ESSENTIAL TIPS FOR FIRST-TIME HOMEBUYERS

Financial planning tips for first-time homebuyers

Before you start shopping for a home, make sure your finances are in order. Determine if now is a good time to buy a house. Understand the pros and cons of buying vs. renting. And most importantly, learn how to budget for a home so that you don’t get in over your head.

Is it the right time to buy a home?

This answer to this question is unique to each person. Ultimately, it doesn’t matter what the housing market looks like, or whether rates are high or low, or whether your friends are all buying houses. It’s something you must ponder and decide for yourself.

Is buying a home something you really want? Go for it! Just make sure you do your homework and keep your head on your shoulders.

Buying a home is a big decision both emotionally and financially. First-time homebuyers often get swept up in the emotional side of things. Don’t forget to focus on the financial side as well. Understand the financial commitment, plan for life events, and budget accordingly.

Is it better financially to rent or buy a house?

If you are planning to stay in your home for at least 5 years, it is generally better to buy vs. rent. Benefits of buying a home include a stable monthly payment and the opportunity to build equity. A home purchase is an investment that will grow in value over time.

However, when you compare renting vs. buying a home, make sure you understand all of the costs associated with buying and owning a home. Don’t confuse your maximum rent payment with your maximum monthly payment on a house. (More on that below.)

How much should I spend on a house?

Your mortgage is just one piece of the puzzle. When deciding how much to spend on a house, it’s important to look at the full picture regarding your finances and your monthly budget. We strongly recommend the one-third rule of home buying.

The one-third rule of home buying

Your monthly house payment should not exceed one-third of your monthly net income. Remember, your net income is your monthly paycheck after taxes are taken out. For a healthy household budget, plan to spend about one-third of your take-home pay on your house payment, one-third on utilities and other expenses, and put one-third into your savings account each month.

How much money should I save before buying a house?

Always have 6-12 months worth of income stowed away in your savings account. This is your safety net in case of a job loss or unexpected life event. Don’t dip into your safety-net savings to cover your down payment. Set aside enough additional savings so that you can put down at least 3-5% on a home. For example, if you want to buy a $200,000 home, you should save $6,000-$10,000 on top of your safety-net savings.

Check your credit score

Your credit score is a gauge of how likely you are to pay back a loan on time. It is determined by information on your credit report, such as personal information, credit card history, credit checks, and public records.

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Credit score ranges:
740–850 = Excellent
720–739 = Good
700–719 = Fair
300–699 = Bad

How will my credit score affect my mortgage?

Your credit score helps lenders analyze your ability to pay back a loan based on your borrowing history. The higher your credit score, the better rates you can get. A lower rate can provide significant savings over the life of your loan.

Note that if you look up your credit score online, it may be different from the score we use. Your consumer credit score is different from your mortgage credit score. Furthermore, when we run your credit, we pull three different credit scores per person from the three major bureaus (Experian, Equifax, and TransUnion). The middle or median number is the one we use to determine your eligibility for a home loan.

What if one spouse has bad credit?

If you’re applying for a home loan with your spouse (or other co-borrower), the lowest median credit score between the two of you is the single qualifying score that lenders will use to determine your ability to repay a loan. If your spouse has bad credit, they should take actions to improve their credit score.

Buying a home with your spouse? Lenders will use the lowest median credit score between the two of you.

Depending on your state, you may have the option to buy the home without your spouse. In that case, you would be the sole borrower and homeowner. Your spouse’s name would not be included on the home loan. The advantage is that you could get a better rate with your higher credit score. Note that there is a minimum income requirement you must meet on your own if your spouse is not included on the loan.

What are the three C’s of home buying?

The three C’s of home buying are the three factors that affect loan approval: Credit, Capacity, and Collateral.

• Credit: Lenders will look at your credit score, payment history, and other factors to gauge whether you are a reliable and trustworthy borrower.
• Capacity: Do you have the capacity (or cash flow) to pay off the home loan? This is largely determined by your employment status, debt-to-income ratio (DTI), down payment, and the money in your savings account.
• Collateral: Collateral refers to the property itself. It is determined by the value of the home you are buying.
  

