How to Avoid Debt Before Buying a Home

If you’re a first-time homebuyer, you’re trying to navigate the current real estate market as best as possible while attempting to save as much money. From exploring different mortgage options to budgeting for closing costs, here are five ways to avoid debt when shopping for your first home.

Save for a down payment.

One of the most significant ways you can avoid debt as a first-time homebuyer is to make sure you can cover a down payment of at least 20% of the home’s price. For example, if you’re looking to buy a $400,000 home, a reasonable down payment would be $80,000. Use a down payment calculator to help you figure out how much you’ll need to hit your down payment goal.

Suppose you don’t think you can reasonably save enough for a down payment before buying a house. In that case, various low-down-payment programs offer assistance and competitive mortgage rates for first-time homebuyers. Ask a mortgage lender about your options and look for specific applications in your state. You could qualify for a Department of Veterans Affairs loan (which requires no down payment) or a Federal Housing Administration loan (which requires a minimum down payment of 3.5%). Note: putting down less than 20% on the house may mean higher monthly mortgage payments.

Start saving up for a down payment by creating a monthly budget, setting aside work bonuses, opening a savings account, or doing freelance work for extra cash.

Explore your mortgage options

A 30-year mortgage is often preferred among first-time home buyers because of the lower monthly mortgage payments. Lower payments can help you put more cash toward savings and help you qualify for a higher loan amount when you purchase a home. However, 30-year mortgages typically have a higher interest rate, meaning you’ll have to pay more. If you can afford larger monthly payments and want a lower interest rate, opt for a 15-year mortgage. Though you’ll be making larger monthly payments, you’ll get to build equity faster and be debt-free after 15 years. You can use our mortgage calculator to help determine your closing costs.

Make sure you have a high credit score.

Mortgage lenders will look at your credit score to assess your creditworthiness and decide whether or not to approve a loan and at what interest rate. To get the lowest interest rate on a mortgage, you should have a 750 or higher credit score. If you have a lower credit score, you may still be able to get a mortgage by shopping around and having enough money saved up for a 20% down payment. If you want to check your credit score, you can request a free credit report from Equifax, Experian, or TransUnion once a year.

Stick to your budget

When shopping for your first home, create a budget and look at properties that cost less than your approved amount. If you’re looking to buy in a competitive real estate market, you’ll probably be bidding on houses with multiple offers. Though it’s tempting to make a high-priced offer to beat out competitors, you shouldn’t let your emotions take over. Consider shopping below your pre-approval amount to generate some wiggle room for bidding.

Budget for closing costs

Most first-time homebuyers underestimate homeownership’s overall cost and don’t have enough saved up for closing costs. In New York, closing costs generally run between 2%–5% of the purchase for buyers. To save money on closing expenses, like homeowners insurance, home inspections, a home warranty, or a title search, shop around and compare prices.

In addition to these expenses, you’ll also want to budget for any repairs you may have to make after closing. If a home inspection reveals that the HVAC isn’t blowing air properly or a major appliance is, broken, your home warranty can save you a ton of money on repairs or replacements. If you don’t have a warranty, you’ll have to pay out-of-pocket for any necessary repairs or replacements, so make sure you have extra cash on hand for these situations.