First Time Homebuyers Guide
Embarking on a homebuying journey is exciting, but there’s a lot to know. In this guide, we’ll walk you through the whole process, from deciding if now...
your ultimate guide to buying a home.
Embarking on a homebuying journey is exciting, but there’s a lot to know. In this guide, we’ll walk you through the whole process, from deciding if now is the right time to buy, all the way to what happens once you sign the closing documents. Remember to bookmark this guide on your phone or laptop so you can reference it every step of the way!
Chapter 1: Prep and Planning
- Personal financial assessment
- Stress management tips
Chapter 2: Home Search
- Researching neighborhoods
- Working with an agent
- Negotiating an offer
Chapter 3: Closing Process
- Applying for a loan
- Mortgage underwriting and loan approval
- Home appraisal and inspection
- Official closing
Chapter 4: Congrats Homeowner
- Buying process recap
- Making your house a home
prep, plan, assess.
Start your homebuying journey on the right foot.
In this chapter you will:
Assess your mindset and motivation
Evaluate your finances
Get pre-qualified or pre-approved for a mortgage
Decide your homebuying and down payment budget
Manage your stress
Which aspect of buying a home are you most nervous about?
- Figuring out my budget
- Finding the right home
- Negotiating an offer
- Getting a mortgage
when is the right time to buy a home?
The right time to buy a home is different for everyone and ultimately comes down to when you feel prepared. So, before you start collecting open house flyers, you’ll want to make sure you’re ready — really ready — to become a homeowner.
Buying a home is an exciting milestone, but it’s probably not something you should do on a whim. It’s a good idea to reflect on why you’re choosing to buy. Some common reasons include:
- A looming rent hike
- Your family is growing
- You’re moving to new city
- You want to build equity
- You have an additional income stream, cash reserves or personal investments you’re ready to tap into
Your motivation for purchasing a home may impact decisions you make throughout the homebuying process.
Evaluate your financial situation
When you apply for a mortgage, lenders will take a hard look at your personal financial situation. You can be prepared by conducting your own assessment first by reviewing the following:
You’ll likely work with a lender, like Ally Home, to fund the cost of your home, but you still need to make a down payment and have the cash to cover closing costs. Review your assets — cash savings, personal investments, etc. — to start forming your home buying budget. If you expect to receive financial assistance from family members, this is a good time to kick off those conversations.
Pro tip: Separate your home fund from other savings and stay organized using Ally Bank’s Online Savings Account buckets feature.
Ally Financial Inc. (NYSE: ALLY) is a leading digital financial services company. Ally Bank, the company's direct banking subsidiary, offers an array of deposit, personal lending and mortgage products and services. Ally Bank is a Member FDIC and Equal Housing Lender , NMLS ID 181005. Credit products and any applicable mortgage credit and collateral are subject to approval and additional terms and conditions apply. Programs, rates and terms and conditions are subject to change at any time without notice.
Have you checked your credit score recently?
- Yes, it looks solid!
- Yes, I'm working on boosting it.
- No, not in a while.
A mortgage commits you to years of payments, so financial stability is important. Lenders will review your income history for the previous two years to look for consistency. If you’re self-employed, paid on commission or have a variable income, be prepared to submit extra documentation and for lenders to be conservative with income calculations.
Keep in mind: Your current and future income matters to lenders, too, and switching jobs during the homebuying process can complicate matters when you apply for a loan.
Your credit score has a big impact on what kind of mortgage you qualify for — so check your Fair Isaac Corporation (FICO) score early to give yourself time to make improvements if necessary. It’s also a good idea to review your credit report, which you can receive free at annualcreditreport.com, and check for any errors.
Evaluate your financial situation (continued)
Minimum qualifying credit scores for a mortgage
Type of Loan
Minimum FICO Score
|FHA loan requiring 3.5% down payment
|FHA loan requiring 10% down payment
||No minimum score. However, most lenders usually will require that your score be at least 620.
While you’re still a few months away from locking down a lender, you may want to pause on any major purchases that require credit (like a car). These can lower your credit score, and you want to keep it in tip-top shape as you home shop.
