A house is likely to be the biggest purchase you ever make, which can make home buying equally terrifying and thrilling.
If you’re preparing to buy your first home, take a deep breath, pour yourself a glass of wine and read these tips for first-time home buyers. The home-buying process is complicated and infuriating at times, but you can figure it out if you follow some sensible guidelines.
Calculating Your Budget
Buying a new home is expensive — and not just because of the down payment. Remember the following when calculating your budget:
1. You may owe more than just a down payment at signing.
Depending on the contract you’ve worked out with the seller, you may also be responsible for closing costs. All together, mine totaled nearly $10,000.
And before you even get to signing, you will likely need to pay for a home inspection, which averages about $315, though it depends on the size of your home.
2. Don’t forget moving expenses.
Moving isn’t cheap, and I say that as someone who has had to move six times in the last decade. Consider the cost of movers (or a truck rental), new identification and vehicle registration, and the cost of breaking your lease if you are moving mid-lease from a rental.
If you’re counting on getting your security deposit back to help with your first mortgage payments, make sure follow these tips when you prepare to move out.
3. Monthly mortgage payments cover more than payments on your home.
Not only will a good chunk of your monthly payment be put toward interest (especially at first), but your monthly mortgage payment will also include:
- Homeowner’s insurance costs,
- Property taxes
- PMI (private mortgage insurance). If you cannot afford to put 20% down on your home, you will likely be required to purchase PMI.
4. Plan for upkeep expenses.
When you rent, your landlord is responsible for replacing old appliances, installing new roofs and windows, and generally fixing anything that breaks. When you own your home and your water heater stops working, you’re on your own.
The general rule of thumb is to budget 1% to 2% of your home value each year for upkeep and maintenance.
Some years the number may be well below that, but in other years of home ownership, expect to pay significantly more, like when you need a new roof. That’s why it’s important to maintain your emergency savings.
5. Grow your emergency savings before buying.
Experts agree that you should save up six months’ of expenses for emergencies. (Easier said than done, I know.)
But still, when buying a house, don’t pour all of your savings into your down payment. Leave some savings for unexpected expenses, like a broken garage door or washing machine, as well as emergencies not related to your home, like job loss or hospitalization.
6. Determine what you’re comfortable spending each month.
Spend no more than three times your annual salary on a house, but use that as a guideline. By no means do you have to spend that much on a home.
If you have multiple jobs but don’t plan to keep them both long-term, only consider one income when budgeting. Likewise, if you or your partner plans to become a stay-at-home parent in the future, do not consider that income when determining your price range.
Saving for a Down Payment
When purchasing a house, you’ll almost always need a down payment. The size of the down payment will depend on the cost of the home and the type of loan you secure (more on that in a bit), but no matter what, it isn’t likely to be cheap.
Here are a few tips for saving for your down payment:
7. Reduce your expenses and increase your income.
If you’re not planning to buy a home immediately, reduce your monthly expenses now and put the savings into a high-interest online savings account.
For example, if you know you will begin your house hunt in roughly a year, downgrade to a cheaper apartment and put the rent savings away into your account.
We also have tips for cutting costs on groceries, car insurance and utilities, as well as advice on several side gigs you can get to earn some extra cash.
8. Shoot for 20% of the cost of the type of house you plan to buy.
Since you’ve already determined the maximum amount you would spend on a house, aim to set aside 20% of that price for your down payment. Doing so will earn you better rates and will keep you from having to pay PMI.
PMI is generally required on any home loans when the buyer puts down less than 20%. My PMI is more than $200 a month, and it is the most useless thing I have ever spent 200 bucks on — every month.
9. If you can’t hit 20%, put as much down as you comfortably can.
Remember, though: leave some money in your emergency savings.
10. Follow my rent rule.
While saving for my down payment, I invented a rent rule to help me save. I calculated what my monthly mortgage payment would likely be on my dream home, since I would need to grow comfortable with paying that each month. Then I subtracted what I was currently paying for rent each month.
I took the difference between the two and stashed that into savings (on top of my regular savings) every month to put toward my down payment. That move quickly grew my down payment savings by several thousand dollars.
Choosing a Real Estate Agent and Getting a Loan
When buying my home, I had the benefit of having a realtor I could trust — my partner’s mother. She obviously wanted to get the best deal for us. Not everyone has that luxury.
A good way to start the search for a real estate agent is to contact several major mortgage brokers and ask for their recommendations for agents. Call all of them and interview them.
Likewise, to find a lending institution, you can call up major real estate brokerages and ask them for mortgage lender recommendations. Now call all of them up and interview them. You’ll get an idea of who you like and the kinds of rates you can get.
11. Don’t go it alone.
As fun as it can be to visit open houses and browse coastal mansions you can never afford on Zillow (or is that just me?), a real estate agent will be able to help you find properties suited to your needs, negotiate for a better deal and understand your contract.
Agents have access to the multiple listing service (MLS) and can show you homes you might otherwise never find.
Plus, your real estate agent should drive you to all homes, which will save on fuel costs. That might sound cheap, but it’s a true Penny Hoarder consideration.
12. Choose a buyer’s agent.
A buyer’s agent is a real estate agent who exclusively helps buyers find homes. That means they do not ever list homes for sale.
Buyer’s agents have no hidden agenda of trying to show you a home that they or their brokerage have listed for sale.
Ask your real estate agent to confirm that he or she is a buyer’s agent before signing with them. If you are still unsure, you can peruse the contract for mention of a buyer’s agent agreement. If there is no such terminology, assume this is not a true buyer’s agent.