Determine your down payment

How much money should you put down on a house? This is a huge question for first-time homebuyers. The biggest thing to remember is that you don’t want to drain your savings account. Keep a safety net in place for life events and home expenses.

Larger vs. smaller down payment

The main advantage of a larger vs. smaller down payment is the more money you put down, the lower your monthly payment. But before you put down all the cash you have on hand, it’s important to consider cash flow and life events. The small amount you’ll save per month by putting down an extra $5,000 (for example) may not be worth the stress of draining your savings—especially if you plan to get married, have a baby, or move again in the next 5 years.

How much do first-time homebuyers put down?

It is a myth that you need to put 20% down to buy a home. Most first-time homebuyers choose to put down 3–10%. With a smaller down payment, you will have to pay for private mortgage insurance (PMI) until you’ve paid down your loan balance to 80%. But nowadays the cost of PMI is quite low.

Can I borrow my down payment?

Technically, yes, you can take out a personal loan (401k loan) to cover your down payment on a home. But we strongly advise against it. The additional debt will hurt your chances of getting approved for a home loan. Keep saving until you can put down at least 3–5% on a home.

Calculate your monthly payment

Make sure the property you want to buy fits your budget. When calculating how much home you can afford, a good rule of thumb is to make sure your monthly payment (including taxes and insurance) is no more than one-third of your monthly paycheck.

How much home can I afford?

The answer to this question largely depends on your debt-to-income ratio. Use this calculator to determine what size loan you can afford based on your maximum affordable monthly payment.

Monthly payment vs. rent payment

A monthly mortgage payment is not the same as rent. First-time homebuyers commonly make the mistake of assuming their maximum affordable rent payment is the same as their maximum monthly payment on a home loan. Don’t forget to budget for the extra costs that come with buying a home vs. renting. You’ll need to budget for things like property taxes, home insurance, home repairs, and maintenance. Subtract these costs from your maximum affordable rent payment to get a better idea of what you can afford.

Get pre-approved

It’s a good idea to get pre-approved for a home loan early in the search process, or even before you start looking at homes. Some real estate agents will not show you houses until you have a pre-approval letter in hand. Be sure to get pre-approved by a trusted lender that will run a credit check. This is an important safeguard to ensure you don’t make an offer on a home you can’t afford.

At Clear, we will verify your income and run a soft credit check for pre-approval. The soft check will not affect your credit score.

Why do I need a pre-approval letter?

Pre-approval is not required but strongly recommended. Knowing approximately what size mortgage you can get will help you shop within the right price range. When you find your ideal property, a pre-approval letter will strengthen your offer and help sellers take you seriously.

What’s the difference between pre-qualification and pre-approval?

Pre-qualification is a quicker and less thorough process compared to pre-approval. To get a better idea of what size loan you’ll be able to secure (i.e., how much home you can afford), apply for pre-approval with a trusted lender.

Red flag alert: Beware of lenders who offer “instant pre-approval” or promise to get you pre-approved “over the phone.”

What’s so bad about instant pre-approval over the phone?

In a word, it’s sloppy. Lenders need to check your actual credit score (not what you think it is, or what you see online) and verify your financial information. Only then can they tell if you’re likely to get approved for a home loan of a certain amount. If your pre-approval comes in too high, you could end up going under contract on a home you can’t actually afford. Then the loan may not go through, and you could lose the house–which can be devastating.

What documents do I need to apply for pre-approval?

You will need to provide relevant financial documents—such as pay stubs, tax forms, and W-2 forms—to verify your income. We will also run a soft credit check. The soft check will not show up on your credit report and will not affect your credit score.

House hunting tips for first-time homebuyers

When shopping for a home, it’s essential to keep your finances top of mind. Carefully determine your budget—and stick to it. Homebuying can be a very emotional process. Remember to keep your head on your shoulders.

Work with a real estate agent who respects your budget and doesn’t pressure you to shop for homes above your maximum price point. And when you’re ready to buy a home, take precautions like getting a thorough home inspection to ensure you’re making a safe investment.