Debt-to-income ratio (DTI)
Your DTI measures your monthly debt payments (like student loans, auto loans and credit card payments) against your gross monthly income. Ideally, lenders like your DTI to be below 43%, though some may accept higher. Rule of thumb? The lower your ratio, the better.
Now that you’ve pulled your credit score and DTI, you can begin to formulate a realistic home buying budget. One way to start? Our Home Affordability Calculator — give it a try!
After you have an idea of how much you can realistically afford to spend, it’s time to find out whether potential lenders agree.
Soft credit inquiry
Hard credit inquiry
|Informal and self-reported
||Requires paperwork (e.g. W-2, bank statements, Social Security number)
|Often done quickly online or over the phone
||Can take a day to a couple of weeks
|Provides a general idea of how much home you can afford
||Spells out exactly how much a lender is willing to loan you
There’s no hard-and-fast industry-wide definition or process for a pre-approval or pre-qualification. But you’ll likely come across two different ways of going about it: informal and self-reported or formal requiring documentation and a hard credit inquiry.
At this point, you’ll probably want to stick with a soft credit inquiry because it won’t impact your credit score. You can go through this informal process with as many lenders as you choose to get a thorough look at your lending options.
Depending on the financial institution, you may be able to complete the pre-approval process online in less than five minutes.
Mortgage pre-qualification/pre-approval (continued)
As for the more formal process, you’ll want to hold off on completing that until you’re closer to making an offer on a home.
Hard credit inquiries can have an effect on your credit score, so you want to limit how often you undergo situations that require them — and they typically expire within 60 to 90 days.
Give yourself options and shop for the lowest rates by getting pre-qualified or pre-approved by at least three lenders.
TERMS TO KNOW
Mortgage pre-approval / pre-qualification:
Often used interchangeably, a process in which you submit financial documentation to a lender. In return, you learn how much they’re willing to lend you and at what interest rate.
Budget time: monthly mortgage payment and beyond
After comparing lenders and undergoing the pre-qualification or pre-approval process, you should have a good idea of the loan amount you qualify for.
But what will your monthly expenses look like? And in addition to your mortgage payments, what other costs should you prepare for?
One time costs:
- Down payment: The portion of your home’s price you pay upfront, typically around 20%, but may be as low as 3%.
- Appraisal fee: $300 to $550.
- Inspection fee: Typically around $300.
- Closing costs: Lender and other third-party fees associated with closing on a home. These expenses usually add up to 2% to 5% of the home's price.
- Mortgage payment: Paid monthly, a portion goes toward your principal and the remainder is interest.
- Property tax: Varies greatly based on where you live, but a typical homeowner pays around $2,300 annually.
- Homeowner’s insurance: On average, around $1,200 a year.
- Private mortgage insurance (PMI): Lenders may require this coverage if you make a down payment of less than 20%.
- Homeowner association (HOA) dues: If you buy property in a condominium or gated community, HOA fees typically run between $100 and $700 a month.
- Maintenance: Expect to spend about 1% of your home’s value safeguarding your property each year.
- Utilities: Rule of thumb advises budgeting around $400 a month for utility bills.
The down payment deep dive
One of home buying’s greatest myths? You must make a 20% down payment to secure a mortgage.
It’s true the greater your down payment, the less you’ll need to borrow, which can mean lower monthly payments and better rates. Putting down 20% or more also means you won't need to pay PMI, which lenders typically require to protect themselves against risk of default.
But if 20% isn’t feasible, you can explore options like Fannie Mae’s HomeReady program, offered by Ally, which lets low-to-mid income borrowers buy with down payment as low as 3%.
Or you might look into government loans like FHA, VA, or USDA mortgages, which allow certain borrowers to buy with 3.5% down payments (or 0% for qualified applicants).
No matter the size of the home, you'll need to save up for your down payment and closing costs. Whether you're doing so in short order or have plenty of time, consider some of these ideas for your growing your savings:
- Review your expenses and find areas you can decrease or pause spending.
- Increase cash flow by seeking a raise or snagging a side gig.
- Use windfall money like tax returns or holiday bonuses.
- First-time homebuyers can tap into an Individual Retirement Account (or IRA) without penalty up to $10,000 for a down payment. However, you should consult a tax professional before withdrawing retirement funds.
