7 Tips for the First-Time Home Buyer

Buying your first home can be exciting—and stressful. Beyond the challenge of finding the right home in the right neighborhood, you'll also be grappling with some financial questions that are unlike those you may have faced as a renter.

Here are seven tips to help you prepare to become a homeowner.

1. Know what you can afford. Consider using a mortgage calculator to get a sense of how much you can afford to borrow based on your monthly income and other financial obligations. There are no hard-and-fast rules for how much debt you can take on—though, if your mortgage is insured by the Federal Housing Administration, your housing costs generally shouldn't be more than 28% of your gross monthly income. Of course, this is just a general guideline. No matter what calculation you use, the key is to not overburden yourself. There's more to life than just keeping up with house payments.
2. Maintain your credit score. Having a better credit score can mean lower mortgage rates. If you're concerned about your score, you can always take steps to boost it before you start hunting for houses. Paying your bills on time and keeping your credit card balances low can help.
3. Understand the other costs involved. Buying a home could involve more than just monthly mortgage payments. You will also have to pay property taxes and will likely have to carry some kind of homeowners' insurance. Before buying a home, you will want to get a home inspection, which can help you budget for major repairs such as a new roof or foundation, not to mention routine maintenance costs and any upgrades. If you're looking at a condo or homes in a community that offers shared facilities such as a pool, you might also have to pay monthly association fees. Such expenses could become a real headache in the event of a job loss or financial setback.
4. Plan to put down at least 20%. Your lender may not require the full 20%, but it's a good idea to do this anyway. Otherwise, your lender may require that you to carry private mortgage insurance (PMI). That means you'll pay monthly PMI premiums on top of your mortgage payments until your loan-to-value ratio reaches 80%. In general, the larger your down payment, the easier it will be to qualify for a mortgage loan and negotiate the lowest rate. Also, the more you agree to put down, the likelier the chance that your offer will be competitive with other bids, as financing can be a key consideration when sellers review multiple offers.
5. Know what documents you will need for your loan. Some of the more commonly requested documents include a fully executed agreement of sale for the property being purchased, financial statements for bank and brokerage accounts, pay stubs, previous W2s, IRS Form 4506 (which authorizes a mortgage lender to obtain copies of a borrower's tax returns directly from the IRS), and homeowners' insurance policies.
6. Get pre-approved for a loan. Getting pre-approved lets you know how much home you can buy before you go house hunting. Plus, it lets real estate agents and sellers know that you're a serious buyer because your financing is already arranged—which can be an advantage when making an offer.
7. Don't buy a home primarily as an investment. There's no guarantee your home will appreciate, even if you're buying in a neighborhood where prices have risen in the past. Of course, when you buy a home, your mortgage payments allow you to build an ownership stake in a tangible asset that you will eventually own. In contrast, a monthly rent check is a recurring cost you'll never get back. But owning a home is as much a personal investment as a financial one. If your primary consideration is earning a financial return, other assets could work without the burden of down payments, maintenance, or insurance. For example, Schwab analysts expect large-cap stocks to deliver average annualized returns of 5.9% over the next decade, according to their most recent capital market expectations.

The process may seem arduous, but for many people, the stress of home buying is outweighed by the pleasures of home ownership. Just remember that a little advance planning—and saving—can make the buying process much easier.