5 Things to Know Before Buying Your First Home

Certainly, the best time to trade a landlord for a mortgage lender is different for everyone.

But if you're considering doing that now, here are five things you need to know that'll help you figure out if you're ready to buy a home or should keep renting.

#1 Your Down Payment May Not Be the Biggest Hurdle

Let's not beat around the bush: Buying a home requires a substantial financial commitment.

There's the down payment, of course. The typical down payment for first-time buyers is 8% of the cost of the home targeted, according to the 2023 "National Association of REALTORS® Profile of Home Buyers and Sellers." Then, add 2% to 5% of the home's purchase price for closing costs, which will vary based on where you live and what taxes your state and city require you to pay.

Tip: Keep in mind if you put down less than 20%, you'll pay PMI, private mortgage insurance, which protects the lender in case of default. Usually, it's about .5% to 1.5% of the loan amount per year, but costs vary by loan program, your credit score, and other factors. But once you reach a certain threshold on your loan to value ratio, you can cancel PMI.

A healthy credit history is also important. Most borrowers will start to qualify for a mortgage with a minimum score of 620 — but the most competitive interest rates will be offered to those with a score of 740 or higher. So if you haven't started practicing those good credit habits yet, it's time to start developing them.

If your credit score is lower than you'd like, external help is on the way. Fannie Mae and Freddie Mac, which guarantee most of the mortgages made in the U.S., have relied on FICO credit scores to understand how likely borrowers are to repay mortgage loans. The organizations will be adding two alternative scoring models that factor in a broader range of payment history data, according to MarketWatch. The alternative models will look at areas like payment of cell phone and utility bills, and rent. As a result, more credit-worthy Americans are expected to have access to mortgages.

Related: Myths About Credit Scores

One of the trickiest hurdles for young adults, so many of whom are lugging around student loan debt, is the debt-to-income ratio. Mortgage companies want borrowers to have a certain level of cash flow each month, and that means taking into account how much you're paying out to other lenders. Ideally, a borrower's debt-to-income ratio — how much you pay toward debt each month divided by your gross monthly income — should fall below 36%. Different mortgage programs have different requirements, but generally staying at or under 43% is advisable. If your DTI is outside that range, think about how you can get that debt needle moving in the right direction.

You can do that by paying off unsecured debts like credit cards and personal loans and keeping them as close to a zero balance as possible.

#2 You Probably Will Have to Compromise

Kathleen Celmins, currently CEO and co-founder of a content marketing agency, was financially prepared to manage a mortgage. But once the house hunting began, she quickly realized she was priced out of the homes she had envisioned for herself.

"I originally wanted a single-family home with a yard and in a great neighborhood," she says. But given her price point, the homes she could afford ended up being in, well, not the greatest neighborhoods. "At one point, we looked at a property that was directly behind a strip club," she laughs. "We didn't even go inside."

After several weeks of searching, Celmins realized she needed to find a middle ground. "In my price range, I could get a not-so-great house in a not-so-great neighborhood. Or, I could get a really cute condominium with a gas range and granite countertops," she says. "It was something I compromised on. I gave up a yard for having fancy stuff in my condo."

First-Time Buyer is presented by The National Association of REALTORS®

#3 Be Emotionally Ready for Financial Surprises

When it comes to renting, surprises don't require much emotional investment. The rent goes up? You can move. The fridge is on the fritz? The landlord will send someone over. Home ownership is a bit more hands-on. If the toilet breaks, it's time to start reading Yelp reviews. And if property taxes unexpectedly rise, it's on you to appeal or pay up.

"My homeowners association fee doubled in the first year I owned my condominium," says Celmins. "Then my real estate taxes were reassessed. My mortgage payment went up, and I panicked. I didn't even know that could happen."

Of course, having the financial flexibility to cover those unexpected things is important, but don't overlook the importance of being mentally and emotionally capable of dealing with them responsibly when they arise. Everything could be peachy for months, and then three maintenance issues might spring up in the same week. Stress management and problem-solving skills are home ownership biggies.

#4 A Mortgage Can Be Cheaper Than Rent

Depending on the home you choose and where you live, you may pay a lower mortgage than you paid for rent. But even if you don't, there's still the financial advantage of building equity in your home, instead of lining your landlord's pockets.

#5 Your Lifestyle May Call for Buying Instead of Renting

Many people find a rental can only take them so far. When you're ready to start a family, you're going to want a few extra rooms, and that can get expensive with rising rental rates. A yard also provides a safe place for Junior to play or for a dog to scamper around. And speaking of your dog, the vast majority of renters have trouble finding a place that will allow their pet. Home ownership can end that stress for good.

Then there are the renovations. If you're itching to test out your DIY skills and personalize your space, you're probably ready to own. Landlords who allow property renovations — especially DIY projects — are few and far between.

Buying a first home is a big change — both from a financial and an emotional perspective. Still, for many, home ownership can be one of the most rewarding life choices one can make. "Turns out it's awesome," says Celmins.

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First-Time Buyer is Presented by The National Association of REALTORS®