13. Ask potential real estate agents good questions.
Interview your agent as thoroughly as you would a babysitter for your kid. A good real estate agent will be happy to answer your questions.
Your questions should focus on their client satisfaction, their familiarity with the area you are researching and how they are paid. The best real estate agents just split the seller’s commission, meaning you don’t pay a cent.
14. Know the types of mortgage loans available to you.
Spend some time researching loan options online. Mortgage options include conventional loans, FHA loans (Federal Housing Administration), etc.
Each loan type has different requirements and qualifications. And if you’re a veteran, a rural borrower or a soon-to-be doctor graduating but plagued with student loan debt, your status could earn you a less common loan.
15. Don’t just go with the lender your real estate agent recommends.
Your agent may have an agreement with a lender, so it’s in their best interest to help each other make more money off you.
Instead, research loans with your own bank or credit union, and don’t forget the list of mortgage lenders you got during your initial research.
16. Compare mortgage rates.
Go with the lowest interest rate you can find. The difference between 4.00% and 4.25% might not sound like a lot, but on a $200,000 home over 30 years, it makes a huge difference.
On this $200,000 home, a 4.00% rate equates to $343,739 for the total cost of the mortgage. A 4.25% rate (just 0.25% higher) bumps the total cost to $354,197, for a difference of more than $10,000.
17. Don’t open new lines of credit.
Your credit score plays an important factor in securing a loan. It’s a red flag to lenders if you open a new line of credit, even if they’ve already committed to the loan and you’re a day away from signing.
18. Get pre-approved.
Before visiting your first home, ask your chosen lender for a pre-approval letter. This will let you know how much the lender is willing to lend you (but remember, you do not have to buy at the top of that limit) and will let potential sellers know how serious you are when you make an offer.
What to Look for in a Home
You can easily and cheaply change a lot about a home. If you’re not crazy about the walls, you can paint them. If the carpet is hideous, you might be able to rip it up and restore the original hardwood floors for under $1,000. (We did ours for just $700.)
However, there are certain things that can’t be changed or are much more expensive to resolve.
19. Check these things when touring a home.
Roof and windows: When was the roof last done? How about the windows? Are they good windows that will keep utility costs down?
Foundation: Are there foundation issues with the home that could necessitate expensive repairs?
Appliances: How soon will appliances need to be replaced?
20. Another thing to consider: location, location, location.
You will likely be living in the area for at least five or 10 years, if not the rest of your life. Make sure you are satisfied with the neighborhood, including access to work, groceries, restaurants and hospitals; the level of traffic; the crime rate; and the typical noise.
Visit the neighborhood at different times of the day and different days of the week, and pay attention to how many cars drive through, if there are loud dogs barking, etc.
It’s also a good idea to drive to and from your work during rush hour to see how unbearable the commute is.
21. Consider your wants and needs.
As you start shopping for a house, you should consider your wants and needs — and how they might change in just a few years. Some important things to think about include:
- Is the house close to your job? Do you plan to work in the same area in a few years, or are you hoping to work somewhere else?
- Are you planning to start a family? Will this house be big enough? Are there good schools in the area?
- Do you plan to rescue dogs? Is the yard big enough? Is it fenced in?
- Do you really want a pool? Can you afford the upkeep and higher insurance?
Getting an Inspection
You should always get a home inspection before buying a home. In some states, home inspections happen before you make the offer. In other states, they happen after offer acceptance, but the contract is contingent upon the inspection. If you’re not happy with the findings, you can still back out of the sale.
22. Don’t cut costs on inspections.
Your cousin may be a plumber, but that doesn’t mean she is qualified to do an actual home inspection. Hire someone who regularly does inspections and make sure they are thorough.
You can check resources like Angie’s List, HomeAdvisor and Yelp — and ask about their certifications.
23. Accompany the home inspector.
You are allowed to be at the inspection. You can direct the home inspector to focus on an area that has you worried, and you can ask questions as you go. Ask about signs of potential water damage, the age of appliances like the furnace and A/C and any other areas that might catch your attention.
A truly good inspector, however, should be thorough enough to answer any questions you have before you even ask.
24. Check the uncommon things.
Not every inspector tests for mold, radon, lead and pests. Ask before hiring, and only pay for an inspector who will check for these crucial red flags. Note: This will likely make your home inspection more expensive.
Making an Offer
If you found a reliable buyer’s agent, they will help you with the negotiating. However, what you offer for a house is ultimately up to you.
25. Negotiate like a pro.
Consider some of the following when making an offer on the house:
- If the house has been on the market for a while or you think the seller is asking too much, offer less than what you are ultimately willing to pay. Beware: you risk losing the house if you lowball the seller and they do not negotiate.
- Specify what repairs you want to be made in your offer, and see if the seller bites.
- If you want to upgrade something expensive, like the kitchen cabinetry or the windows, ask the seller to fund it, and you can offer to pay that much more on the house. That way, your expenses to update the house aren’t out of pocket but are worked into your mortgage.
- Everything is negotiable, even closing costs.
As a first-time home buyer, the entire process of buying a home can be intimidating. You’ll likely lose some sleep (and maybe some hairs if you pull too tightly), and at some point you’ll probably reconsider the whole idea and Google “how to live off the grid in a tent.”
But if you persist, ask good questions and rely on family and friends for support, you’ll get through it. And soon enough, you’ll have a place to call your own.
Timothy Moore is a writer and editor based in Germantown, Ohio. He, his partner, and their two dogs love their home together, but they are less enthusiastic when you ask them about their mortgage.
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