There’s really nothing quite like the exhilaration of buying a first home. If you’re thinking of checking off that life milestone, congratulations! That’s major. Before you hand over your hard-earned cash, there are a few things you should know about the home-buying process. Read on for a game plan that will land you your dream residence.
Clearly define your wants and needs.
Before you get started, create a wish list. Create a want list. Create a gotta-have-it list. You need to know these things before buying your first home; otherwise your efforts will be riddled with confusion, uncertainty, and possibly regret.
Gauge the complete cost of living.
First-time homebuyers should consider all costs of homeownership, such as insurance, property tax, homeowners association (HOA) fees, and maintenance and upkeep. What you’ll spend on a monthly basis depends on your PITI—an acronym for a mortgage payment that includes principal, interest, taxes, and insurance—plus any additional expenses for maintenance. To prevent a rude awakening, tally these up.
Consider the trade-offs.
Location versus space is one of the most common trade-offs you’ll be met with when shopping around for potential new homes. A small home in a prime location could be in the same price tier as a larger home in a less desirable part of town. Before starting to look for your first home, make a clear list of numbered priorities. Know exactly what on your list you’d be willing to forfeit, and for which alternatives you’d trade them.
Understand the market.
The average length of time a home remains on the market varies depending on location. According to Svenja Gudell, senior director of economic research at Zillow, “In hot markets that favor sellers, like the Bay Area, Seattle, or Denver, homes can be under contract less than a week after listing. In slower, more buyer-friendly markets like Philadelphia, Chicago, and Cleveland, homes may take a couple of months to sell.” This will impact the offers you make and the competition you encounter. Don’t dillydally if you’re looking to buy in a hot market, and don’t be surprised if you’re outbid.
Aside from the characteristics of the house, county assessments, taxes, and the area and amenities around a home—especially the school district—affect the home’s value. Additionally, nearby sales, foreclosure status, or list prices can all have an impact on a home’s value.
Assess if it’s right to buy.
According to Gudell, it’s helpful to consider the “breakeven horizon” when assessing how long a prospective homebuyer should be planning to live in his or her first home to make it a good financial decision to buy rather than rent. While maybe personal finance experts say you should plan to live in a home for at least five years, times are changing. “Right now, the national breakeven horizon is 1.9 years, but among the top 35 metros in the U.S., it ranges from just 1.1 years in Dallas to 4.5 years in Washington, D.C.”
Today, renters spend roughly 30% of their income on rent on average. “If you think you’ll be in a home for more than a few years and can make a down payment and qualify for a mortgage, buying is definitely better from a financial standpoint,” Gudell told us.
Know your home loans.
Get a handle on the ins and outs of your particular loan: eligibility, the type of loan you’ll be seeking (fixed or floating), the fine print (are there security clauses that will have you paying more should property prices fall?), and the rate. Prepare your financial documents in advance of calling your lender. Know that consistency in employment and pay is valued!
A down payment is always a good idea.
A down payment is the money you spend upfront to purchase a home. Typically, combined with a mortgage, it helps prospective homebuyers fulfill the total price of a home. Even if you qualify for a home loan, it’s always a good investment to put money down on your first home.
According to Gudell, “A 20% down payment is usually best—it allows you to avoid private mortgage insurance and also gives you a considerable chunk of equity in your home.” If 20% seems out of range, there are other popular low-down-payment financing options available too.
Consider the timeline.
When are you looking to buy and move by? The process of buying a first home can be lengthy, and ultimately depends on several variable components—how quickly a buyer finds a house that he or she likes, how fast price negotiations go, the closing of the home, and so on. According to Gudell, “The type of market the buyer finds herself or himself in—a buyer’s or seller’s market—will also make a difference. It can go as fast as a few weeks to many months.”
Look into homeowner’s insurance.
Decide what kind of coverage you want. Prices vary here, so do some research beforehand so you can take it into consideration when budgeting. If you already have auto insurance, get a quote from that same company—companies often offer bundle deals. You’ll want to get quotes from several insurers, big and small, so that you can compare coverage and quotes.
Read your HOA documents carefully.
Before closing a deal, it’s important to sit down and carefully read through the covenants, conditions, and restrictions of your particular HOA agreement. The fine print may alert you to hidden fees or other stipulations that could affect your interest in or ability to afford your home.
Not all renovations are good renovations.
It can be hard not to envision all of the changes you’re excited to make once you buy your new home. But not all renovations are smart ones. For example, updating plumbing or adding energy-efficient windows add immediate, long-term value to your home. Other renovations—putting in a pool, making overly custom design decisions, forgetting your home’s surroundings—may actually lose you money. Be aware of these two sides to the coin before you buy, and take them into consideration when assessing if a home is, and will continue to be, right for you.
Consult a professional.
“Especially for first-time buyers who haven’t experienced it before, it’s definitely a good idea to consult with a real estate professional who can guide you through the process,” advises Gudell. Things to consider when finding a realtor are how long they have been in business, if there are any ethics complaints on file, how well they know your desired neighborhood, etc. While real estate agents represent the seller, a buyer’s broker, or buyer’s agent, represents your needs and wants.
Prepare to get down to the nitty-gritty.
During inspection, dig really deep into everything you notice that may be amiss. Maintenance is a fact of life for every homeowner, but you should be aware of the pitfalls you’ll be paying for. This is true whether you’re buying a fixer-upper or not.
Get creative in your bidding tactics.
If you’re in love with a home, consider making an offer and then adding a contingency onto your offer that you’ll pay a set amount that works for your budget over any competing offers. Just make sure to set a maximum price point!
Did we miss anything? Tell us in the comments!
100 Questions Every First-Time Home Buyer Should Ask by Ilyce R. Glink ($12)