- In lieu of presents, request gifted funds for occasions like birthdays, holidays or your wedding.
Don't stress. Make the journey half the fun.
You’re about to make one of the biggest purchases of your life. No big deal, right? In all seriousness, purchasing a home is a huge accomplishment and an exciting investment in your future. While the process can feel overwhelming at times, remember: You can do this, and you aren’t alone.
If you find that home shopping stress overwhelms the thrill of becoming a homeowner, try these three tips to keep your cool:
Give yourself time to be flexible. The thing about buying a home is there’s no predetermined timeline. The whole process can take a couple months or closer to a year, so the more wiggle room you have to work with, the less you’ll be stressed by strict timelines.
Lean on experts. Real estate agents, mortgage experts — they’re here to help you (and that includes us at Ally Home!). Find ones you trust and let them guide the way.
Be confident in yourself as a buyer. Sure, some days may be tougher than others. But as long as you do your due diligence, know that you’re prepared and ready to take on this challenge. You got this!
let the search begin.
Research neighborhoods, tour houses and make a successful offer.
In this chapter, you will:
Choose the right neighborhood for you
Decide between a new or resale property
Find your real estate agent match
Ask questions while home shopping
Determine and negotiate your offer
Who do you go to for home shopping advice?
- Family and friends
- Social media
- Industry experts
It’s all about location, location, location.
Now, the search begins! It’s time to think about where you’ll put down roots. Before you start browsing properties online, reflect on what you’re looking for in your future community.
Do you want to live next door to mom and dad? Down the road from your siblings? Or is distance more your thing?
If you get your daily 10,000 steps by strolling around the neighborhood or walking to the grocery store and want your kids to bike to school, sidewalks and bike lanes might be a make-or-break feature for you.
Your commute can have a big impact on your day-to-day life — so don’t ignore this important consideration. Think about its length, nearby traffic and public transit options.
If you have children or plan to someday, schools will play a big role in where you choose to live. But you may also want to consider things like what kind of youth sports programs and other after-school activities are nearby.
What's your dream
- Block parties and BBQs
- Quiet and calm
- City streets and sidewalks
When you have a clear idea of what you’re looking for, visit the neighborhoods on your radar. Talk to current residents to get a feel for the community and get to know the schools in the area.
Ask yourself, “Can I see myself (and my family) living here?”
New for you or pre-owned and well-loved?
When you’re thinking about moving into your first home, one of the biggest things to ask yourself is whether you want to buy a pre-existing property or build one from scratch. Both resale homes and new construction come with benefits and drawbacks that can impact your decision.
Newer, more efficient appliances
Better resale value
Building time (average 5 to 6 months)
Limited by location
Higher price points
Less character and charm
Can be leess expensive
Can offer greater variety
Quicker move in time
May require more maintenance
Older appliances and major systems
Shop ’til you drop
It’s the moment you’ve been waiting for: Time to find your future home. You can take this on by yourself or enlist a real estate agent.
The real deal: real estate agents
A real estate agent can help simplify confusing paperwork, connect you with the right sellers, work out deals and reduce your anxiety about the entire process. A great agent on your side can be a huge asset — so it’s important to find the right one for you.
Many buyers use an agent referred to them by a friend, neighbor or relative, or one they have worked with in the past. It’s always a good idea to interview several candidates before picking one that best suits you.
Look for someone you can trust, who you feel has your best interest at heart and who you feel comfortable with — because when you’re buying a home, asking questions is key.
What questions should you ask while homeshopping?
The more you know about a neighborhood, the surrounding area and the specific properties you’re considering, the better.
Ask the real estate agent …
- Should I be aware of anything like constant construction or heavy traffic, loud train tracks or spots police commonly patrol in the area?
- How close are the nearest grocery stores, hospitals, etc.?
- What have similar homes in the area sold for recently?
- How long are houses typically on the market?
Ask the seller …
- Why are you selling the house?
- What are the neighbors like?
- What’s included in the sale (washer, dryer, refrigerator, etc.)?
- How old are the appliances, roof and other major systems?
- Have you made major repairs or renovations?
