Buying your first home is an exciting milestone, but it can also feel overwhelming—especially
when you’re faced with a sea of financial terms and processes you’ve never encountered
before. Understanding the basics can help you feel more confident, make smarter decisions,
and avoid common mistakes. This guide walks you through everything you need to know
financially before buying a home for the first time.
Financial Terms First-Time Home Buyers Should Know
Let’s start with a glossary of important mortgage terminology for beginners. These are financial
terms first-time home buyers should know to understand the home buying terms explained by
your lender or real estate agent.
Key Terms to Know:
● Mortgage: A loan specifically used to purchase real estate. You pay it back in monthly
installments.
● Principal: The original amount of money borrowed.
● Interest: The cost of borrowing money, typically expressed as a percentage.
● Escrow: A neutral third-party account used to hold funds such as taxes and insurance
until they are due.
● Loan Estimate: A document lenders must provide that outlines loan terms, projected
payments, and closing costs.
● Closing Costs: Fees and expenses beyond the property price that are paid at the
closing of the transaction.
● Loan-to-Value Ratio (LTV): A comparison of the loan amount to the home’s value.
Lower LTVs are less risky for lenders.
● Debt-to-Income Ratio (DTI): Compares your monthly debt payments to your monthly
gross income. Lenders use this to evaluate loan eligibility.
● Mortgage Points: Fees paid to the lender at closing in exchange for a lower interest
rate.
How Mortgages Work for First-Time Buyers
Understanding how mortgages work for first-time buyers is critical to making informed decisions.
Typically, you’ll choose between a fixed-rate or adjustable-rate mortgage.
Fixed vs. Adjustable Rate Mortgage Explained:
● Fixed-rate: The interest rate remains the same for the entire loan term, offering
predictable payments.
● Adjustable-rate (ARM): The interest rate may change over time, potentially starting
lower but increasing later.
You’ll also encounter different loan programs, including FHA loans, VA loans, and conventional
loans. Each has its own income requirements for first-time home buyers and different levels
of flexibility.
Budgeting for a First Home Purchase
Before shopping for houses, it’s important to begin budgeting for a first home purchase. This
includes calculating how much house you can afford, estimating how much money you need
to buy your first house, and understanding your total monthly mortgage costs.
Budgeting Basics:
● Down payment (typically 3% to 20% of the home’s price)
● Monthly mortgage payment (principal + interest + taxes + insurance + PMI)
● Estimated closing costs (usually 2% to 5% of the loan amount)
Financial Literacy for First-Time Home Buyers
Becoming financially literate as a homebuyer means knowing how to read a loan estimate, how
interest rates affect home buying, and how your credit score impacts loan terms. Understanding
these basics can help you avoid financial mistakes first-time home buyers make:
Common Financial Mistakes to Avoid:
● Not saving enough for a down payment or closing costs
● Ignoring the impact of credit score on mortgage approval
● Not understanding how interest rates affect home buying
● Choosing the wrong loan type or lender
Financial Checklist for Buying a House
Use this financial checklist for buying a house to stay organized.
Step-by-Step Financial Checklist:
1. Review your credit report and improve your score if necessary
2. Calculate your DTI and LTV ratios to ensure you meet lender criteria
3. Get prequalified and then preapproved for a mortgage
4. Compare loan options and lenders
5. Request a loan estimate from at least three lenders
6. Set aside money for your down payment and closing costs
7. Understand mortgage terminology and ask questions
What to Know Financially Before Buying a House
So what to know financially before buying a house? In short:
● Your monthly budget
● Your credit standing
● Your eligibility for loan types
● What affects mortgage rates
● Your options for assistance programs
If you live in Utah, research Utah-specific programs and lenders who understand the local
market. This can help you qualify for down payment assistance, lower interest rates, or special
loan terms.
Understanding the Financial Process of Buying a House
The financial process of buying a house typically involves these steps:
Step-by-Step Overview:
1. Get prequalified, then get mortgage preapproval
2. Shop for homes within your budget
3. Make an offer and submit your preapproval letter
4. Apply for the mortgage officially and choose a lender
5. Receive a loan estimate and compare terms
6. Complete underwriting (the lender verifies all financial information)
7. Close the loan and pay closing costs
Credit Score Needed to Buy a House First Time
The credit score needed to buy a house first time usually ranges from 580 (for FHA loans) to
620+ (for conventional loans). However, higher scores often qualify for better interest rates and
terms.
Final Thoughts: Be Prepared and Empowered
Buying your first home doesn’t have to be intimidating. When you understand key concepts like
loan-to-value ratio, debt-to-income ratio, PMI, and escrow, you put yourself in a strong
position to negotiate better terms and make informed choices.
By following the steps to financially prepare to buy a house, and by knowing your numbers,
you’re well on your way to turning the dream of homeownership into a reality.