Happy hunting! Once you have a property under contract, come back and get a quote. With Clear, you can get a customized rate quote online in about 30 seconds. Feel free to reach out to us at any point if you have questions. Talk to a loan expert.

Home loan tips for first-time buyers

Understand the home loan process

As a first-time homebuyer, the home loan process may be a little confusing and overwhelming. At Clear, we’re on a mission to make it as easy as possible.

Here’s the entire process in a nutshell:

Before you apply‍
1. Do your homework
2. Get pre-approved
3. Find your dream home
4. Get it under contract
5. Choose a lender
During the application‍
6. Set up an account on our website
7. Complete tasks and upload documents
8. Submit your home loan application online
After you apply‍
9. Receive a rate lock within 1–3 days
10. Provide additional documents as needed
11. Underwriting
12. Loan approval
13. Closing‍
After closing
14. Funding and deed recording
15. Begin your monthly payments

In our Home Loan Process Timeline, we walk you through the entire process–before, during, and after you apply–in more detail.

Can I apply for a loan and lock my rate before I find a property to purchase?

Yes. You can apply for a loan and we can underwrite everything TBD (property address and purchase price “to be determined”) before you have a property under contract. However, we cannot lock your rate until we have a property address. This option to apply early is helpful in a hot market because you can close faster, which makes your offer more attractive to sellers. 

‍Please note: If you are still in the early stages of home shopping, the first step is to apply for pre-approval. You must be pre-approved before we can move forward with a TBD loan approval as described above.

What type of loan is best for first-time buyers?

There are various programs designed to help make homeownership more affordable for first-time buyers. First-time homebuyer loan programs might feature a lower rate, a lower down payment, or lower closing costs. First-time buyers can get a conventional loan with a minimum down payment of 3%. FHA loans are another popular choice, because borrowers only need to put down 3.5% when purchasing their first home.

You will also have a choice between a fixed vs. adjustable rate mortgage (ARM). For first-time buyers, we generally recommend a 30-year fixed rate mortgage.

Have questions about what first-time homebuyer loan programs are available in your state? Talk to a loan expert.

How do I get the best mortgage rate?

Get quotes from three different lenders. When shopping for the right lender, look for low rates, good reviews, and a high level of knowledge and availability. Consider working with a lender that specializes in first-time homebuyer loans to get the best deal possible.

Carefully compare your options before you commit. It’s important to realize: The best rate isn’t necessarily the best loan. In addition to the interest rate, pay attention to closing costs and other fees. Beware of gimmicks. Sometimes lenders will shift fees around to make loans look more appealing. Often where there’s a discount, you can expect a fee added elsewhere.

With Clear, what you see is what you get. No surprises. No tricks. We line out all the costs associated with our loan options and make them as detailed as we can based on the information that you provide.

Ask a loan expert: What are the best tips for first-time homebuyers?

Here’s what our veteran team of loan experts recommend based on their many years of experience with guiding customers through the home loan process.

What are 5 tips you recommend when purchasing a house?

1. Financial planning is key.
   Use the one-third rule to carefully plan your budget before you start house hunting.
2. Think about desire vs. need.
   When shopping for a home, don’t let your emotions cloud your judgment when it comes to spending.
   
3. Get your credit in check.
   Your credit score has a big impact on your interest rate and whether you can qualify for a home loan.
4. Plan for life events.
   Leave extra room in your budget if you are planning to get married, have a baby, or move again in the next 5 years.
5. You only need to put down 3-5%.
   It’s a myth that you need to put down 20% on a home. Most first-time homebuyers are better off making a smaller down payment and keeping the extra money in their savings. You can make additional principal payments at any time, without penalty, to build equity and pay off your loan faster.

What is the best way to go about getting a home loan?

Do your homework when it comes to choosing a lender and selecting which home loan option is right for you. Once you have a home under contract, use our custom quote builder to get a detailed yet easy-to-read breakdown of all available loan options. Compare your favorites side by side, and reach out to us with any questions.  

Buying a home is a big milestone and a huge financial decision. It can be confusing and overwhelming for first-time homebuyers. But it doesn’t have to be. At Clear, we’re all about making the process easier and more transparent. We’re here to talk you through whatever you need. No pressure. No strings attached.

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