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Staying Financially Fit | First Steps to Take for First Time Homebuyers

| NOV 29, 2019

TV shows and realtor advertisements do a great job of showing the last step of becoming a first-time homebuyer – smiling while you take possession of the keys on the front step. It’s no surprise that buying a house involves a lot of moving parts, but most first-time buyers never learn that they can take first steps – and ideally should – much earlier than they think. Like, years earlier.

Of course, first-time homebuyers by definition have no experience to draw from. So we asked some of our financial advisors for the best advice they give or wish they had a chance to give to people before they buy their first house, condo or other residence.

Always: Work on your credit and savings
Too many first-time homebuyers end up “cramming for the final” in the last months before a purchase, trying to scrape up assets for a larger down payment and pay down debt to improve their credit score, both of which affect the terms of their mortgage. It’s easy to say and harder to do, but – if you plan to buy a house in the future, working on credit and savings a year or two or five sooner is better. It’s good advice for everyone, but especially for buyers.

Up to two years in advance: Meet with a Realtor and loan officer
Before you even get serious about buying, take advantage of the only two parts of the home buying process you get for free: Working with a realtor and advice from a loan officer. (The fees for a buyer’s Realtor are usually paid by the seller). It’s best to meet both before you have a house – or even a neighborhood – in mind.

Realtors have excellent insights about neighborhoods, housing stock, and can teach you what to expect and where to look for the lifestyle you imagine for yourself. Visit open houses with a realtor with no intention to buy; these are pure educational opportunities – basically, just practice for your real home search. Loan officers, given enough time, can help you find little-known financial resources, and show you where to work on credit scores and down payment.

Before you start your search: Educate yourself about the process
First-time homebuyers don’t have first-hand experience with escrows, homeowner’s insurance, private mortgage insurance (PMI), and just how much maintenance and ongoing expenses add up. These will affect your monthly cash flow, and so help dictate how much house you can afford. Rather than learning after the fact – which most people do – take some time to ask your financial advisor, read books, or take advantage of free online education.

As you are getting serious: Plan down payment and look for community-based resources
When you are ready to start looking at houses in earnest and have settled on a handful of communities or neighborhoods with your Realtor, talk to your loan officer again. The expected purchase range will give you a better idea of the down payment you need. Sit down and discuss where you can get it, whether cash, loans from parents, even borrowing against a 401k – these can be good options for the right buyer, but it takes time to line them up, and one size does not fit all.

The other critical piece is community-based assistance. Some neighborhoods offer down payment assistance or loan benefits to attract buyers. Other programs help people with particular careers – for example, many communities want to attract public service workers like police or firefighters or schoolteachers and will offer assistance to attract them.

When you’re looking at houses: Consider if the house could be right with renovation
Ask your loan officer about new loan products that account for the purchase price of the home AND renovations that are intended immediately after purchase. If you see a two bedroom with a space that could be converted to a third bedroom, and you want a three bedroom, this type of loan gets you the money to make that conversion right after purchase. With such a loan on the table, you can expand your search to include more houses in more neighborhoods – making it more likely you’ll find the right house for you.

In conclusion: Be thoughtful, be prepared, be flexible, be curious
Buying a home is exciting and one of the biggest purchases you will make in your life. It’s worth the extra effort it takes to prepare and do it right. Also, with only so many houses available at any one time, your mindset matters. Be flexible and curious to learn about options you might not think you would consider.

With the right planning and a quality team – like the advisors at Alerus – you give yourself the best chance to find the home of your dreams on your terms.

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