Keep in mind: You may never get to speak with a seller directly, unless the property is for sale by owner (FSBO). But you and your real estate agent can ask their agent as many questions as you’d like.
5 considerations for a well-thought-out offer:
- The quality and characteristics of the home
- Where the property is located
- Any price changes
- How motivated the seller might be
- How much you want the home
You found the one — let’s lock it down.
You’ve combed through listings, virtually toured kitchens and attended all sorts of open houses on the hunt for the home of your dreams. Now that you’ve found it, the next step is making a competitive offer.
Determine your offer
You already put in the work to define your budget, a major factor when calculating what you'll offer. But to nail down the specific amount, you’ll want a good sense of the local real estate market.
Your agent can help you understand whether competition is hot and you need to move quickly, or if buyers have the upper hand and you can offer below the asking price.
Make a successful offer
Once you’ve settled on an amount, take a deep breath while your agent creates and submits your written offer to the seller via a purchase and sale agreement.
These agreements vary by location, but typically include the following:
- The amount you're offering
- Earnest money — a deposit, often 1 to 3% of the purchase price, to demonstrate you’re serious about buying the home.
- The amount of your intended down payment
- How you plan to pay for the property (all cash, finance with a mortgage)
- Proposed closing date
- Contingencies, or the conditions that must be met for the sale to happen, which can include satisfactory inspection results, financing approval, etc.
- An expiration date for the offer so the process continues moving forward
Make a successful offer (continued)
It may seem like a lot, but covering these details protects you as a buyer. And by including these specifics, as well as having a mortgage pre-approval letter in hand and writing a short-and-sweet offer letter (optional, but makes the buying process more personal and less transactional), you’ll increase your chances of standing out and show sellers just how serious you are.
Once received, the sellers will review your offer. They’ll likely make a counteroffer — and you’ll need to decide whether to make a new offer, stick with your original or walk away.
Negotiation help is the #2 most important thing buyers want from agents.
Landing on the purchase price: Negotiation tips
Negotiating is a natural part of the homebuying process, but it can certainly be nerve-racking. Luckily, your real estate agent is here to help. Remember, sometimes the negotiation occurs over several rounds, so you may need to practice patience and potentially make some compromises.
- Communicate through your agent
- Negotiate closing costs (you may get the seller to pay for a portion of them)
- Negotiate a home warranty and for repairs related to what’s uncovered during the inspection
- Negotiate solely on the asking price
- Be afraid to walk away
- Lose sight of your overall budget
secure your home with a mortgage loan.
Find the right financing option for you and close on your new home.
In this chapter, you will:
Gather all your documents
Apply for a mortgage and lock in your rate
Have the home appraised and inspected
Close on the property
Do you plan on your home being:
- A starter home
- My forever home
- Only time will tell
the final stretch: from contract to closing.
Congratulations! You found your future home. Once your offer has been accepted, you’ll be under contract, which means it’s time to officially secure your home loan. If you researched lenders and underwent the pre-approval process earlier in your homebuying journey, you should have a good idea where you plan to get your loan and whether your application will be accepted. If you haven’t yet, now is the time to get pre-approved by several lenders so you can compare rates.
Gather all your documents
When applying for a loan, you'll need to provide quite a bit of paperwork:
Streamline the mortgage application process and stay extra organized by digitizing your documents early on. Scan your paper docs, download any files you need and save everything in one spot so you can easily submit your paperwork electronically.
Pro tip: With Ally Home, you can easily submit all your paperwork online — no papers, printing or mailing required.
Mortgages come in all shapes and sizes, and what type of mortgage you take out can have a big effect on both your month-to-month payments and the total cost of your loan over time.
With a fixed-rate mortgage, there's no surprises. You'll have the same interest rate for the life of your loan. These mortgages are typically offered in 30-, 20- and 15-year terms. Best if: You plan on being in your home long-term.
With an adjustable-rate mortgage (ARM), you'll have a fixed rate for an initial time period. After that time frame is over, rates will adjust (and could increase or decrease) each year, based on market rate factors.
