The Ultimate Guide to Owning Your First Home
Gaining ownership of your first home is an exciting milestone. But it can bring a few other emotions into the process, too, including joy, relief, and probably a little anxiety. You’re now responsible for all the things that you used to call the landlord for – and that can feel overwhelming and even intimidating. But with the right preparation, you can handle it.
In this handy guide, we’ll break down what you need to know into manageable steps so you don’t run into any unhappy surprises.
Elements of a Home Buying Budget
Affording homeownership requires planning for costs you’ve never had to consider before. You’ll also need to decide how to best prioritize projects and repairs over time. Just remember, you don’t need to be able to afford everything up front, but you will need to plan your budget differently than when you were a renter. Here’s what to think about.
In 2022, the median down payment for a new home was 13% of the total sale price, according to the National Association of Realtors.
But depending on what kind of mortgage you’re applying for, you may not need a substantial down payment. Government-insured mortgages, for example, may only require up to 10% of the purchase price as a down payment, depending on your credit score. Conventional mortgage lenders, on the other hand, require good-to-great credit scores and have different standards for down payments — sometimes at least 20% of the purchase price. Every lender is a bit different, so make sure you discuss all your options.
If you do meet the 20% down payment, that waives the requirement for private mortgage insurance (PMI). You’ll pay more up front, but less on your monthly payments by avoiding the need for PMI.
Homeowner’s insurance and property taxes
These two costs are typically rolled into your monthly mortgage payment until the house is paid off in full, so it’s easy to forget about them as separate costs. But it’s useful to know their proportion of your monthly payment so you understand how much is going to mortgage, interest, taxes, and insurance. We’ll share more on this in a later section.
Appliances and furniture
Many home purchases include appliances, but you’ll want to plan for these costs if the appliances are old or in need of repair.
It’s tempting to go all out for new furniture and finishings, but outfitting a house with all new goods is expensive. Most people have to prioritize and purchase over time. What can you bring from your previous home? What do you need immediately, and what can be purchased second-hand until you’re able to afford an upgrade? Perhaps your new neighborhood has a Buy Nothing group where you can ask for a particular item. Making do with the minimum in the near term is better than getting in over your head with big credit card bills.
Costs that you may not ever have handled in the past include plumbing and electrical repairs, appliances, roofing and rot repairs, and exterior painting. Those are just a few of the things that can take you by surprise.
The cost of heat and electricity are hard to determine before you live in the house and use the utilities. If you’ve met your future neighbors, you could try asking them about typical costs if the homes are similar in square footage and layout.
Water, sewer, and garbage fees may be easier to determine if they have fixed rates (explore the associated provider websites for your area).
Explore seller disclosure rules
If you’re less than impressed with the roof’s appearance or the beams in the crawl space, you might be wondering if you have any leverage as a buyer. Seller disclosures are mandatory in most, but not all, states—but their rules vary. Sellers in New York, for example, are required to either provide a complete property condition disclosure or give the buyer a $500 credit at closing. The rules in Alabama, Arkansas, and West Virginia basically amount to “buyer beware.” However, even if a state doesn’t require a disclosure, a seller could fill one out anyway.
In states that do require disclosures, the seller must provide the prospective buyer with a written list of known property issues that could affect its value, including things like an aging or leaky roof, pest damage, or poor or improper drainage.
Plan for a home inspection
Even if your state requires that you are provided with a seller’s disclosure, the document doesn’t replace the need for a home inspection. Most disclosures typically only cover known defects, and there are plenty of issues an average homeowner might not recognize with the naked eye. But you’ll want to know about any additional issues before committing a down payment.
This involves hiring a third-party professional to closely examine the house and its key systems to determine if any issues need to be resolved prior to closing, or if the sales contract needs to be altered so the seller can cover any issues that are discovered.
For example, let’s say your inspector finds a drainage issue in the basement. You may be able to get the seller to cover the work needed to resolve the issue. However, if the bank doesn’t require the seller to cover something discovered during inspection, and if the owner refuses, you need to be prepared to pay for the repairs.
