So, you’re finally ready to take the next step in your adult life and make what will probably be the biggest purchase of your life - a home.
It’s certainly an exciting time. All those saved Zillow and Trulia searches in your browser history. Figuring out what furniture to buy for the living room. Deciding where you’re going to put all those pictures of your dog. Becoming a first-time homebuyer is an experience that I wish upon everyone.
But on the flipside, spending that much money on one thing can be nerve-racking. And if you don’t know what you're doing, you can end up in a bad financial situation for years to come.
After having gone through the home buying process 3 times (with more to come), I've learned quite a bit and want things to go smoothly for you now that it’s your turn. Here are some important things you need to know when buying your first home.
Budget Before You Buy
We all love searching those million dollar homes on the lake, but not all of us have million dollar home on the lake money (including me).
As a first-time homebuyer, it is important for you to understand your limits (and stick to them). Setting upper and lower price points for yourself before you start your search will make it easy to eliminate places you shouldn’t even bother looking at.
Have a look at some tips we provide on creating a budget that works for you.
Location! Location! Location!
Location plays a huge role in the upside of your home and should be the first thing you consider after setting your budget. A great neighborhood can turn your first home into your forever home, while a less desirable neighborhood might have you thinking about selling the place before unpacking your boxes.
Make sure you're looking into things like safety, quality of the schools, time it takes you to commute to work, restaurants and fun activities to do around the area.
The value of your home is tied closely to its location as well. If you’re looking to build wealth (isn’t that what we are all here for), then you should be paying attention to the market trends of the location in which you buy your property (e.g. how prices have moved over the last year or job growth in the area). Realtor.com is a great place to find what's happening in your desired area.
If you’re doing your due diligence, you can end up making some good money simply just by living life in your home.
Get Pre-approved Before Seeing Properties
In markets where the properties are selling like hotcakes, you're going to want to make sure you are pre-approved for a mortgage before you book a showing.
If you end up falling in love with a place, you won't be able to make a bid unless the seller knows you have been qualified by a lender to make a purchase. And if others have that same lust for a property, you can bet you won't be the only one wanting to throw money at it.
Fortunately, many lenders and mortgage brokers work late and on weekends, so you may be able to get away with being irresponsible. However, I would not recommend taking the chance.
Find a Knowledgeable Real Estate Agent
For a first-time homebuyer, and even an experienced homebuyer, a real estate agent who knows what they are doing can be the difference between a good deal and a deal gone wrong.
You should be able to lean on an agent to learn more about an area and its growth opportunities, negotiate a better price and give you a basic understanding of all the paperwork that comes your way. I even had an agent successfully negotiate for the seller pay all of my closing costs (which you’ll soon see can pile up).
Make sure to ask your agent a ton of questions from the jump. You will be able to quickly get a sense of whether or not they are the right person for you.
Understanding the Costs
And now we get down to business.
We all know that buying a home is expensive, but what exactly are you spending your money on (other than the actual home)? Let’s go through some common pre and post-closing costs you can expect to pay when buying a home:
Pre-close
Post-close (and both Pre-close/Post-close)
Even after you pay off your home completely, you will still be responsible for property taxes and homeowners insurance. And if you are purchasing property within a community, you will most likely pay a monthly homeowners association (or HOA) fee as well, for the upkeep of amenities, for as long as you own the home.
The good thing is, many of the costs shown above can be (and should be) shopped around for or negotiated; most important one being the interest rate since this will have the greatest impact on what you pay over the course of the mortgage.
To receive the best rate possible (and to avoid having your application denied), you’ll want to make sure your credit score is up to par. Check out our tips on raising your credit if you could use a boost before buying your new home.
Have Your Rainy Day Reserves Ready
As we’ve seen in the past, things can take a turn for the worst when we least expect it, which is why reserves are necessary. Reserves are extra funds a lender will require you to have at closing, after you’ve paid your downpayment and other pre-closing costs, in case things go wrong. You can expect to need around 2-3 months worth of living expenses in cash and/or assets easily convertible to cash (like stocks).
Choose a Term Length That Works for You
By far, the most popular term for a mortgage these days is the 30-year fixed loan. But the less popular 15-year mortgage may be a better option for you in the long run. Check out how 30-year and 15-year mortgages stack up against each other below:
Regardless of the term of the mortgage you choose, it’s important to consider your future goals and how it will impact your ability to achieve them.
Research Local Zoning Laws
There’s a good chance that one day you’re going to wake up and say to yourself, “It’s time to make a change to the place.” Maybe it’s that in-ground pool you always wanted or an additional bedroom for the additional family member on the way.
Whatever the changes may be, you’ll need to make sure the local zoning laws allow for it. Zoning laws control how land can be developed and the purposes it may serve. If the law says that in-ground pools are a no-go, then you can forget about that in-ground pool.
Prepare for a Battle
The market is hot these days, which means bidding wars are bound to happen. If you are interested in a place, you better make sure you’re ready for counteroffers (from both the seller and other potential buyers).
Many first-time homebuyers will lose out on a place because they are timid about raising their offer. And if the price becomes a little too steep for you, then it’s probably a good idea to back away.
Try coming in a little under asking price at first. If there isn’t much demand for a property, you may get a counteroffer, but it’ll most likely be less than the original ask. If demand is high, don’t be afraid to be aggressive and raise your offer. Just be aware of your max price before things get out of hand.
A Guide for the First-time Homebuyer: The Wrap-up
Come into the process with a budget. There is no point in wasting your time on properties you either can’t afford or are too cheap that they don’t include the things you want.
Take your time when choosing the location of your new home. It may be the most important factor in how well your investment turns out.
Choose a real estate agent who knows what they are doing. It could be the difference between a good deal and a regrettable one.
Understand all the costs that go into buying a property. There’s a lot more to it than just the cost of the home.
Be sure to have a few months of living costs stashed away after paying your closing costs. The lender will want to make sure you can stay afloat if things get ugly.
Choose the type of loan that will benefit you in the long run. While a 30-year term is the most affordable, it will most likely cost you more over time due to the interest paid.
Look into the local zoning laws. Those additions you want to make may not be allowed.
Prepare yourself for counteroffers. You want to be aggressive on the property you desire, but keep in mind that you have a budget to maintain.
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