First Time Home Buyer Guide: Your Step-by-Step Path to Buying
This first time home buyer guide walks you through buying your first home one step at a time. You will learn how much house you can afford, how to save a down payment, and how to budget for closing costs.
Each step links to a free ModernWallet calculator so you can run your own numbers. Take it slow, and check that you are financially ready before you buy.
Step 1: Figure out how much house you can afford
Start by working out a home price that fits your income and debts. Lenders look at your debt-to-income ratio, which is all your monthly debt payments divided by your gross monthly income. A common guideline is the 28/36 rule: keep housing costs near 28% of gross income and total debt near 36%.
Use our home affordability calculator to apply the 28/36 rule to your own numbers. It shows a realistic price range before you start shopping. Knowing your limit keeps you from falling for a home you cannot comfortably afford.
Step 2: Save your down payment and understand PMI
Your down payment is the cash you put toward the home price up front. A larger down payment lowers your loan and your monthly payment. When you put down less than 20% on a conventional loan, lenders require private mortgage insurance (PMI), which protects the lender, not you.
Some loans need less cash to start. Conventional loans can go as low as 3% down, and FHA loans backed by HUD allow as little as 3.5%. Putting 20% down avoids PMI on a conventional loan. Use our down payment calculator to see how different amounts change your costs.
Step 3: Budget for closing costs
Closing costs are separate fees you pay to finalize the loan, on top of your down payment. They cover things like the appraisal, title insurance, taxes, and prepaid items such as homeowners insurance. These costs typically run about 2% to 5% of the loan amount.
Many first-time buyers forget to budget for this cash. Your lender lists every fee on your Loan Estimate, so review it carefully. Use our closing cost calculator to estimate this amount and avoid a surprise at the closing table.
Step 4: Understand the monthly payment and paying it down
Your monthly payment is more than just principal and interest. It often includes property taxes, homeowners insurance, and PMI if you put down less than 20%. Knowing the full payment helps you plan your budget honestly.
Paying extra toward principal can shrink your loan years faster and save interest. Even small extra payments add up over time. Use our mortgage payoff calculator to see how extra payments shorten your loan and cut total interest.
Step 5: Make sure you're financially ready
Being financially ready means more than affording the payment. You should have an emergency fund for repairs and a clear picture of your overall finances. Owning a home brings new costs, so a cash cushion protects you when something breaks.
Tracking your net worth shows whether you are on solid ground before you buy. It adds up what you own and subtracts what you owe. Use our net worth calculator to check your full financial picture before you commit to a mortgage.
Frequently asked questions
What is the first step for a first time home buyer?
The first step is figuring out how much house you can afford. Review your income, debts, and credit before you shop. Lenders weigh your debt-to-income ratio, so knowing your budget early keeps your search realistic and your finances safe.
How much do I need for a down payment?
You may need far less than 20%. Conventional loans can allow as little as 3% down, and FHA loans backed by HUD allow as little as 3.5%. Putting 20% down on a conventional loan lets you avoid private mortgage insurance (PMI).
What is PMI and how do I avoid it?
PMI is private mortgage insurance that protects the lender, not you. On a conventional loan, it is required when your down payment is under 20%. You avoid it by putting at least 20% down, which removes the PMI requirement.
How much are closing costs?
Closing costs typically run about 2% to 5% of the loan amount. They are separate from your down payment and cover fees like the appraisal, title insurance, and taxes. Your Loan Estimate lists each fee before closing.
What is the 28/36 rule?
The 28/36 rule is a common affordability guideline. It suggests keeping housing costs at or below 28% of your gross monthly income and total debt at or below 36%. Lenders use your debt-to-income ratio to judge how much you can borrow.
How do I know if I'm financially ready to buy?
You are likely ready when you can afford the full monthly payment, have an emergency fund, and a positive net worth. Homeownership adds costs like repairs and insurance, so a cash cushion matters as much as qualifying for the loan.