Whatever the outcome, a home inspection is always worth it. Knowledge is power when owning a home!
Understand what escrow is
Escrow is a legal arrangement in which a third party (in this case, your lender) holds money or property in an “escrow account” until an agreed-upon condition is met—that is, the sale of the house or a paid-off mortgage. Homeowners usually experience two types of escrow accounts, one short-term and one long-term.
- The first type of account is for the purchase of the house. Earnest money (or a “good-faith” deposit) from the buyer is often held in escrow until the sale is completed. At completion, that earnest money gets applied to the down payment. If the sale falls through due to an unforeseen issue on the buyer’s end, the seller typically gets to keep the earnest money.
- The second type of escrow exists for the life of the mortgage. Money is held in this account to pay homeowner’s insurance and property taxes as part of your monthly mortgage payment. You make the mortgage payment, and the lender holds part of it for property taxes and insurance. When those bills come due, the lender pays them out of the escrow account.
Down the road, once you’ve paid off your mortgage, you’re responsible for paying your homeowner’s insurance and property taxes on your own. The property taxes are usually due in two payments, six months apart, or you can pay the whole amount all at once. It’s important to budget for these costs when you get there, but it’s not something you have to think about now.
Purchase homeowner’s insurance
You’ll likely be required to (and you’ll want to!) purchase homeowner’s insurance—but, as stated above, it’s typically paid out of your escrow account while you hold the mortgage. Homeowner’s insurance covers things like damage to your home or theft of your possessions, but the items covered go beyond just your house. Here’s what’s typically covered:
- Dwelling (the main structure itself)
- Other structures (garage, shop, accessory dwelling unit, etc.)
- Personal possessions (jewelry, devices, etc.)
- Loss of use (living expenses while home is repaired)
- Personal liability and medical coverage (bodily injury or damage that happens to others while on your property)
When you purchase insurance, you want enough dwelling coverage for the cost of rebuilding the home in a worst-case scenario. Think: you experience a total loss after a hurricane. On top of the dwelling coverage, if the house is in a flood-prone area, you may be required to purchase flood insurance, depending on location and type of mortgage. It’s a separate policy that not everyone needs.
Personal possessions coverage insures most possessions. One guideline is to insure your things for 50 to 75% of your dwelling coverage. If you have expensive jewelry or fine art or something else outside the scope of typical possessions, you can purchase additional coverage separately for those items.
Loss of use coverage funds the cost of living you might incur if your home suffers significant damage that requires you to stay in a hotel or rental while repairs are completed.
Personal liability and medical coverage protect you in the event that someone is injured on your property. Medical coverage also kicks in for you and your family if you’re hurt on your own property.
You can choose the deductible you want. A higher deductible typically means a cheaper policy, but that also means you need to be prepared to handle some costs out-of-pocket. However, the savings on annual premiums are often worth the higher deductible for many homeowners. It’s also important to plan to review your policy coverage periodically to make sure the policy limit will cover materials and services of rebuilding because these increase over time.
It’s not a good idea to skip homeowner’s insurance, but if you do, your lender can buy it for you and charge you for it. However, the lender may not choose the best or most cost-effective policy. It’s best to do your own research and purchase it yourself.
Research your property taxes
Property tax rates are set by the local government, and they can be a shock to new homeowners. The taxes vary tremendously depending on where you live. Local governments use these property taxes to fund all of the major and minor services a city or town requires, including police and fire departments, public libraries, public schools, waste management, road construction, and parks.
Every state handles taxes slightly differently and imposes different types of taxes. Some states have sales tax, some require state income tax, and some lean most heavily on property taxes—although most states use some combination of all three.
Your property tax bill is based on the tax rate in your town/county and the value of your home. The value is typically the current fair market value of the home, not the purchase price, or even the appraised value. Improvements to the home or natural changes in the going rate for homes in your area can cause your property tax bill to go up. Your tax bill is recalculated every year.
