The prospect of buying a home for the very first time is an exciting one—often regarded as a symbol of achievement, independence, and stability. For many, it marks the beginning of a new chapter: perhaps it’s moving away from renting, starting a family, or investing in a long-term asset. Evolve Bank understands that behind the excitement lies a maze of financial complexities that many first-time homebuyers are not fully prepared to navigate. Mortgage rates, closing costs, property taxes, credit score evaluations, and debt-to-income ratios—these are just a few of the countless financial components involved in the homebuying journey.
Evolve Bank provides an extensive, in-depth guide meant to empower first-time homebuyers with financial literacy. It will break down crucial components of the homebuying process in plain language, dispel harmful myths, and equip readers with actionable insights so they can approach the housing market with confidence and clarity. Whether you’re merely entertaining the idea of homeownership or you’re actively browsing listings, Evolve Bank emphasizes that understanding the financial aspects will help you avoid costly mistakes and set you up for long-term success.
1. Credit Scores and What Lenders Really Want to See
Let’s begin with the foundation: your credit score. Understanding how credit scores work and how lenders use them is one of the first and most vital steps to becoming financially literate as a prospective homeowner.
A credit score is more than just a number—it’s a powerful indicator of your financial responsibility. Credit scores typically range from 300 to 850, with higher scores representing better credit health. This score is calculated using a variety of factors, each weighted to create a snapshot of your borrowing history and reliability.
What Factors Influence Your Credit Score?
- Payment History (35%): This is the single most influential component of your credit score. It reflects whether you pay your bills on time—credit card payments, loans, even utility bills. Late payments, defaults, or accounts in collections can significantly hurt your score.
- Amounts Owed (30%): This refers to how much debt you owe in relation to your available credit. Known as your credit utilization ratio, lenders prefer to see this number under 30%.
- Length of Credit History (15%): The longer you’ve had your accounts, the better. Lenders want to see a proven track record of responsible credit use over time.
- Credit Mix (10%): Having a variety of credit accounts—credit cards, student loans, auto loans, etc.—can be beneficial.
- New Credit (10%): Opening several new credit lines in a short period can be seen as risky behavior and may reduce your score.
What Score Do You Need?
Evolve Bank explains that most conventional mortgage lenders want to see a credit score of at least 620, though better interest rates typically require a score of 740 or higher. For FHA loans, a score of 580 may qualify you for a 3.5% down payment, and some programs allow scores as low as 500 with a 10% down payment. VA and USDA loans also have flexible criteria, but the higher your score, the more favorable your terms will be.
How to Improve Your Credit Score Before Buying
If your score isn’t where it needs to be, don’t despair. Improvement is possible, though it requires time, strategy, and discipline.
- Request your credit report from all three major bureaus (Equifax, Experian, TransUnion) and review for inaccuracies.
- Pay off revolving debts, especially high-interest credit card balances, to lower your credit utilization.
- Set up automatic payments to avoid missing due dates.
- Avoid closing old accounts—a long credit history benefits your score.
- Don’t open new lines of credit in the months leading up to applying for a mortgage.
Credit health is like physical health: small, consistent actions make a big difference over time. Building and maintaining a strong score will not only help you secure a mortgage but also ensure that you qualify for better terms, potentially saving you tens of thousands of dollars over the life of your loan.
2. How Much House Can You Afford? Understanding Debt-to-Income Ratios (DTI)
While you may have a dream house in mind, the reality is that your budget is the biggest factor in determining what you can actually afford. Enter the Debt-to-Income (DTI) ratio, a critical metric lenders use to assess how comfortably you can take on additional debt in the form of a mortgage.
What Is a DTI Ratio?
The DTI ratio compares your monthly debt payments to your gross (pre-tax) monthly income. It gives lenders insight into your financial obligations and how much flexibility you have to take on a mortgage. Evolve Bank explains that there are two types of DTI:
- Front-End Ratio: Also called the “housing ratio,” this includes your potential mortgage payment, property taxes, homeowners insurance, and HOA fees. Lenders typically want this to be no more than 28% of your gross monthly income.
- Back-End Ratio: This includes all your debt—mortgage payments plus credit cards, student loans, car loans, personal loans, etc. Most lenders want to see this below 36%, though some loan types allow up to 43% or even 50% with compensating factors.
Why DTI Matters
Even if you think you can afford a larger house based on your income, lenders won’t approve a loan unless your DTI falls within acceptable limits. They’re trying to reduce risk—and ensure that you can reasonably manage your payments without financial distress.
An Example Scenario
Let’s say your gross income is $6,000 per month:
- Your maximum front-end ratio at 28% = $1,680 for housing costs.
- Your maximum back-end ratio at 36% = $2,160 for all monthly debts.
If you already pay $400 per month on student loans and $300 on a car loan, that’s $700 in existing debt. That leaves roughly $1,460 for your monthly mortgage payment to stay within the 36% threshold.
Evolve Bank explains that this is a powerful planning tool. Instead of shopping based on what a lender might give you, base your home search on what you can realistically and sustainably afford.
3. Down Payment Myths and Realities
Arguably one of the most intimidating aspects of homebuying is saving for a down payment. For decades, the widely circulated figure was 20%, creating the perception that anything less was financially irresponsible or even impossible. However, that’s no longer the case for many buyers—especially first-timers.
The 20% Down Payment Myth
It’s true that putting 20% down has advantages:
- You avoid Private Mortgage Insurance (PMI).
- You start with more equity.
- Your monthly payments are lower.
