Things no one tells you about buying a home if you're a first-time homebuyer
If you’re considering buying a house for the first time, the process could feel shrouded in mystery in many ways.
Here are seven things you might not know regarding the homebuying process — from some things to know about down payments to how to think about your income in relation to how much home you can afford to buy.
1. The credit score you might need to buy a house
A good credit score is important in most cases when setting out to buy a home.
But what’s considered a good credit score, and what credit score do you actually need to buy a house?
There are two main credit score calculation models in the U.S.:
- The VantageScore®: Created jointly by the three major consumer credit bureaus. Credit scores range from 300 to 850.
- The FICO® score: This is used in most lending decisions, including mortgages. Credit scores range from 300 to 850.
As mentioned, mortgage lenders will heavily emphasize your FICO score. FICO credit scores fall into ranges:
- 800+: Exceptional
- 740-799: Very good
- 670-739: Good
- 580-699: Fair
- 579 and below: Poor
Typically, the higher the score, the better off you’ll be when buying a house. You’ll have a better chance of being approved for a mortgage, and having a strong credit score could result in lower mortgage payments and interest.
Now, as far as what credit score you need to buy a house and if you can buy a home with a poor credit score? There are loan options for those with a less-than-ideal credit score, including options like the United States Department of Agriculture (USDA), Federal Housing Administration (FHA), and Veteran Affairs (VA) Home Loans backed by the U.S. government. FHA loans allow homebuyers with credit scores as low as 580 (or 500 if you can make a 10% down payment on a home) to secure a loan. VA Home Loans (for servicemembers and veterans) and USDA loans (for buyers in rural areas) might also be easier to qualify for. These loan options come with specific requirements that are important to understand to determine eligibility.
Chase Credit Journey® can be a valuable tool for those looking to monitor and possibly improve their credit score to buy a house (and it’s free, even if you aren’t a Chase customer, and using it to check your credit score won’t impact your credit score). Enroll, and you’ll have access to a personalized action plan provided by Experian™ where you can input the specific goal of buying a house, select a timeframe, and receive steps to help you improve your credit score. Credit Journey® provides you a credit score using the VantageScore 3.0 model, rather than the FICO score most lenders use to approve someone for a mortgage, but it can still be beneficial if you want to try to improve your credit score and understand your score factors.
2. How much money you need to buy a house
Figuring out how much money you need to buy a house – particularly if you’ll need a mortgage – comes down to assessing both your ability to save for a down payment, your ability to make monthly payments on the home, and your ability to save some money to have “in reserve” in case you have a loss of income (so you’ll still be able to continue making monthly payments on your home). Using an online tool to assess how much you can spend on a home can be helpful.
Beyond preparing for your down payment and monthly home payments, you’ll also want to prepare for other expenses like appraisal fees, inspection fees, moving costs, and repair work in your new home. Bottom line: give yourself some financial wiggle room when you figure out how much money you need to buy a house.
3. How much of a down payment you need to buy a house
Down payments can be required depending on your credit score, loan type, and loan program you may qualify for. Additionally, if you’re looking to buy in a co-op, condo, or development, there might be requirements in place.
All of that being said, there are a few things to be aware of when it comes to home down payments. For instance, perhaps you’ve heard that 20% is commonly recommended when buying a home, and there are a few reasons for this.
First, if you put less than 20% down on a conventional loan, you’ll likely have to pay private mortgage insurance (PMI). The yearly cost of PMI is about 1% of your outstanding loan balance and is added to your monthly mortgage payment. Though you can request to have the PMI removed once your outstanding balance falls to 80% of the original loan, depending on your mortgage, PMI can be a significant expense.
Second, you may also get better mortgage rate options the bigger the down payment you make.
That said, many people who buy a home put less than 20% down. There are mortgages (sometimes called no-down payment mortgages) that let first time homebuyers purchase a house with no money down and only require that they cover standard closing costs. If you can’t or don’t want to put 20% down on a home, the U.S. government-backed USDA and VA home loans may allow you to buy a home with $0 down (although, again, these loans come with eligibility requirements).
FHA-backed loans may also allow borrowers to secure a mortgage with looser financial requirements, including lower down payment requirements. It’s important to note that FHA loans require both an upfront Mortgage Insurance Premium (MIP) and an annual MIP that is paid monthly for a minimum of 11 years. The cost of this insurance is based on several factors including the loan terms and how much is borrowed.
Beyond loan options, tax credits and cash grants may be available to first-time homebuyers that can help with down payments and closing costs.
Deciding how much to put down on a house is based on a couple of different factors. Consider seeking advice from a mortgage professional who’ll be able to help you determine potential paths forward.
4. The income you need to buy a house
Everyone’s income differs, and there are calculation requirements lenders use to decide if someone can be approved for a mortgage. It’s also important to keep in mind that it’s one of many factors lenders use to determine whether or not to approve a loan.
One starting point lenders use, though, when it comes to income (and you can use it to see if you might have enough income to buy a house) is the 28/36 rule.
The rule states that your monthly mortgage should be no more than 28% of your total monthly gross income and your total debt payments should be no more than 36% of your mortgage payments and other long-term and significant short-term monthly debts (that could be auto loans, credit card debt, student loan debt, or other financial obligations).