Depending on where you live, your property may be eligible for certain exemptions that can cut down your tax bill. Most states allow qualifying residents to declare a homestead tax exemption on their primary residence. Just make sure you apply for any exemptions applicable to you as soon as possible.
After You Take Ownership
What to know about home warranties
A home warranty is a limited form of insurance that covers all or some of your new home’s electrical systems, HVAC, plumbing, and major appliances. It can help replace or repair covered items, although the coverage is usually pretty limited.
The seller may offer to purchase a home warranty as part of the sale, basically as insurance against anything breaking down in the first year or so after the sale. You’ll have the opportunity to renew your home warranty annually. Generally, home warranty coverage can be lean, and it’s usually better to avoid the cost of the premium for the plan and just handle those costs on your own.
For example, let’s say you find out during your home inspection that the furnace is nearing the end of its life. Maybe you’re guessing that it will need to be replaced within the next year. You might consider acquiring a home warranty to cover the eventual cost. If the furnace does die within that year, you’re likely covered under the home warranty—and you’ve saved yourself at least a couple hundred dollars!
But keep in mind, if the furnace ends up lasting longer, you’ve paid the home warranty premium only for the chance that you might need it. And in the event your furnace does need replaced within that year, typically, you won’t have much say in what the warranty lender decides to do. They usually get final say in the contractor they send to install a new furnace, as well as the brand and model of the furnace itself.
Overall, just like the rest of the home purchasing process, it’s best to do thorough research and ask plenty of questions of any lenders you’re considering working with.
First Day To-Do List
Transfer or set up your accounts
Once you’ve taken ownership (congratulations, by the way!), the first thing you need to do is transfer (or set up) various accounts. That includes utilities, such as electricity, gas, water, garbage and recycling, and amenities such as phone, cable, and internet. If you’re tight on money at this point, it’s recommended to get on a budget plan with your utility providers. For example, let’s say your home is heated with gas. Some gas providers offer a plan in which you pay the same exact rate every single month as opposed to paying varying rates that change with the weather and how much gas you’re using. Find out what your providers offer.
If you’ve never actually paid for a utility like water and garbage, then you need to set up a new account. Find your city’s schedule and options for garbage pickup, recycling, and possibly yard waste. The utility may offer once-a-week, every-other-week, or even once-a-month options (fewer pickups usually mean a lower bill). Find out if the bins are already at the home, or if you need to have them provided and whether there’s an extra fee.
Also make sure to update your address online with your financial institutions, employer, Department of Licensing, car insurance, medical insurance, IRS, doctor and dentist offices. You can set up a change-of-address online with the USPS to avoid missing important mail.
Explore primary electrical and water shut-offs
One of the first things you should do is learn where the electrical breaker box and water main shut-off valve are located. These are important to know about in the instance of a tripped breaker or a frozen pipe. Also explore individual water shut-off locations, like under the sinks and behind the toilets.
First 6-12 Months
Save, save, save!
It’s crucial to save what you can to have a financial backstop for when house emergencies come up. Homeownership includes unexpected situations, like the furnace breaking down, basement flooding, a tree falling during a windstorm, or an older fence needing repaired. You’ll be so much better prepared to handle unexpected events if you have a savings account for them.
Maintain your home
It may feel tedious but keeping up on home maintenance saves you from bigger issues and bigger bills down the road. A few things to remember to do:
- Walk around the property every so often, making note of changes in foundational elements, trees on the property, exterior paint condition, and possible pest issues. Don’t ignore issues as they will likely only get worse with time.
- Replace and clean your air filters, clean the washer and dryer, vacuum the vents (or hire an HVAC professional), clean your gutters, and get your chimney cleaned if you use a fireplace. Learn how to avoid frozen pipes, including winterizing your outdoor taps. These simple tasks will save you energy costs and make systems last longer. Consider this maintenance list for using as a general guideline.
