First-time homebuyer guide

Buying your first home is a big step, and it’s normal to feel a little overwhelmed. With figuring out your finances, understanding mortgage options and navigating the buying process, there’s a lot to take in. But don’t worry: With the right preparation, it becomes much more manageable.

Let’s walk through everything you need to know as a first-time homebuyer—from budgeting and loan choices to making an offer and closing the deal—so you can approach your home search with clarity and confidence.

What you'll learn

• Check your finances and budget
• Calculate how much you can afford
• Explore mortgage options
• What kind of mortgage to get as a first-time homebuyer
• Plan your down payment
• Understanding the homebuying process
• The road to homeownership begins with preparation

Check your finances and budget

Buying a house is a big financial commitment, so your first step is to make sure you’re financially ready. Start by taking a close look at your income, savings and debt. Lenders typically prefer your monthly debts (including the new mortgage) take up no more than around 36%-43% of your gross income. You don’t necessarily have to calculate this ratio yourself, but it’s helpful to understand that your debt load and income will determine how much house you can afford.

Next, review your credit score and credit report. Your credit score plays a major role in the mortgage interest rate you’ll qualify for. Generally, a higher score will get you a lower rate. If your credit score isn’t in the best shape, consider spending some time improving it before you apply for a loan. Pay down high-interest debts if possible, keep making all bill payments on time, and correct any errors you find on your credit report. These actions can boost your score, and even a 20-point increase can potentially save you thousands of dollars in interest over the life of your mortgage.

Calculate how much you can afford

When it comes to affordability, don’t just look at the sticker price of a home, focus on the monthly payment. This includes the mortgage principal and interest, as well as property taxes, homeowner’s insurance, and possibly homeowners association (HOA) fees or mortgage insurance. A house that seems affordable at first glance might feel very different once those costs are added in.

A smart rule of thumb: Aim for a mortgage payment that’s no more than 25%-30% of your gross monthly income, especially if you have other financial goals like saving for retirement or raising a family. And always leave room in your budget for future repairs, utilities and life changes.

To get a realistic sense of what fits your finances, try Alliant Credit Union’s home affordability calculator. It factors in your income, debts and estimated costs like property taxes and insurance—along with your down payment and loan terms—to show how much mortgage you may qualify for and what kind of monthly payment to expect.

Explore mortgage options

First-time homebuyers have a variety of mortgage options available, each tailored to different financial situations. The best choice for you will depend on factors like your credit score, savings and qualifications for specific programs. Here’s a quick overview of the most common types of home loans.

• Conventional loans: These are offered by private lenders and are not insured by the government. You typically need decent credit (often a 620+ score) and can put as little as 3% down. If you put down less than 20%, you’ll pay private mortgage insurance (PMI) until you reach 20% equity.
• FHA loans: Mortgages insured by the Federal Housing Administration (FHA) are popular with first-time buyers. They allow a down payment as low as 3.5% and have more flexible credit requirements. The trade-off is you’ll pay mortgage insurance premiums (MIP) on an FHA loan.
• VA loans: If you’re a U.S. military veteran, active-duty service member, or eligible surviving spouse, a VA loan can be an excellent option. VA loans require no down payment and no PMI, and often offer below-market interest rates. They are available through private lenders, with the VA guaranteeing a portion of the loan.

What kind of mortgage to get as a first-time homebuyer

For most first-time homebuyers, the two main mortgage options are conventional loans and FHA loans, both of which offer low down-payment options and are widely available. If you're a veteran or active-duty service member, you might also qualify for a VA loan, which offers zero-down financing and other benefits.

It’s a smart move to connect with a lender early in the process. A good lender can help you get prequalified, explain your loan options, and assess which programs you qualify for based on your credit, income and location.

Also, don’t forget to look into special assistance programs for first-time buyers. Many state and local housing agencies offer grants, forgivable loans or down payment assistance that can significantly reduce your out-of-pocket costs. Some lenders even offer their own first-time buyer incentives, such as reduced PMI, closing cost credits or 0% down programs. Alliant’s Advantage Mortgage program, for example, allows qualified first-time buyers to put down 0% (on loans up to $650,000) with no PMI.

Plan your down payment

Saving for a down payment can sound like an imposing task, yet it often ends up being less difficult than one might expect. While the old 20% down rule still keeps making the rounds, most first-time buyers today put down much less—only 9% on average in 2024, according to the National Association of Realtors.

FHA loans can be purchased with as little as 3.5% down, conventional loans permit 3%, and VA or USDA loans can be financed with zero down. These low- and no-down-payment programs make home purchase a reality even with minimal savings.

Your down payment needs to exist within the context on your broader financial picture. A higher down payment can save you private mortgage insurance (PMI) and lower your monthly payment, but shouldn't come at the expense of draining your emergency fund. Many first-time homebuyers opt for a smaller down payment to keep extra savings for costs such as move-in fees or repairs.

In the end, your down-payment strategy should balance what you can comfortably afford today with what protects you in the future.

Understanding the homebuying process

You've got your finances in order, now the fun part begins: House hunting! From financial vetting to inspection, here are some of the major steps you'll encounter.

• Get prequalified: Add some preparation before you start house shopping by getting a mortgage prequalification letter from a lender. This verifies how much you qualify to borrow and makes you seem serious-minded to sellers.
• Purchase a home: Start viewing homes within your budget (your prequalification amount) and engage a real estate agent if possible. When you find the perfect home, you will make an offer and negotiate price and terms with the seller.
• Inspection and appraisal: Once your offer is accepted, have the home inspected to expose any flaws. Your lender will also have an appraisal performed to ensure the value of the house is worth the price of the loan. If problems arise (like a low appraisal or repair needs), you'll need to negotiate or alter the agreement.
• Closing: In the last step, you will have a closing meeting where you sign all the documents and finalize the sale. You'll pay your down payment and closing fees (most times via a wire transfer or cashier's check). Then the keys are yours! Congratulations, you now own a home.

The road to homeownership begins with preparation

Buying a first home is an exciting adventure, but it’s also a big responsibility. The sooner you prepare—by understanding your finances, comparing loans, and getting familiar with the process—the smoother it will be. Fortunately, you don't need to go it alone. Alliant Credit Union offers tools like the first-time home buyer mortgage calculator, guidance from experts and a variety of mortgage terms and down payment options. Your first home is a big milestone and with the right plan, you’ll be well on your way to making it a reality.