Another formula that can help you determine how much house to buy is the 3-30-10 rule. In essence, the rule is that you shouldn’t spend more than 3X of your income buying a home. In other words, if you earn $100,000 per year, you shouldn’t spend more than $300,000 on a home.
Again, there’s no hard and fast rule, and everyone’s situation differs.
5. How long it takes to buy a house
While you might be able to find your dream home in an hour, buying a house takes a bit longer. Here’s what you may need to accomplish to buy a house:
Step 1: You’ll need to decide if buying a home is right for you. This can involve looking at the current shape of your finances and examining what buying a house will mean financially compared to renting a home or apartment. It can also involve assessing the value of building up equity in a home over time when you buy versus continuing to rent.
Step 2: After deciding that your goal is to buy a house, you might need to take some time to get your finances in order to prepare to buy a home, particularly if you want to get a mortgage. Two important factors when getting approved for a mortgage are your debt-to-income ratio (DTI) and your credit score, so keep those in mind.
Step 3: In parallel to getting your finances in order, you might want to start planning (and saving!) to make a down payment on your future home. Research available homebuying grants and assistance programs that might be able to help at this stage of the process, too.
Step 4: Make a wish list of what you’re looking for in a future home. It can be helpful to divide that wish list into must-haves and nice-to-haves.
Step 5: Research neighborhoods in which you might be interested in buying a home. Doing this earlier rather than later can help you narrow your search so you can move faster when finding a home you love.
Step 6: Armed with your home wish list and desired neighborhood, connect with a real estate agent to advise on your home search. Real estate agents can be a great resource, especially for first-time homebuyers.
Step 7: Find the right mortgage for you. You might want to search for loans entirely online to find rates and payments that fit your budget.
Once you find the home you want to buy, if you need a mortgage to secure it, it can take around 30 days to get your loan approved, and in peak months, it can take lenders 45 days or more to approve your loan. Even after you secure a loan, expect it to take some time to close. It can take up to 60 days to close on a home once you’re working through the process. Some mortgage lenders have a closing guarantee that can help you plan timewise when buying a home.
6. The best time of year to buy a house
Every season brings unique challenges and opportunities when buying a home. In other words, there isn’t a simple right time.
The summer is considered prime – and it’s the busiest time of the year for the housing market. Not only do housing costs often surge during these months, but so does inventory. The cost of moving can be higher as well. About 70% of moves occur from Memorial Day weekend to Labor Day. It can be hard to find a moving company during this time of year and hiring one will likely be more expensive than any other time.
The fall and early spring months aren’t dormant in the market, but they can be slower than the summer. That can translate into less competition than in the summer and sometimes lower moving costs.
The winter is the slowest time of year, and it’s often considered the least popular time to buy or sell a house. This can translate into less competition for buyers, lower moving costs, and less inventory.
If you have flexibility regarding your schedule and what you’re looking for in a home, you might want to consider moving in the winter, fall, or spring. If you’re very specific about what you’re looking for in a home – and therefore will need access to more housing inventory – or you have schedule constraints, moving in the summer might be your best option.
7. How buying a house can help your tax situation
Consult your tax advisor about whether buying a home can help lower your taxes. There can be tax benefits associated with owning a home, but it’s important to understand them to see if they can benefit you. (The following are only suggestions and not tax or legal advice, please seek guidance from a professional).
The mortgage interest deduction
In some instances, mortgage interest paid may be used as a tax deduction. For further details, contact a personal tax advisor or call the IRS. When required, a mortgage lender will report the interest paid on a qualified mortgage annually on IRS Form 1098 (Mortgage Interest Statement).
Deductible real estate or property taxes
In certain cases, real estate taxes may be deductible from your income taxes. For further details, contact your tax advisor for more information on utilizing the deduction.
Deductible mortgage (or discount) points
If you pay mortgage points, the amount may be deductible for the year you paid the points if they were paid toward the purchase of a primary residence. If the points are paid for a refinancing of your mortgage, they may be deductible over the life of your mortgage. For further details, consider contacting a tax advisor.
Mortgage interest tax credits for low-to-moderate-income homeowners
First-time homeowners may be eligible for mortgage interest tax credits for a portion of the interest that the state pays on their behalf. To do this, you must obtain a “mortgage credit certificate” from your state or local government before obtaining a mortgage. Contact your local government agency to assess if this is available to you and to get the certificate.
Final thoughts
If you dream of owning a home – whether in the next year or even a few years from now – it really will help to start thinking about the process early and getting your ducks in a row. Chase MyHome® has a range of digital tools available to help as you do this. Here’s how you can use the tools as you begin to think about buying a home:
- To browse homes: Use the property search tool to quickly search by ZIP code, city, or address to browse properties and see need-to-knows, like home value info, sale history, and upcoming open houses. You can easily save your favorites as you search so you can come back to them later, too.
- To assess how much you can afford to spend on a home: You may want to use the Chase MyHome Affordability Calculator as you begin to plan for how much you can afford to spend on a home. Enter your monthly income or the mortgage payment you can afford, plus expenses and a specified mortgage rate, to get your estimate.
- To find mortgage options tailored to you: See the mortgage options available to you, choose the one that fits your goals, and apply when you're ready.
Simply sign in with your Chase account to use Chase MyHome. Even if you don’t have a mortgage with us — if you’re a Chase customer or new to Chase with a username and password — you can still access homebuying resources.