There’s a predetermined cap that establishes the maximum amount rates can increase each year — so you’ll know the “worst case” scenario going in. Most ARMs are offered at 5/1, 7/1 or 10/1 — meaning your rate is locked for the first five, seven or 10 years, then adjusts each subsequent year. Best if: You plan to sell or refinance before your initial fixed-rate period ends.
TERMS TO KNOW
A home loan that will keep the same interest rate for the life of the loan.
Adjustable rate mortgage (ARM):
A home loan that has a fixed interest rate for an initial time period, then is subject to change periodically.
Mortgage rates (continued)
Are rate locks in your best interest?
Mortgage interest rates fluctuate all the time. If rates are low today, there's no guarantee they'll be exactly the same when you sign your closing papers. That’s where a rate lock can help.
Lenders may let you "lock in" the current interest rate while you go through the loan application and approval process (which can take a bit of time). That way, you don't have to worry about rising rates.
Of course, you do assume the risk that interest rates could drop, and you're locked into a higher rate.
Use this example to compare the potential total cost differences between a 30-year fixed-rate conforming conventional mortgage and a 7/1 ARM and a over the life of the loan.
The lower initial payments of the ARM are only beneficial for approximately the first nine years of the loan.
30-year Fixed Conventional
3.25% 7/1 ARM
||Total Life of Loan
|Year 1-7 payment
|Year 8 payment
|Year 9 payment
|Year 10-30 payment
*Based on 30 year total term, $250,000 purchase, ARM adjusting 2% in years 8 and 9 with a maximum 5% increase in year 10.
Now that you know the different ways interest rates can be applied to a mortgage loan, it’s time to pick out the right type of loan for you. You have lots of options, so let’s take a look at what’s out there.
Conventional loans are the most popular type of mortgage. They’re offered or backed by a private lender (like Ally Home) or by Fannie Mae (the Federal National Mortgage Association) or Freddie Mac (the Federal Home Loan Mortgage Corporation), which are government agencies that oversee mortgage lending.
Non-conventional loans are backed by the federal government. If you qualify, the three types you might consider are a Federal Housing Administration (FHA), a United States Department of Agriculture (USDA) or a Veteran’s Affairs (VA) loan.
Types of mortgage loans (continued)
Conforming vs jumbo loans
Mortgages fall into one of two categories depending on their size. To be a conforming loan, a conventional mortgage has to meet the loan limits spelled out by either Fannie Mae or Freddie Mac.
The limits for conforming loans vary depending on where you live. In areas where property values are higher than normal, the maximum conforming loan limit is typically higher.
Mortgages that are above the maximum conforming loan limit are called jumbo loans. To qualify for a jumbo loan, buyers typically have to meet stricter requirements, like a higher credit score, greater down payment and lower DTI.
|Loan amounts for one-unit home
||Must not exceed $548,250 in most areas; up to $822,375 in high-cost housing markets
||Any loan that exceeds $548,250 in most areas or the specified conforming amount for high-cost markets
||Must be less than 50%
||Must be less than 43%
|Down payment requirement (for purchase)
||At least 3%-5% of purchase price
||Typically 20% of purchase price
TERMS TO KNOW
A mortgage that is backed by a private lender or Fannie Mae or Freddie Mac.
A mortgage that is backed by the federal government.
Mortgage that meets the loan limits spelled out by Fannie Mae or Freddie Mac.
A common type of non-conforming loan that exceeds the loan limits set by Fannie Mae and Freddie Mac.
Points and credits
When working with your lender to nail down the details of your mortgage, you may come across the terms credits and points. “Taking credits” means accepting a higher interest rate (and therefore higher monthly payments) in exchange for cash to offset your closing costs.
The flip side of taking credits is “paying points,” which means you pay some of your mortgage balance upfront in exchange for a lower interest rate (and therefore lower monthly payments).
Deciding if taking credits, paying points or neither is the best option for you depends on how long you plan to keep your mortgage. If you’re in it for the entire term length, saving on interest may make the most sense.
But if you plan to sell or refinance in just a few years, taking credits could be financially beneficial.
TERMS TO KNOW
Fees you pay your lender at closing in exchange for a reduced interest rate
Credits allow you to lower your closing cost in exchange for a higher interest rate.