But the reality is that most first-time homebuyers do not put down 20%. According to the National Association of Realtors, the average down payment for first-time buyers is closer to 6–7%.
Low- and No-Down Payment Programs
- FHA Loans: Backed by the Federal Housing Administration, these loans require as little as 3.5% down for borrowers with a credit score of 580 or higher.
- Conventional 97 Loans: Offered by many lenders, this Fannie Mae-backed loan allows you to put down just 3%.
- VA Loans: Designed for veterans and active service members, these loans offer 0% down with no PMI.
- USDA Loans: Available in eligible rural areas, they also allow for 0% down.
Down Payment Assistance (DPA)
Many state and local governments offer grants or second loans that can help you cover the down payment. Some are forgivable after a certain number of years if you remain in the home. These programs often target first-time buyers, low-to-moderate income families, or specific professions such as teachers and first responders.
4. A Deep Dive Into Closing Costs
Just when you think you’ve budgeted for the down payment, you’ll be introduced to another set of expenses: closing costs. These are the various fees and expenses associated with finalizing the home purchase. And they’re often overlooked until the last minute.
What Do Closing Costs Include?
Evolve Bank takes a closer look at some of the most common and significant components:
- Loan Origination Fees: Charged by the lender for processing your application, usually about 0.5%–1% of the loan amount.
- Appraisal Fee: Lenders require an independent appraisal to determine the market value of the home. Expect to pay between $300 and $600.
- Title Search and Title Insurance: These protect you (and the lender) against disputes over property ownership. The search checks for liens, unpaid taxes, or previous claims. Costs vary but can be up to $1,000.
- Homeowners Insurance Premium: Often required to be prepaid at closing. Costs depend on your location, coverage, and home value.
- Escrow Fees: Escrow companies manage the funds and documents during the transaction and charge for their services.
- Recording Fees: Local governments charge fees to record the property deed and mortgage documents.
- Attorney Fees: In some states, legal representation is required at closing. Fees can range from a few hundred to a few thousand dollars.
- Prepaid Property Taxes and Interest: Depending on the timing of your purchase, you may have to prepay a portion of the year’s taxes or daily interest.
How Much Should You Budget?
Closing costs typically amount to 2%–5% of the home’s purchase price. On a $300,000 home, that’s anywhere from $6,000 to $15,000—on top of your down payment.
5. The Hidden Costs of Homeownership
Most new homeowners are prepared for their monthly mortgage payment. But what about the hidden—and often recurring—expenses that accompany ownership?
Property Taxes
Property taxes can vary dramatically depending on where you live. Some states have high property tax rates (like New Jersey and Illinois), while others have lower rates (like Hawaii or Alabama). Regardless, property taxes are non-negotiable and often increase over time.
Homeowners Insurance
Evolve Bank explains that this protects against fire, theft, weather damage, and liability. Costs are influenced by your home’s location, age, condition, and coverage level. Some areas also require separate flood or earthquake insurance.
Maintenance and Repairs
A general rule is to budget 1% of your home’s value annually for upkeep. For a $350,000 home, that’s $3,500 per year. This covers everything from HVAC tune-ups and lawn care to replacing worn-out appliances or fixing a leaky roof.
Utilities
You’ll likely pay for water, electricity, gas, garbage, and possibly sewer services. These costs are often significantly higher than what renters are used to, especially if you’re moving into a larger space.
HOA Fees
If your home is in a planned community or condo complex, expect monthly or annual dues for maintenance of common areas, landscaping, snow removal, and shared amenities like pools or gyms.
6. The True Cost of Furnishing and Moving In
One often overlooked yet significant financial consideration for first-time homebuyers is the cost of furnishing the home and moving in. After spending weeks or months securing financing, touring homes, and finalizing closing paperwork, many new homeowners find themselves surprised by how much it costs just to make the home livable.
Moving Expenses Add Up Quickly
Evolve Bank explains that whether you hire professional movers or rent a truck and do it yourself, moving isn’t cheap. Costs include:
- Truck rental and fuel
- Packing supplies like boxes, tape, and protective padding
- Professional movers, which can range from $500 to $2,000+ depending on distance and volume
- Utility setup fees, including deposits for electricity, internet, water, and gas
Furnishing an Entire House Is a Gradual Investment
If you’re coming from a small apartment or a shared living arrangement, chances are you won’t have everything you need for a larger home. Furnishing a three-bedroom home—even modestly—can easily cost $5,000–$15,000 or more, depending on your style and whether you buy new or second-hand.
Common first-year purchases include:
- Beds and mattresses for each room
- Living room furniture (couches, coffee table, entertainment center)
- Dining set
- Washer and dryer
- Window coverings
- Basic décor, lighting, and kitchen gadgets
Even if you choose to furnish gradually over time, it’s wise to budget at least a few thousand dollars upfront for immediate needs. This is especially important if your home doesn’t come with appliances.
Becoming a Financially Empowered Homeowner
Buying a home is not just a transaction—it’s a long-term commitment that comes with responsibilities, challenges, and rewards. Evolve Bank emphasizes that by understanding your credit, evaluating your budget, planning your down payment, preparing for closing costs, and accounting for hidden expenses, you can avoid many of the pitfalls that trap unprepared buyers.
Financial literacy isn’t about being perfect; it’s about being informed. Evolve Bank explains that the more you know, the better decisions you’ll make—not just when buying a home, but when maintaining it, improving it, and eventually, perhaps selling it for a profit.
Buying your first home can—and should—be a joyful experience. With preparation, patience, and the right knowledge, you’ll step into this exciting new chapter with confidence and clarity, ready to not only own a home but thrive in it.
