pay for the principal balance and interest.
Getting a clearer understanding of the intricacies of taking out a mortgage is fundamental to the financial planning process because mortgage payments and debt will directly impact your ability to own a home. Your mortgage will be affected by factors like your credit score, interest rates, loan terms, and the type of mortgage you choose. Knowing these critical components ensures that you can make informed decisions regarding your first home purchase and how to improve your chances proactively to get the best mortgage available.
Read More: How the Federal Funds Rate Affects Interest Rates
Take the Next Step:
Quicken’s Website
Axos Bank® Rewards Checking
Smart Money Rating: 5/5
APY: 3.30% with No Minimum Balance
Bonus Offer: Up to $500 Bonus (Terms Apply)
7 Items to Consider Before Buying Your First Home
Buying a house for the first time (or second) can be stressful. Decision fatigue can set in during the process, which is why it is vital to contemplate what you want out of your home purchase before you even begin. Here are seven variables to consider before buying your first home:
1. What Type of House Do You need
The first thing to think about is the type of house you need. The type of house you need is determined by your current (or future) family size, lifestyle, and more. There are several different types of real estate structures to consider. For example, do you want a single-family home, townhome, or condominium? All three have their advantages and disadvantages.
Single-family homes have more yard space but will also require the most maintenance. Condominiums will be the exact opposite. Knowing what type of home you want lays the foundation for a successful search. The last thing you want to do is buy a condominium and suddenly realize you should have purchased a house. The ideal property you end up with will suit your current and near-future requirements.
2. What Size Home Do You Need
The next thing you should consider before buying your first home is how big of a home you physically and logistically require. Home size is a critical consideration that makes you contemplate your space needs honestly, based on variables like your family side, potential future needs, professional needs (for those who work remotely or operate a business), and your lifestyle.
Considering the usual bed and bath requirements, this is a great place to start. You should also debate the living space, the storage space, the area for your car, and the total square footage. Be sure you try to balance your wants with your desires because a large house also requires a lot of maintenance and upkeep.
You Might Also Like:
3. Features of Your Home
One reason buying a house is such a big deal is that you spend so much time in your home. You should contemplate factors that are important to you during the home-buying process to ensure you are happy with your final selection.
For example, if you want to be able to ride a bike to work, walk your children to school, or be close to shopping, it requires careful planning. It also helps to think forward-looking and contemplate how many rooms you want. If you work from home, you might want an additional room for a home office. A spare room might be a requirement if you have frequent visitors who are friends or family. And if you have already paid off your car note, you might want a covered garage.
Alternatively, you may want specific architectural features, such as brick construction, multiple stories, or archways. You will not be able to get everything you want, but entertaining your “must-haves” can help narrow down your search.
Need to remodel? Consider taking out one of the best personal loans.
Take the Next Step:
on Upstart Website
Upstart Personal Loans
Smart Money Rating: 5/5
Best For: Fast Online Loans
Loans From: $1,000 – $50,000 (Terms Apply)
Bonus Offer: Checking Interest Rate Won’t Affect Your Credit Score
4. How Much House Can You Afford?
Another cornerstone of an effective and educated homebuying experience is determining how much house you can realistically afford. Analyzing the monthly mortgage you can afford before buying your first home should be rooted in your budgeting process.
You want to ensure you can comfortably afford your monthly mortgage payments and additional homeownership expenses (most first-time homeowners aren’t familiar with), such as property taxes, insurance, maintenance, and more.
Smart Tip:
Lenders analyze your debt-to-income ratio during the mortgage approval process. If you can reduce your debt loan before applying for a mortgage, the better your chances of securing a better and higher loan.
Consulting an online mortgage calculator can help you realize how much mortgage you would be financially comfortable with. While these are great tools, there are general rooms of thumb for how much your mortgage should cost.
For instance, a common personal finance rule is the 30% rule, which states that you should keep your housing costs to 30% or less of your take-home pay. The 30% rule allows room in your budget to ensure you can make credit card, student loan, or other debt payments. Additionally, you want to double-check that you have enough funds to put in your savings or checking account.
Getting familiar with what you can afford can help avoid setting you up for disappointment down the line.
Try Smart Money's 50/30/20 Budget Calculator to see how much your mortgage you can afford.
5. Saving for a Down Payment
Saving for a down payment is a significant hurdle for most first-time homebuyers. In fact, it is usually the highest barrier to entry into the housing market. Most lenders want to see first-time homebuyers put down at least a down payment of 20%. A high down payment is needed for most conventional loans, particularly jumbo loans. Saving this amount, especially if you live in an expensive and competitive market, represents a massive achievement in financial planning and saving.
Your down payment affects closing costs and the terms of your mortgage (like the interest rate). Many lenders have a specific minimum down payment percentage that they are willing to work with. While the conventional 20% down payment might seem too high, the good news is that there are other options. Depending on your situation, you might qualify for a down payment assistance program or a VA loan, FHA loan, or USDA loan.
If these financing options are not an option, you should plan on saving at least 10% to 20% of the potential value to get ideal terms with a lender.
Down Payment Calculator
Calculator
Down Payment Calculator
6. Make Sure You Have Excess Savings
Depending on the property you buy, this is where things can get a bit nebulous. Beyond the down payment, it is necessary to keep a bolus of cash for any of the myriad things that can pop up after closing.
Owning your home can increase your net worth but is also full of unforeseen homeownership costs and expenses. These costs range from repairs, emergencies, or simple maintenance. Maintaining an emergency fund ensures that you have some degree of preparation for when the inevitable problem pops up, and it can help keep you in good standing with your lender. If you have a little financial cushion when the unexpected happens, you will be in a much better place to tackle that challenge while still making your mortgage payments on time each month.
Stash your cash in one of the Best Online High-Yield Savings Accounts.
Take the Next Step:
Member FDIC
Quontic High Yield Savings Account
Smart Money Rating: 5/5
APY: 4.50%
Required Minimum Balance: $100
7. Hire a Professional to Help You
Leveraging professional help simplifies the complexities and nuances of the real estate market for first-time homebuyers. You should hire a qualified, local real estate agent to help you find the right property, negotiate favorable deal terms, and handle all the paperwork. Additionally, consult with more than one bank or lending institution so that you have multiple options for loan terms (as well as potentially two different pre-approval amounts).
Other professionals crucial to buying your first home are home inspectors, real estate attorneys, and financial advisors who can provide make-or-break insight and support. Keep a list of essential experts readily available to help you make the entire experience much more pleasurable.
Smart Summary
As a first-time home buyer, you want to ensure you get everything you want. By researching and hiring the best real estate agent, you can get a head start on your purchasing process. But before you even press that button, it makes sense to think long and hard about whether you are prepared to buy. Consult your budget, get your emergency fund in place, save your down payment, and get the right type of mortgage. Being prepared before buying your first home is a smart money move.
(1) Consumer Financial Protection Bureau. What is a Mortgage? Last Accessed January 20, 2025.
