7 Financial Must Haves for the First-Time Home Buyer

Buying your first home can be one of the most exciting events in adult life. In many ways, it's our society's primary marker of adulthood, a symbol of financial prudence, and the ultimate sign of stability. But without the right planning, buying your first place can be fraught with stress, fear, and way too much guesswork. Here are seven financial prerequisites that, in my book, are musts before you sign on the dotted line and start picking out curtains and countertops. (See also: Buying a Home Without the Money)

1. Bank a Large Enough Down Payment

Ask 12 people what an acceptable down payment is, and you'll get a dozen different answers. Common ranges are 5% to 20%, with anything less than 20% requiring buyers to carry private mortgage insurance (PMI) to protect lenders against loan default. Your down payment should be large enough to make the resulting mortgage manageable month-to-month, even if there's a temporary financial hiccup. Remember, every dollar you save toward your down payment is one less dollar you'll need to borrow and one less dollar you'll be paying interest on for the next 30 years.

2. Understand How Much You Want to Afford

Lenders are great at telling us exactly how large a mortgage we can afford based on factors like our down payment and debt-to-income ratio. But I think there's a second, much more important equation — how much do we want to afford?

Ask yourself, "What kind of lifestyle would I like to have after I purchase my home? What level of mortgage debt am I comfortable with?" Consider your other financial goals and calculate just how much money you're willing to devote to your mortgage, mortgage insurance, property taxes, and association dues.

3. Know Your FICO Score

Lenders use FICO scores to determine if buyers qualify for a loan and help calculate the mortgage rate for those who do. Typically, anyone with a credit history has three FICO scores, one from each of the three credit reporting agencies: Experian, Equifax and TransUnion. It's a good idea to know your credit score before you apply for a mortgage and, if necessary, correct any errors that might negatively affect your chances of getting the best mortgage rate. By law, credit bureaus are required to provide consumers with their scores free of charge once every 12 months.

4. Gauge Your Job Stability

Knowing that your income is relatively secure is an important but often ignored prerequisite to buying a home. A few times over the course of my career, I've initiated candid conversations with my boss whenever I'm on the cusp of making a large purchase. I like to check in and see how the company is doing and how I'm doing, and I base at least part of my purchasing decision on the answers I get. I try to be as direct but as discrete as possible and explain why I'm asking.

Usually the conversation begins something like this, "Hey, Chris, I'm thinking of putting an offer in on a condo and just wanted to touch base with you about the company. Off-the-record, is there anything I should be concerned about or any potential bumps in the road that might make this a bad time to make a big financial commitment?"

Of course there are no guarantees with any job and not all employers will welcome this approach or be forthcoming with their answers. But it helps to put it out there and try, as much as possible, to get a clear sense of your short-term and long-term employment realities.

5. Cut Your Consumer Debt

Did you know that, according to NerdWallet, the average credit card debt per household in the US is $15,216? That's a lot of unsecured debt, a lot of interest, and a lot of stress.

Regardless of what debt-to-income ratio your mortgage company allows, strive to drastically reduce or entirely eliminate consumer debt before you buy a home. And after, resist that nagging temptation to use easy credit to remodel or furnish your new digs. The quickest way to sour on home ownership is to stack a bloated credit card bill on top of new expenses like mortgage payments, homeowners insurance, property taxes, and maintenance costs.

6. Build a Healthy Emergency Fund

A well-funded emergency account not only protects you from financial and employment hiccups — it protects your assets. Having six to eight months' worth of income squirreled away and available for withdrawal penalty-free is a must before you commit to buying your first home. If stashing cash seems impossible, especially after you've just scrimped and saved for a down payment, consider some creative strategies on how to build an emergency fund.

7. Fund Your Retirement

Don't let the home buying process distract you from solid retirement planning. Contribute to your 401(k) at a rate that lets you take full advantage of the company match and then add a Roth IRA to your investment mix. Young savers who start early and stay consistent can benefit from a longer investment horizon (and that sure beats playing panicked catch-up later).

For first-time homebuyers, taking the financial leap can be daunting. But there's real power in understanding our financial realities personally — well beyond what the mortgage lenders tell us (and sell us). And when we're empowered enough to truly know our financial pictures, we can make better choices and "own" the homeownership process.

Did I leave anything out? What else should first-time home buyers do before they buy a home?

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Guest's picture

Very good article. I advise my clients to eliminate all debt and then build a fully funded emergency fund before making a downpayment.

Guest's picture

Don't forget to include a repairs fund when calculating how much you want to afford. One way to do this is to pay your repairs fund (I use a separate savings account) when you pay your mortgage, so you just consider it part of your overall monthly housing payment. You do NOT want to be facing an unexpected layoff right after you replaced the roof, the furnace or got hit with an extra association assessment and realize that your emergency fund is gone!

Also, realize that there will be small repairs that you will need to make along the way - new sprinkler heads when the lawnmower was set too low, annual termite inspections, filters for the heating/cooling system, replanting the pots on the porch, etc. They can break your budget if you don't have something built in for them. Think about if you want to take these from your repairs fund or if you just want to build a little extra room into your budget so you can take care of them.

Guest's picture

There is something else you need to seriously think about - your partner and the addition of possible children - if possible, buy the home before you get married - it'll save you lots of hassle later on if you separate.

Guest's picture

This is a great article. There are all very good tips. I think the most important one is to have that emergency fund. You never know what surprises could hit when you get that new house! I've heard you should budget ~5% of the value of the house each year for repairs. If something major hasn't hit yet, just wait!

Guest's picture
Patrick Oliver Jones

Overall, this is a good article as one begins the home-buying process, but step #3 (Know Your FICO Score) needs to be clarified. While it is true that each credit bureau has its own FICO score, these are different from "credit scores" which can easily be found through the credit bureau websites as well as other third party services.

However, mortgage companies and bank lenders do not use these credit scores to establish the financial health and ability of borrowers. They, along with credit card companies and the like, use FICO scores instead. However, getting that score is not as easy as obtaining a credit score. For example, only lenders can access the Experian FICO score, the standard score in use by most lenders (according to myFICO.com). You'll have to go to FICO directly to purchase their scores, and it's not cheap. It is ridiculous the amount of control credit companies have over our financial future and how difficult it is for us to access it, but unfortunately this is the way it is.

Guest's picture

Great tips for first time home buyers. They can use this as a reference. I got this bookmarked, so that I have my own reference in the future. Thank you so much for this!