What You Should Know Before You Buy Your First Home

Ready to ditch the roommates and get a place of your own?

You’re not alone. More than 5.45 million homes are expected to be purchased this year, according to the National Association of Realtors—a 3 percent increase from last year (and 10 percent jump from 2014). And about one-third of them will be snapped up by first-time buyers.

That doesn’t necessarily mean you need to be among them. “Just because you can afford to buy or qualify for a mortgage doesn’t mean you should, [especially] if there’s a good chance you’ll be moving in one to three years,” says Deb Tomaro, a broker associate with RE/MAX Acclaimed Properties in Bloomington, Ind. “Think about your job stability, career and family goals before taking the housing leap.”

But if you are ready to take the plunge, follow these six steps to make sure you get the most for your money.

1. Build a budget.

Traditionally, experts recommend spending no more than 30 percent of your gross income on housing—but when you’re buying, that’s only part of the picture.

“First-time buyers need to look at their total debt load,” Tomaro says. “Many are carrying large amounts of student loan debt, and that plays into their housing budget.”

Her rule of thumb: “My personal belief is that no more than 40 percent of your income should go toward total debt service [including mortgage and other debt],” she says. “You can get loans for higher debt loads, but I don’t think it’s worth the risk.”

To calculate your debt, include car and student loans, credit card balances and any other lines of credit. And don’t forget: your mortgage and interest aren’t the only housing expenses. Jonathan Duong, a Certified Financial Planner and founder of Wealth Engineers in Denver, Colo., says buyers commonly forget extras like property taxes, insurance, Homeowners Association dues, maintenance and utility costs. But those can add up.

2. Set aside a down payment.

Next, determine how much of your savings you’ll fork over. While programs through the Federal Housing Administration let first-timers put down as little as 3.5 percent (terms vary depending on your credit score), Duong still recommends aiming for 20 percent.

“First, this eliminates the need to pay for private mortgage insurance,” he says—something you’ll pay until you’ve built up 20 to 22 percent equity (or, in other words, until you’ve paid that percentage of the amount the home was appraised for). Note, though, that FHA loans generally require you to pay mortgage insurance for the entire term.

“Second, it ensures you have a significant amount of equity in the home to avoid going underwater with even a small decline in value,” adds Duong. (Being “underwater” means the value of your home has gone down and is now worth less than you owe on it.)

To get to 20 percent, you can consider taking a $10,000 IRA distribution—a penalty-free withdrawal for first-time buyers, so long as you use it within 120 days. But if you do, make sure to replenish your retirement account as soon as possible. Keep in mind that for every year that money is missing, you’re missing out on compound growth. (As we pointed out in an earlier story, $10,000 invested in the Standard and Poor’s 500-stock index in 2009 would have more than doubled to $24,571 by late 2014.)

3. Get pre-approved.

Don’t risk falling in love with a home you can’t afford. Get pre-approved before you start house hunting. This is when a lender formally verifies your income and assets and liabilities, and checks your credit. Just make sure you don’t confuse this with pre-qualification, a looser process that doesn’t include a credit check.

Failing to check this off your list can leave you vulnerable to not getting approved for the amount you need later on, says Tomaro. On the other hand, banks may pre-approve you for more than it may make sense to actually borrow. So make sure you only apply for a loan amount you’re sure you can afford to pay off without compromising your other financial goals.

4. Make a wish list.

One last to-do before house-hunting: List your wants and needs. What features can you compromise on? And what’s a deal-breaker? Ask your real estate agent to review your list to ensure it makes sense with your budget.

Then check out potential neighborhoods, noting walkability, traffic patterns, parking and distance to amenities, says Scott Polly, a Realtor with Samson Properties in Washington, D.C. Also look online for stats on crime rates and school districts, especially if you have kids or plan to start a family soon.

Finally, think about resale value. While fixer-uppers in nice neighborhoods can pay off, they’re risky. “Once you start peeling back layers, you can end up spending twice as much money as you think and not come out ahead,” Tomaro says, whereas you could find a great house in an up-and-coming area that will rise in value over time.

5. Put in an offer.

When you’re ready to bid on a home you love, talk to your Realtor about the right price, based on comparable properties and other relevant favors, like how long the house has been on the market.

Though there’s usually some wiggle room, Tomaro encourages buyers to set realistic expectations when negotiating with sellers. Once your offer is accepted, make sure to read all the fine print. “A purchase agreement is a binding contract once all parties agree to the terms,” Tomaro says. “It’s important you understand what you’re agreeing to.”

After you’ve signed? Congrats! You’re no longer a first-time buyer—but a first-time homeowner.

6. Claim your tax breaks.

Don’t forget the savings you now qualify for as a homeowner come tax time—including deductions for your property taxes and mortgage interest.

There’s also the home mortgage points deduction. (Points refer to fees paid to obtain a mortgage and are equal to 1 percent of the total mortgage.) Use this handy IRS flowchart to determine if you can deduct your points this year, and learn more about tax treatment of home mortgage points on the IRS website.

acorns+cnbcacorns cnbc

Join Acorns


About Us

Learn More

Follow Us

All investments involve risk, including loss of principal. The contents presented herein are provided for general investment education and informational purposes only and do not constitute an offer to sell or a solicitation to buy any specific securities or engage in any particular investment strategy. Acorns is not engaged in rendering any tax, legal, or accounting advice. Please consult with a qualified professional for this type of advice.

Any references to past performance, regarding financial markets or otherwise, do not indicate or guarantee future results. Forward-looking statements, including without limitations investment outcomes and projections, are hypothetical and educational in nature. The results of any hypothetical projections can and may differ from actual investment results had the strategies been deployed in actual securities accounts. It is not possible to invest directly in an index.

Advisory services offered by Acorns Advisers, LLC (“Acorns Advisers”), an investment adviser registered with the U.S. Securities and Exchange Commission (“SEC”). Brokerage and custody services are provided to clients of Acorns Advisers by Acorns Securities, LLC (“Acorns Securities”), a broker-dealer registered with the SEC and a member of the Financial Industry Regulatory Authority, Inc. (“FINRA”) and the Securities Investor Protection Corporation (“SIPC”). Acorns Pay, LLC (“Acorns Pay”) manages Acorns’s demand deposit and other banking products in partnership with Lincoln Savings Bank, a bank chartered under the laws of Iowa and member FDIC. Acorns Advisers, Acorns Securities, and Acorns Pay are subsidiaries of Acorns Grow Incorporated (collectively “Acorns”). “Acorns,” the Acorns logo and “Invest the Change” are registered trademarks of Acorns Grow Incorporated. Copyright © 2019 Acorns and/or its affiliates.

NBCUniversal and Comcast Ventures are investors in Acorns Grow Incorporated.