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First Time Homebuyers Guide for Realists

first time home buyers guide

Home ownership remains a priority for many Americans. The rates of real estate activity are even increasing among Millenials, a group that many experts long thought were simply not interested in owning their own homes. While a number of societal and economic factors led to that generation delaying homeownership, it seems they are finally getting around to making the leap from renting to owning in growing numbers.

While buying a home for the first time is totally doable, it can be far from easy. But all of the hard work it takes to get there is part of what makes being a first time home buyer such a momentous occasion. In this guide, we take a realist’s perspective on exactly what kind of discipline and sacrifices it takes to position yourself to make your first real estate purchase.


First Time Homebuyers Guide: Step by Step

The down payment is the first and usually most challenging step in the road to buying your first home. Because you do not have an existing home to sell, you are in essence starting from scratch because you do not have any home equity to flip over into a down payment like a homeowner just looking to upgrade or downsize might have.

With typical down payments being between 5 percent and 20 percent of a total home price, it can be daunting. Say for instance you are looking to purchase a home for $225,000. That would mean that you would need to save up between $11,250 and $45,000 before you could start seriously looking at real estate. And with nearly 80 percent of Americans living paycheck to paycheck, it can be easy to give up before you have even started.

The key to successfully saving for your down payment is to not focus on the huge number that is your goal, but to instead break up your plan to save for a down payment into actionable steps. This is how you are going to eat the elephant, so to speak. Keeping in mind that it will absolutely take patience and discipline, here is how you can get started saving for your down payment today:

first time home buyers guide

Have a frank conversation with your significant other

If you are single, this step will obviously not apply to you. But if you are like many first time home buyers and have a spouse of significant other you are looking to purchase a home with, it is imperative that you have a serious talk to ensure that you are both on the same page. One of the most common ways best-laid plans for savings get derailed is when both partners are not on the same page in terms of goals and priorities. To make sure that you are both rowing in the same direction, talk at length about the timeline for buying a home, how much home you can realistically afford and where buying your first home ranks as a priority — both from a team standpoint and for each individual.

Consider getting pre-qualified for a mortgage … not pre-approval

First of all, let’s briefly explain the difference between getting pre-qualified and pre-approved for a mortgage. It is a common misconception that they are the same thing, when in fact they are not. At this stage in the game, you are probably far from ready to get pre-approval for a mortgage. During the pre-approval process, a bank will conduct a thorough check to determine a precise loan amount they are prepared to give you within a 90 day window. Wait until you have your down payment money saved up and are ready to pull the trigger before you go down this route.

In the meantime, loan pre-qualification means that a lender will conduct a more superficial process to give you an estimate of how large of a home loan you would theoretically be approved for later on in the process. Using data about your credit history, your income and so on, getting pre-qualified can help solidify how much of a down payment you will be looking to save to put up against the mortgage on the first home you will be buying eventually.

first time home buyers guide

Remember that your down payment will impact your monthly mortgage payment

When setting your goals for down payment savings, bear in mind that the amount you put down on a house can impact how much you will be shelling out toward your mortgage on a monthly basis. This is due to a number of factors. Obviously, the down payment impact the overall amount of your loan. Beyond that, putting down less than 20 percent of the total price of the home, you will end up paying more every month for private mortgage insurance (PMI), at least until you build enough equity to refinance your home and drop that obligation. This is also assuming that interest rates remain low enough to make a refinancing a practical option for you down the road.

Speaking of interest rates … the amount you apply as a down payment will also have significant bearing on what the interest rate will be on your home loan. A bigger down payment means a lower interest rate, which means more money being invested into your home equity and less money going to the bank to never be recouped again.

first time home buyers guide

Determine how much you need to save for a down payment

When setting a goal for your down payment savings, base that number on the amount of house you can realistically afford. While some people think bigger is better, the truth of the matter is that many people find themselves in over their heads when the opt for a house with too much square footage. Aside from the higher selling price, the costs to maintain a larger home are significantly more. Do not forget to factor in utilities, landscaping and all of the other regular costs that go into homeownership.

Browse listings for real estate in the area you would like to live and consider how much space you really need to get an idea of how much money you will need to set aside. A guest bedroom AND a den might be nice, but is it necessary?

Make a budget … and stick to it!

As mentioned earlier, it is common to feel like there is simply too much month at the end of the money. But taking a hard look at your finances and where the money is going could shock you. Whether it is how much money you could save over the course of a year by switching from satellite TV to a streaming service, how much your Starbucks habit adds up to at the end of every month or the eye-popping amount of money you may be spending on eating out, most people will find that they have more discretionary income than they realize. Once you have identified the areas where you can afford to cut back, saving will be far easier. However, it requires real commitment from everyone in the family to give up some luxuries in the effort to reach the larger overall goal of homeownership. The discretionary spending you are cutting back on is the key to your next step, tackling debt to further reduce your household’s monthly financial obligations and maximize your savings.

first time home buyers guide

Analyze and devise a plan to pay off debts

Knocking out outstanding debt is one of the quickest ways to increase the amount you are able to put away for a down payment. If you are no longer making payments on a car loan or a credit card company, it is that much more money to stash away every month and that much less you will be paying in the long run in interest rates. Opinions vary on the best way to tackle debts. Some advise attacking debt with the highest interest rates first (usually credit cards) while other instead counsel folks to tackles debts in order from smallest to largest. The theory on the latter approach is that you are less likely to get discouraged and to stick to a long-term commitment to eliminate debt if you are able to have some smaller victories earlier on in the process. Whichever approach you think will work the best for you and your family, the most important part is that you get started and make consistent progress each month.

