It has been a little over two years since we bought our first home. An experience that has in turn become a valuable education for us. As someone who loves real estate, and is a licensed realtor, I constantly have real estate on the mind. I want to make sure that first time home buyers do not make the same mistakes I see so many folks make. If you are looking to buy your first home, it can be a nerve wracking experience. There are a lot of questions to answer before you can even consider making such a big purchase, but that is why DXD is here!
Let’s start with a PSA:
You are not buying an emotional gingerbread house filled with puppies and unicorns. You are making an informed business decision. A house is building materials and land. Go into this process with this mindset, it will benefit you tremendously.
If you have not already started saving for a down payment, you need to get the ball rolling. A new homebuyer can get an FHA loan (First time home buyer loan) and only have to put 3.5% down on a property. So, if you are on a tight budget, this may be the option for you. I prefer to have skin in the game and would recommend saving at least 20% of the down payment. This will lower your mortgage payments, in addition to eliminating private mortgage insurance ( a.k.a. PMI). Private Mortgage Insurance is required insurance for anyone puts down less than 20% of the purchase price of the home. This can range from $70-$150 extra dollars that you would be paying on a monthly basis. So karate kick that to the curb by putting the 20% down. Always make sure you have more than you think you need, in case your closing costs are higher than expected. It will give you peace of mind on closing day.
In addition, you want to make sure your credit score is in good condition. If you do not have a great credit score, you will need to work on getting it up so you can get approved for a loan. Do not make any other big purchases during this time to avoid any dings on your credit score.
Understand Your Market
While you are saving for your home, you want to start looking in your market and deciding what type of home will fit your lifestyle. Understanding your market is so important to making a wise financial decision. As a real estate agent, I see way too many first time home buyers purchasing homes for way more than they are worth. This can be detrimental to your financial future, especially if your first home is not your forever home. What most people don’t know is that buying a house is actually a skill rather than something you just do. The average person stays in their first home purchase for 5-7 years, which is plenty of time for the housing market to take a nice dip. So if you buy wrong, and need to move because your family has grown, then you could be losing money on your investment. So take the time and do the research ahead of time. If you buy it right, you will be able to sell and make a nice profit.
What type of Home Fits your Lifestyle
Figuring out the type of home that fits your lifestyle will come as you begin to understand your market and budget. Are you single and looking for a place for numero uno? Then maybe a condo would be your choice. Are you married and have a dog? Then maybe a single family house. If you have not read my article on how to live rent free, check it out here. This is a great option for first time homebuyers and can become a great investment in the future. Whatever you living situation, make sure you become laser focused on the right living style for you. You must choose, but choose wisely.
How Much Home Can You Buy
I am going to say this right off the bat; do not over extend yourself based on a house you love. I repeat, do not buy too much house. How much home can I buy you ask? You do not want to your mortgage to be any more that 25% of your net monthly expenses. I would prefer you keep it closer to 20% as a safeguard, but no more than 25%. I really like the mortgage tool at Bankrate.com. Their calculator gives you your estimated monthly mortgage cost based on your purchase price. You will want to search for the average interest and home insurance rates in you area, to ensure you get an accurate estimate.
Once your down payment is ready to go, you will want to get pre-approved for a mortgage. When I bought my first home, I used a mortgage broker that made the process a breeze. If you go this route, you will also want to talk to a few banks to compare interest rates (manage the manager). The difference between .1% of your interest rate over the long term is significant, so make sure your lender is competitive. Additionally, make sure you compare the closing costs of each lender you talk to. I have seen many people with a look as if they just saw a ghost when they have to add $4,000 of closing costs to their down payment. Don’t be this person.
Start The Hunt
Once you have the down payment, it is time to start searching for your new home. “Put rubber to the road” as they say (Who is they?). I would recommend using a real estate agent, especially since it is free for the buyer (seller pays the agent fees typically). I would interview a few, or if you know one you can trust, go with them. You want to make sure the agent has your best interest at heart. I was not an agent yet when we bought our first home – so we used a long time friend. He was extremely helpful in letting us know when a house was overpriced, a neighborhood was not on the rise, or if we needed to act quickly because a house was selling below market value. Remember this is the person you are trusting with investment advice on a massive purchase, you need to make sure they care about your financial well being.
When you begin your search, don’t sit back expecting the perfect house to come to you. You need to search along with the agent. They will most likely have more clients than just you, so it is in your best interest to do your part of the legwork. This will ensure any potential houses that fit your criteria do not fall though the cracks. Homes that are newly renovated are usually at or above market price. I would avoid these unless you know it is a great deal. Usually, these are people who have invested the money so that you can pay for their work as profit.
If you have an eye for renovation, look for houses with cosmetic issues but are structurally sound and below your budget. This is where the great deals are, and where you can buy into instant equity. Our house had blue and purple walls, shaggy carpet, and pink shower tiles when we bought it. We put about $8,000 into it and made it our own modern design. A great way to find these houses are short sales. Make sure your agent has experience with short sales if you go this route.
If you do not have an eye for renovation, then I would watch some of the “fixer-uper” shows on T.V. (Yes, seriously). After a few, you should be able to start developing an eye for renovation.
Here is the fun fact of the day:
*Building a home in America is usually between $100-$200 a square foot, so any price outside of this range is either a bargain or overpriced.
As you find houses that fit your criteria, send them to your agent to schedule times to show you the property. Make sure you go through a few in one day to save time. As you walk through the houses, be aware of any visible issues in the walls, ceiling, foundation, roof, HVAC, water heater etc. This will save you time and money in the long run. Don’t fall in love with the first place you see. Make sure you walk through a few and if you still like the first one, then move forward in the process. You don’t want to say “what if” in the future. Oh yeah, and please for the love of Pete (Who is Pete?), do not fall in love with a house above your price range and make a destructive decision. You will regret it in the long run when you can not do anything fun because all your hard earned money goes towards your mortgage. You probably should not be looking at houses outside of your budget, unless you see they have been on the market for some time, and you feel a lower offer has the potential of acceptance.
Make An Offer
You have found one you like and it is time to make an offer on the house. Before you even make the initial offer, nail down the maximum price you will pay for the home. The last thing you want to do is get into a bidding war with someone else and your emotions cause you to pay more than you intended. Once you have the offer, your agent will call the listing agent and make a verbal or written offer. If accepted, you will fill out forms to guarantee escrow, your lenders proof of approval, etc. I would recommend always putting an inspection contingency in your offer. This will allow you to have your own home inspector go through the home and make sure everything in your expected condition. If there are any issues with the main components of the house, make sure you attempt to knock that off your offer. On our home, we asked that the seller take an additional $3,000 off the purchase price because the HVAC (AC Unit) was 13 years old. They agreed to do so. That baby is still purring 3 years later.
The Offer Is Accepted
Once your offer is accepted it is time to do some paperwork, schedule an inspection, and have the home appraised. Your lender and real estate agent will work together to get the details completed and guide you along the way to establishing a closing date.
On closing day, you will most likely meet at your title company’s office and sign papers for two hours along with the seller.
You HaveThe Keys (The Keys The Keys)
After you close, you should do one final walk through to make sure the house is in the condition you anticipated.
Now it is time to pop the champagne because you are embarking the journey of home ownership. It is a lot of time, maintenance, and money, but if you are in the right market, and buy at the right price it will pay off in the end. Just remember to keep your emotions in check and educate yourself before making your decision. Remember if you spend 50 hours researching and that saved you $30,000, how much did you make per hour? Happy house hunting!