7 Tips for First-Time Homebuyers

Buying your first home can be exciting—and stressful. Beyond the challenge of finding the right home in your chosen neighborhood, many financial questions are sure to arise. With advance planning—and saving—the homebuying process will be much easier.

Our top tips:

1. Don’t buy a home primarily as an investment.You can’t rely on home values always rising. If financial return is your primary goal, plan to own a property for at least five years.
2. Know what you can afford. Use a mortgage calculator to figure out how much you can borrow based on your income and financial obligations. As a rule, keep your housing costs below 31–40 percent of your gross monthly income.
3. Check your credit score. Having a better credit score can mean lower mortgage rates. Take steps to boost your score before you start house hunting.
4. Understand the other costs involved.
   • Plan to pay property taxes and carry homeowner insurance.
   • A home inspection can help you plan for major repairs and routine maintenance.
   • A condo or home in a community that offers shared facilities like a pool may have monthly association fees.
   • Closing costs can be between 1.5-5 percent of the purchase price. These include mortgage applications, appraisal, transfer of property fees, and government recording fees. California is an escrow state, which means that funds are held by a third party to cover property taxes and insurance.
5. Save for a downpayment. For a conventional loan in California, a minimum down payment is 3% of the home price. However, the average down payment is 13%. Ideally, plan to put down at least 20% of your mortgage. Otherwise, you will have to pay private mortgage insurance (PMI) premiums on top of your mortgage payments until your Debt-to-Income (DTI) Ratio reaches 80%. The larger your downpayment, the easier it will be to qualify for a mortgage and negotiate the lowest rate. Plus, when sellers review multiple offers, the more you put down the more competitive your offer will be with other bids.
6. Know what documents you need for your loan.Commonly requested loan documents include a fully executed agreement of sale for the property being purchased, bank and brokerage account statements, pay stubs, previous W2s, IRS Form 4506 (which authorizes a mortgage lender to obtain copies of your tax returns from the IRS), and homeowners insurance policies.
7. Get pre-approved for a mortgage. Get a preapproval letter from a competitive mortgage broker that specifies how much a lender is willing to lend you and locks in the rate. This lets real estate agents and sellers know that you’re a serious buyer because your financing is already arranged. In competitive markets, many realtors now ask for a preapproval letter before showing any properties or entering a contract with a buyer.

Additional resources:

• Research first-time homebuyer programs and down payment assistance programs specific to California. If you are a low- or moderate-income homebuyer or a veteran, the California Housing Finance Agency (CalHFA) offers several first-time homebuyer programs like the MyHome Assistance program.
• Check out the California Department of Real Estate’s First Home California program and podcast.
• Many government programs require homebuyers to attend classes to be eligible. Find free housing counseling and certification classes at the U.S. Department of Housing and Urban Development.
• The DFPI oversees mortgage lenders in California. You can look up mortgage lenders credentials and, should you have any problems, submit a complaint with us or call (866) 275-2677.