Be Money Conscious as a First Time Buyer

How to Avoid Debt Buying Your First Home It can be easy to fall into debt when buying your first home, especially if you’re not financially prepared or don’t understand what each step of the home buying process looks like. Chances are, you’re attempting to navigate the real estate market as best as you can while trying to save as much money in the process.

From saving up for a down payment to budgeting for closing costs, you’ll be able to avoid debt when shopping for your first home (and hopefully have some extra money left over to put away).

Start saving for a down payment as early as possible

One of the biggest ways you can avoid debt as a first-time home buyer is to make sure you can cover a down payment of at least 20% of the home’s price. If you’re looking to buy a $500,000 home, a reasonable down payment would be $100,000.

You can start saving up for a down payment by creating a monthly budget, setting aside work bonuses, opening up a savings account, or doing freelance work for extra cash. One of the biggest benefits of coming up with twenty percent is avoiding paying private mortgage insurance which can be a hefty amount of money coming out of your pocket every year.

Compare low down payment programs

If you don’t think you can save enough for a 20% down payment, there are a variety of low down payment programs that offer assistance and competitive mortgage rates for first-time home buyers.

Some mortgages that come with no down payment, or a very small one, include the Department of Veterans Affairs loan, the Navy Federal Credit Union loan, a USDA loan, and an FHA loan.

The Department of Veterans Affairs loan requires no money down while an FHA loan requires a minimum down payment of 3.5%. If you put down a down payment of less than 20% on a house, just know that you may be making higher mortgage payments each month.

Get pre-approved

A pre-approval helps lenders determine how much money they’re willing to loan you based on your income, debt, and credit history, and it also shows you how much home you can actually afford. After getting pre-approved, if you know you’ll only be receiving a $100,000 loan, you won’t have to waste your time looking at multi-million-dollar homes.

Note: You don’t need to settle on the first mortgage lender you find. Compare different banks, online lenders, and credit unions and figure out the interest rates, fees, and terms that each lender and loan offers.

One other important thing to keep in mind – make sure you get pre-approved and not pre-qualified for a mortgage. This means the lender you use should do a full check up on your finances including verifying your income and employments as well as doing a credit check.

You might be wondering why and the answer is simple. The seller and their agent are going to want to know you’re qualified to buy their home. A pre-approval does this, a prequalification does not.

Don’t put yourself in the unenviable position of scrambling for a good mortgage letter at the last minute.

Explore your mortgage options

There are two main mortgage options that most first-time home buyers consider: a 15-year mortgage and a 30-year mortgage. With a 15-year mortgage, you’ll typically pay higher monthly mortgage payments at a lower interest rate. The upside to paying higher payments month-over-month is that you’ll get to build equity faster, pay off your house sooner, and be debt-free after 15 years.

If you can’t afford high monthly payments, opt for a 30-year mortgage—this type is often preferred among first-time home buyers. Lower mortgage payments can help you put more cash toward savings and help you qualify for a higher loan amount when you purchase a home. Note: 30-year mortgages typically come with a higher interest rate, meaning you’ll have to pay more money over time.

Build up your credit score

Your credit score plays a huge role in securing a loan for your house. It’s based on information in your credit report and includes information about your credit information, balances, delinquent payments, bankruptcies, and other items.

Mortgage lenders will look at your credit score to decide whether or not to approve a loan and at what interest rate. To get the lowest interest rate on a mortgage, you should have a credit score of 760 or higher. If you have a lower credit score, you may still be able to get a mortgage by shopping around and having enough money saved up for a 20% down payment.

Stick to your budget

One of the easiest ways to avoid debt when shopping for your first home is to create a budget. Have a firm dollar amount and look at properties that cost less than the amount you were approved for. It might be tempting to make a high-priced offer on a house to beat out competitors, but you shouldn’t let your emotions take over.

Shop below your pre-approval amount to generate some wiggle room for bidding.

Get a grip on your emotions

When you find a house you love, it can be easy to completely forget your budget and pay whatever price is necessary to secure your dream home. However, if you go this route, you risk paying an exorbitant amount for a house that you can’t afford and are stuck with extremely high monthly mortgage payments. Be patient and remember to stay within your price range—you’ll find a house that’s worth it.

Also don’t get so enamored with a home that you lose sight of the importance of other factors such as neighborhood, the surrounds and the local school system if you have or are having kids. These things affect the value of the property and the ability to sell in the future.

Budget for closing costs

Most first-time home buyers underestimate the cost of home ownership and don’t have enough saved up for closing costs. Closing costs are fees associated with your home purchase that are paid at the closing of a real estate transaction. These fees can include an attorney fee, an application fee, a home inspection, homeowners’ insurance, and recording fees.

In general, homeowners will pay between 2%–5% of the purchase price of their home in closing costs. It’s a good idea to have three to six months’ worth of living expenses saved up in cash to afford these costs and other expenses.

Remember to get a home inspection

A home inspection will provide information about the current condition of the home you’re planning on buying along with any issues with major systems and appliances. An inspection is especially helpful because it will list any defects associated with major systems and will come with recommendations on how to proceed with these issues.

Note: a home inspection report doesn’t list quotes for home repairs or replacements, so you’ll have to contact a local service technician to determine how much it will cost to repair or replace certain appliances and systems.

In addition to closing fees, you’ll also want to budget for any repairs you may have to make after closing or invest in a home warranty. If a home inspection reveals that the HVAC isn’t blowing cold air properly or the washer and dryer are broken, your home warranty can save you money on repairs or replacements.

If you don’t have enough saved for repairs and you don’t opt for a warranty, you’ll have to scramble and pay out-of-pocket for any repairs or replacements, so make sure you have extra cash on hand for these situations.

Final Thoughts

Buying a home for the first time comes with a lot of financial responsibility. Never buy a home before you are truly ready. Find a local real estate agent you can trust to be your advisor. The best real estate agents will not pressure you but be your ultimate advocate.

Hopefully, these tips for staying out of debt have been helpful.

Additional Helpful Resources For Buyers and Sellers

Take a look at these additional resources where buyers and sellers can find valuable information to make informed real estate decisions. First time home buyers who do a lot of research will be in a much better position than those who don’t. Be one of the smart first timers!

Kay Carter


About the author: Kay Carter is a writer from Raleigh, NC. When she isn’t writing about interior design or real estate, she enjoys reading, traveling, and practicing photography.