- Plan for demand and try to handle appliance maintenance during the off-season for that particular appliance. For example, when a heat system breaks down during an ice storm, it can be difficult to get a technician in. You can’t predict the future, but ensuring you have your systems inspected and repaired regularly does help. Consider your hot water heater, air conditioner, and heating system. If you know a system is going to retire soon, shop for a replacement price before you need an upgrade. These fall maintenance tips will help you prepare for winter.
- Find reputable contractors you can trust. Do your research on anyone you’re considering allowing into your home, both for personal and financial safety. Read reviews of the business and feel free to ask for references, especially for more expensive jobs.
Shop for household tools
Now that you have a property to maintain, you’ll likely need some tools, like a lawnmower, snow shovel or snow blower, ladder, or vacuum. You don’t have to buy everything new—these things add up! Consider which things are worth splurging on and which you might be able to pick up second-hand or even share with a neighbor.
The Years Ahead: How to Prioritize Home Improvements
Weigh the project and its cost
Improvement projects can make your home more you, while also increasing the value of your home. But those two things don’t always go together, so before you begin a project, first decide what your primary objective is and how long you plan to stay in the house.
Some projects may be primarily aesthetic (bathroom tile, for example), while others may be less exciting but necessary, such as a roof replacement or a porch floor rebuild.
Weigh the aesthetic value against your budget. Is a project necessary for the health of the house, or is it just for fun? Both have their place. You just need to plan appropriately and not get caught short financially if an emergency necessary repair comes up.
Do your research and watch out for scams
Home improvement scams or just plain bad contractor work can take you to the cleaners. Make sure you have researched and vetted any contractors before hiring them. Don’t let someone pressure you into any agreements until you know the quality of their work (best bet is to see the quality of a friend or neighbor’s completed project). That goes for hiring tradespeople too—get recommendations for good plumbers, electricians, and appliance repair people before you need to hire them. Create a contact list for people you can reach out to and feel confident about working with.
Mortgage relief scams are a different type of scam homeowners need to be alert to. These scams target people who have fallen behind on their mortgage. If you’ve fallen behind on your mortgage payment, work with your lender or contact a nonprofit housing counseling agency (like MMI) to discuss your options. Don’t trust every piece of mail that comes through your mailbox.
More About Your Mortgage
If You Miss a Mortgage Payment
As with any loan or credit product, if you miss a payment, your creditor will likely contact you to get you to make up the missed payment. Your credit will also likely take a hit.
If you fall further behind or fail to catch up, you may run of the risk of facing a foreclosure. But even if you fall months behind, it may be possible to correct the situation and keep your home. Learn more about your options before you get too far. Even though it’s difficult, facing the issue head on is always preferable to ignoring it.
When Your Mortgage Lender Changes
When you get a mortgage, you’ll have a mortgage lender and a loan servicer. These two roles may be handled by the same company, but often they aren’t. The lender is the one that lends you the money, while the servicer is responsible for collecting your monthly payments.
Lenders often sell loans. Theoretically, the reason they sell the loans is to get money to create more loans (since it’s going to take most people 30 years to pay off their mortgage, and lenders need that money a lot sooner). Mortgage investors buy loans because they’re typically a fairly low-risk investment with a steady return.
Once your loan is sold, you’ll likely get moved to a new servicer. If you get a letter in the mail letting you know that your loan was sold, don’t be too surprised. Just be sure to follow the instructions on how to make payments going forward. If you’re ever concerned that the switch isn’t legitimate, reach out to your former lender for confirmation.
Congratulations on your new home!
Owning a home is a dream for most people, but it can be challenging if you aren’t financially prepared. If your finances aren’t fully ready for life as a homeowner, MMI offers free, confidential financial counseling to help you create a spending plan that fits your new lifestyle.
Meanwhile, don’t forget to celebrate your status or future plans as a new homeowner! Congratulations on taking this major step.