Buying Your First Home: What to Do and When to Do It
Buying your first home is a beautiful thing. Actually, scratch that. Moving in to your first home is the beautiful part. Most of the stuff that comes before that is demanding, difficult, and often downright stressful. After all, for most people, that home purchase is the most money they’ll ever spend in one shot and the biggest loan they’ll ever ask for. But before you run screaming for the closest rental property, there is some good news — much of the stress associated with home buying can be mitigated through preparation and organization. (See also: 9 Costly Things New Homeowners Don't Prepare For)
Is a new home on your horizon? Here’s what you should be doing before, during, and after the big purchase.
As Soon as You Start Thinking About Homeownership...
The desire to own a home often starts with the idea that you’d like a yard, a better neighborhood, or just to move out of a rental you can’t learn to love. That’s all daydreaming though. What you really need to start thinking about is money. So whether you think you want to move this year, next year, or at some unspecified time down the road, now’s the time to start thinking about the following.
1. Your Credit
It’s possible to get a mortgage with poor credit and sometimes even with rather awful credit, but it isn’t a good idea. Those who go this route will pay considerably more in interest, which can increase the final cost of your home by tens — or even hundreds — of thousands of dollars over the life of the loan. Plus, the worse your credit, the fewer options you’ll have in terms of lenders, which will reduce your ability to shop around and negotiate the best deal. If you want to be a homeowner soon – or even someday - start working on good financial habits that’ll improve your credit score now.
2. Your Down Payment
It’s also possible to get into a new home with little or no down payment, but just like buying a home with a poor credit score, this one isn’t a good idea either. In fact, the more you save, the more you’ll...well, save.
FHA loans require only 3% down — sometimes less, but most experts recommend 10 to 20% of the purchase price of the home (or more!). If you buy a $300,000 house with no down payment, you’ll pay more than $213,000 in interest on a 30-year loan (assuming a 4% interest rate). Put 10% down ($30,000), and you’ll cut that by more than $20,000. By paying upfront you’ll pay a lot less, so make saving for a down payment a priority.
3. Decide If You’re Ready
Most experts say that you shouldn’t buy a home unless you think you can hang on to it for at least five years. Having a longer time frame in mind can help reduce the risk that you’ll sell at a loss when you do decide to move and will allow you to build some equity before having to spend on closing costs and other fees again. If you want to buy a house, think about where you want to live and work before you start looking. That way when you do buy, you’ll be more likely to be able to stay put and reap the benefits of your purchase.
Up to Three Months Before You Start Shopping...
Before you start shopping for a house, you should do a few key things.
1. Shop Around
There is no shortage of mortgage lenders offering a range of rates, features, and services. So shop around to ensure you get the best possible mortgage at the best rate.
2. Get Prequalified
Many people start shopping for a home based on what they want. In reality, you need to focus on what you can afford. The last thing you need is to start looking at listings for homes out of your price range. Start by getting a pre-approval. That way, you can start browsing homes that could actually become yours.
3. Narrow Down Neighborhoods
Where you live has a huge impact on how you live, so think about what you want out of the neighborhood you live in. Maybe it’s proximity to work, certain amenities, or a great walking path. Whatever it is, find the neighborhoods that fit your criteria and throw out the rest.
4. Think About the Home Itself
Another thing that can save time and frustration when it comes time to view homes for sale is to decide on what features are important to you. Want a garden in the backyard? A south-facing yard may be important. Do you plan on holding big family dinners? In that case, the kitchen and dining room may be key factors in your decision. Whatever those deal breakers are for you, decide what they are before you start house hunting. That way, you’ll be able to rule out the houses that aren’t a good fit and focus on the ones that have real potential.
Up to One Month Before...
Start getting ready with these action items.
1. Seek Out Professionals
If you plan on using a real estate agent (and I know that people have very strong feelings on this one way or the other!) start seeking referrals among your friends and coworkers to find someone you’re comfortable working with. The same goes for other professionals you may use, such as a lawyer and even an inspection company.
2. Mobilize Your Money
When you buy a home, you need to be able to mobilize money fairly quickly when it comes time to make an offer. Besides your down payment, you will need a deposit (generally a few thousand dollars) and money for closing costs (about 2-3% of the cost of the home), as well as money for an inspection. Plan for these expenses before you start shopping and move them to an account where they’ll be accessible fairly quickly.
While You’re Shopping...
Looking at houses can be stressful. Keep calm, and follow this advice.
1. Ask Questions
Not sure if that crack in the ceiling is bad news or not? Wondering how possession works? Curious about the neighborhood? Ask, ask, ask. A house is a big purchase, so if you have questions, find someone who can answer them. That might be a realtor, an inspector a lawyer, or even a friend or family member. Whoever you ask, take the time to get answers that satisfy you. The last thing you want is to find out the answer isn’t what you’d hoped when it’s already too late.
2. Take Notes
When you’re viewing a lot of properties, it can be easy to get them mixed up. As you’re viewing, take notes about the homes you see. You can also use this to list out what you like and don’t like, and to write down any concerns or questions you want to address.
3. Consider Going Back
If you think you’ve found the winning home, consider going back for a second look to make sure before making an offer. It can’t hurt to be really sure this is the house you want to spend your money on.
4. Get an Inspection
Inspections cost money, but a good inspector should be able to uncover all kinds of things that homebuyers can miss. Unknown problems in a home can lead buyers to pay too much for it based on its condition or, in a worst-case scenario, to buy a lemon that’s more trouble than it’s worth. If you put an offer on a house, make an inspection a condition of purchase.
5. Be Reasonable
When you make an offer, there’s nothing wrong with trying to get a better deal (and you should!). Just don’t get carried away. Why? Because there is a seller in this agreement too. The idea is to get a fair price on a home you like. Unless there’s something seriously wrong with the seller’s judgment, that’s all he or she’s going to accept. If you try to run them to rock bottom, you might end up with no deal at all.
After the Deal Closes...
Congratulations! But your financial journey isn't over yet. Here are some things to keep in mind.
1. Set a Budget
A home’s expenses don’t start and end with the purchase price. Once you’re responsible for a home, anything can happen; the roof can leak, the furnace can break, or a baseball could fly through the picture window. Those things cost money. Once you buy your house, make a budget that’ll allow you to make your mortgage payments and save for contingencies.
2. Pay Down That Mortgage
Making extra payments on your mortgage is the best way to reduce how much you end up paying for your home. If you get a raise, a bonus, or a big, fat tax return, consider funneling it into your loan. The faster you pay it off the more you’ll save, and the sooner you can start enjoying the freedom of being debt-free.
3. Forget About the Market
Once you move in, enjoy your home whether the market goes up, down, or sideways. A house can be an investment, but as long as you plan on living in it, what the market does really doesn’t matter.
Buying a house isn’t easy, but it doesn’t have to be hard either. Stop the stress by getting informed and being prepared and organized. Once you turn the key in your new home, the rest will be smooth sailing.