Since you have just analyzed your monthly spending and cut out all unnecessary expenditures, you should have extra money to throw at debts above and beyond minimum payments. Based on that extra money you are dedicating to becoming debt free each month, calculate the timelines for which debts should be paid off when. As a bonus, your dedication to eliminating debts will pay off again when it comes time to get pre-qualified for a mortgage.

first time home buyers guide

Get a side gig

In addition to saving and paying down debts, one of the best ways to speed up your journey to homeownership is to increase your monthly income. And while we would all love to get a raise from our existing jobs (high five if you just got or are about to get one!), at most jobs, significant pay raises do not happen all of the time. Look to other ways to increase your income by taking on a side gig.

Dave Ramsey constantly advises people to take work delivering pizzas. But, bear in mind that this is an example. The number of potential side gigs you can take on is infinite. With the advent of rideshare companies like Uber and Lyft, you can make money if you do not mind driving people around instead of pizza. Or maybe someone in your household is qualifies to give music lessons or tutor students in a certain subject.

Whatever the best fit for your skillset, working more than the typical 40-hour work week is a surefire way to boost your income and accelerate the rate at which you can save for a down payment. Whether or not you feel that you are overqualified for a job or that you make far more money per hour at your day job is irrelevant (unless you have the opportunity to clock in extra overtime at your regular job). Just remember that the side gig does not have to be permanent and that all of your hard work will pay off … literally!

Put off making large purchases

As you start to get rid of monthly credit card payments and put away some money into savings, the temptation to reward yourself for all of your hard work can be huge. “We have got more money than ever! We can put a huge down payment on that car or pay for a really great vacation!”

Do. Not. Give. In. Sure, you should give yourself a pat on the back. That does not mean you should buy a car. Treating yourself to a nice dinner and a movie would not be wholly inappropriate — so long as it does not become a regular occurence. The entire reason you are doing so much better financially is because you have been so disciplined up to this point. Don’t lose your momentum now! Need a little inspiration? Check out this story about a couple who forewent a large wedding in favor of saving for their first home. If they could make that sort of sacrifice, surely you could drive your existing vehicle a while longer (or if it is no longer reliable, trade it for a similarly priced used model) or handle a trip to the community pool rather than Splash Mountain, right? It will all be worth it in the end when you are hanging out in the backyard of a home that you own all for yourself.

first time home buyers guide

Learn about down payment assistance programs

While you are busy clipping all of those coupons and saving as much money as possible, check out mortgage down payment assistance programs that you may qualify for. Down payment assistance programs are especially useful for first time homebuyers and those who might have less than ideal credit scores. Governments and municipalities offer these programs to encourage homeownership, which in turn boosts local economies.

Most of the programs are available to Arizonans based on their household income levels and the neighborhood where they are looking to buy a home. If you are a good fit and accepted into one of the programs, you could receive a grant to help you cover part of the down payment. In addition to articles on this website, the U.S. Department of Housing and Urban Development is an excellent resource and starting point for you to learn about which programs are available in Arizona and whether or not you might qualify.

Get in touch with a licensed realtor

Once you have set the foundation for buying your first home with the steps outlined above, it is time to think about getting in touch with a real estate agent. Disclosing your goals for homeownership, including your budget, ideal neighborhood and home size will enable that professional to counsel you on specific next steps. Talk to your realtor about how much money you have for a down payment and specifics about your timeline. Could you take your current lease to a month-to-month arrangement to have more flexibility in when you HAVE to be moved into your new home? If so, your real estate agent may be able to negotiate an even better deal for you or recommend a time of the year when the Phoenix area real estate market is less competitive.

Your realtor will also be able to discuss with you the appropriate timing to go ahead and get pre-approved for that home loan and might even be able to suggest other new down payment assistance programs. Has your search for your first home in a specific neighborhood given you tunnel vision? Your agent might also be able to recommend another neighborhood that fits all of your needs but is a better fit for your budget. The more information you share with a trusted real estate professional, the more thorough and helpful advice he or she will be able to provide.

first time home buyers guide

Your real estate agent’s role in buying your first home

Many first time home buyers do not get all of the benefits they should demand of their real estate professional because they simply do not know what to expect. In addition to the advice you can get from your realtor outlined in the above section, a great realtor will help you maximize your real estate investment. Through a thorough understanding of your situation and priorities, as well as expert knowledge of the local real estate market, your realtor should negotiate a beneficial contract for your when purchasing your first home.

A good real estate agent will also be frank with you when needed. Whether your expectations are too high given the current market or a counter offer from a seller on a home you have fallen in love with just does not make sense, tough love coming from your realtor is a good thing in the long run so long as they have your best interests at heart. It is extraordinarily helpful to have that professional acting as a fiduciary for you and helping you maintain a clear focus on the situation at hand, taking into account all pertinent variables.

Are you a first time home buyer? Or do you hope to be soon? Do not hesitate to reach out to us directly at any point for some direct and expert advice. Our realtors pride themselves on giving realistic advice to all of our clients and we will never pressure you into buying a home that you are not prepared for. Whether you need some help running some numbers to set your down payment goal or are ready to start looking at properties right away, call us today!

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