The estimated value of a home, determined by an unbiased professional appraiser.
The home appraisal
A home appraisal is the estimated value of a home, determined by an unbiased professional appraiser. Lenders typically require an appraisal of the home you want to purchase so they can determine its worth and how much to lend you.
They’ll order an appraisal report and an appraiser will visit the home, where they will walk in and around the property, take measurements and pictures and make an assessment.
In some cases, depending on the type of mortgage and other criteria, you might qualify for a waiver (allowing you to opt-out of the appraisal process) or a drive-by appraisal, which consists of an appraiser simply performing an external examination of the property.
While separate from an appraisal and typically not required by lenders, it's a good idea to get your future home inspected. That’s because a home inspection looks for any potential trouble spots you should be aware of (like water damage, foundational cracks or an outdated HVAC system) before signing off on a purchase.
You can even use a home inspection to determine whether you want to follow through with the purchase. Plus, any flaws or defects highlighted in the inspection can be bargaining tools when negotiating your offer.
Depending on what you’re looking for and state or lender requirements, you might need to get a general or specialized home inspection. Types of home inspections include:
- General inspection
- Foundation inspection
- Mold inspection
- Radon inspection
- Wood-destroying organism (WDO) inspection
Once complete, the inspector will provide you a comprehensive written assessment that includes:
- Baseline details about the house, like its construction date, square footage and home type
- Summary that outlines any significant issues with the property
- Details about major home systems and critical components and whether they work
- Descriptions and photos of any issues and recommendations on how to proceed with a repair
Forgoing an inspection can be risky, as you could end up moving into a home with major problems you aren’t aware of. While an upfront cost, this process can save you major headaches (and expensive repairs) down the road — and can even be used as leverage to lower your purchase price.
TERMS TO KNOW
An examination of a home’s safety and physical condition.
Just a few more crucial steps lie between you and your new digs. As you cross off tasks like the appraisal and inspection, your lender will undergo the underwriting process.
Basically, they will review and verify all the financial documentation you submitted to officially approve your loan.
The length of this varies case-by-case and can take a few days up to a few weeks. Just be prepared for your underwriter to potentially reach out with additional inquiries about your financial history, employment history, assets, etc.
TERMS TO KNOW
When a lender reviews your loan application and analyzes your finances.
It’s closing time
You found the home, secured the loan, gathered all the paperwork and took a final walkthrough. Now it’s time to make it yours.
The actual logistics of closing on a home (i.e. who needs to attend the closing appointment, where it’s held, etc.) will vary depending on where you live. But in general, you can expect to sign a lot of papers, pay the remaining closing costs and have the property title signed over to you. You’ll typically receive the keys to your new home at or after the closing appointment.
Once the deed of ownership is transferred from the current owner to you, you are officially a homeowner. Now, pop the champagne!
congratulations, future homeowner.
Recap the process and kick off your home buying journey.
your new home is just around the block.
By now, you know that a lot goes into buying a house, from preparation and planning, to researching neighborhoods and reviewing paperwork. So, let’s quickly recap the steps of the homebuying process.
- Perform a personal financial assessment
- Form your homebuying budget
- Get pre-qualified or pre-approved by a lender like Ally Home
- Research where you want to live
- Enlist a real estate agent to assist your home search
- Make an offer on the home you want
- Apply for a mortgage
- Have the home appraised and inspected
- Close on the house
time to celebrate and decorate.
Make your home your happy place.
The road to purchasing your first home is no joke, but having a space that is all your own makes it totally worth it. As the owner, you make the rules — and you can turn your home into whatever you want it to be. Minimalist sanctuary? Urban bachelorette pad? Family farmhouse? You decide.
Our tips for making your house a home?
Make it functional: Integrate things you use regularly into the design of your home.
Add warmth: Use furniture, decor and paint choices to give your space a more lived-in touch.
Show your personality: Your space is a reflection of you, so add personal touches to make it unique.
Create a welcoming environment: Consider decorating an outdoor space or arranging your furniture to make it more conducive to hosting guests.
Make it yours: Take inspiration from interior design trends, but more importantly, fill your space with what makes you happy and excited to come home every day.