Picture it… Central Pennsylvania, 2021. Homes are flying off the market in days with offers well-over asking price. But…You’ve decided you are ready to start exploring the option of homeownership. Scary right? It doesn’t have to be.
I say, Congratulations!! Buying your first house is exciting. I know this thought might overwhelm you, but I’ve been in your shoes. I bought my first house at age 21 and right out of college with little money to put down.
Having a better understanding of the process may ease some of those initial fears. I’ve gathered some personal tips, as well as tips from other industry experts, to help guide you along your journey of homeownership.
Tips for First-Time Homebuyers
1. Start saving early
This is a big one because there are a lot of costs involved in buying a home.
Here are the main costs to consider when saving for a home:
- Down payment: As a general rule of thumb, the bigger the down payment, the better. This will reduce your monthly payments as well as the overall interest you will pay (and could save you Private Mortgage Insurance (PMI)). However, the required down payment will vary depending on the type of mortgage you choose and the lender. A good starting point is 20% of the purchase price of the home.
- Closing costs: These are the fees and expenses you pay to finalize your mortgage, and they typically range from 2% to 5% of the loan amount. These are part of every mortgage, but you can save some money by negotiating seller’s assistance to pay some of those fees.
- Moving expenses: Even if you don’t hire movers, you will still need to purchase boxes, fix things in the home/apartment you’re moving out of, rent a moving truck, etc. The costs can add up quickly.
- Move-in expenses: One expense that’s usually forgotten about is moving expenses. You’ll need some cash after the home purchase for things like immediate home repairs and furnishings.
So how much do you need?
Ideally a down payment on a mortgage should be 20% (or more) of the home’s price to avoid added fees, but if you don’t have that much of a down payment, don’t worry. A mortgage down payment can be as low as 10%, 5%, or even 0% for certain types of mortgages (e.g., VA loans or a USDA loan).
How much debt you have is a major factor in determining if you qualify for a mortgage because a high debt to income ratio could indicate that you do not have enough money to pay all of your debts, including your mortgage. These debts can include credit cards, auto loans, student loans, and any personal loans you have – essentially anything you owe. To find your debt to income ratio, add up the minimum payment for each of your debts (NOT other expenses like groceries, gas and utilities), then divide the total by your gross monthly income.
It’s always a good idea to pay down debt. By paying down your debt, you’ll decrease your debt to income ratio and have more money available each month.
2. Work With A REALTOR®
Working with a REALTOR® will be a key to finding the perfect property. Agents and REALTORS® are local professionals who are experts in the home buying process and your local market.
A real estate agent can help by:
- Showing you houes in your area that fit your needs and budget
- Attending showings with you to learn more about your priorities as a homeowner
- Helping you decide how much to offer for a property
- Submitting an offer letter on your behalf
- Helping you negotiate with the seller or the seller’s agent after you submit an offer
- Attending the closing with you to make sure everything goes smoothly
When shopping for REALTORS®, choose carefully. A good real estate agent will scour the market for homes that meet your needs and walk with you through the negotiation and closing process.
To find a good agent, get referrals from other recent home buyers. Interview a few agents and request references. You’ll want to ask about their experience helping first-time homebuyers in your market and how they plan to help you find a home.
Note that only a buyer’s agent will work on your behalf. The seller’s agent will have the seller’s best interest in mind, not yours. So always choose your own qualified REALTOR® or real estate agent to help you buy a home.
3. Get a preapproval letter
A mortgage preapproval letter is a letter from a lender saying that they have offered to loan you a certain amount of money to purchase your home. Having a preapproval letter shows the sellers and real estate agents that you’re a serious buyer. This can give you an edge over home shoppers who haven’t obtained a preapproval letter.
The time to apply for preapproval is when you’re ready to start home shopping. A lender will pull your credit report and review documents to verify your income, assets, and debt. You can apply for a preapproval from multiple lenders to shop rates as well. Complete this process within 30 days to avoid having this affect your credit report.
Important to remember is that preapproval is different from prequalification.
Prequalification is a much simpler process that will give you a ballpark figure of what the lender thinks you can afford to borrow, but there is no guarantee that they will actually lend you the money.
Getting preapproved is a more complex process that involves you providing them tons of paperwork, but it’s worth the trouble because it guarantees you will get the mortgage.
4. Figure Out How Much House You Can Afford
You might be thinking, but I just got preapproved – I know how much house I can afford!
But that preapproval doesn’t necessarily mean you’ll be able to afford a mortgage that size.
The approved amount is for the home only and does not include other fees that are part of your monthly payment like interest, private mortgage insurance (PMI), and escrow.
Interest is what the lender charges you for borrowing money. There are several factors that determine the interest rate on your mortgage. These include your credit score, the type of loan you get, your lender, and your loan term.
If you don’t put at least 20% down on the home, you’ll need to pay PMI. This helps protect the lender in case you default on your loan. This is non-negotiable and can fall between $55 and $125 per $100,000 borrowed per month. Once pay the mortgage down to that 20% mark, you can call your mortgage company to get it removed.
Many lenders require you to have an escrow account to hold money to pay your property taxes and homeowners insurance. They collect this money each month as part of your monthly mortgage payment.
As a general rule of thumb, you should be spending no more than 25% of your monthly income on your TOTAL mortgage payment (including principal, interest, PMI, and escrow). This will give you enough room in your monthly budget for your other living expenses.
5. Research first-time home buyer assistance programs
If you’re strapped for cash or have a lower credit score, you might assume you have no financing options and delay your home search.
But there are options!
Many states, cities, and counties offer first-time home buyer programs that can include low-interest-rate mortgages, down payment assistance, closing cost assistance, and even tax credits.
FHA loans require 3.5% down payment with a minimum 580 credit score. FHA loans can can be a good option for people who don’t have great credit or a bunch of money saved. The downside is that you will pay mandatory mortgage insurance, both annually and upfront at closing.
VA loans are backed by the VA for eligible active-duty and veteran military service members and their spouses. These loans do not require a down payment, but you may be required to pay a funding fee. VA loans are offered through private lenders and there is a cap on lender fees.
USDA loans help moderate-to- low-income borrowers buy homes in rural areas. The home must be in a USDA-eligible area and you must meet certain income limits to qualify. Some USDA loans do not require a downpayment at all borrowers with lower incomes.
6. List Your Needs, Your Non-Negotiables And Nice-To-Haves
You have no-doubt already thought about why you’re purchasing your home and what type of house you want.
Once you’ve decided on the type of home that’s right for you, you should begin to prioritize which features you want in your home based on your needs.
For example, if you have kids, you may need a certain number of bedrooms and/or bathrooms. If you have animals, maybe a large, fenced back yard is a priority. Do you want a garage? Private driveway? Certain sized kitchen?
Sit down and create a list of qualities you absolutely need. Then create another list of things that would be great to have but would not be deal-breakers. Also, create a list of things you absolutely do NOT want. This will help you shop for homes more efficiently and compare properties with less stress.
7. Research Neighborhoods for Best Fit
Be careful not to buy a home based on the property and price alone.
You know what they say – the 3 most important things in real estate are Location, Location, Location!
Some location-specific things to consider include crime rates, school quality, commute times, traffic, and noise.
Your real estate agent can get you information on crime rates and the quality of schools around your prospective neighborhoods. Calculate your new commute times to see if they are reasonable for you. Visit the neighborhoods at different times and days to check for traffic conditions and noise levels and to see if people are comfortable being outdoors.
Only choose a location/neighborhood that you and your family feel good about. If you compromise here you will likely regret the decision.
8. Go shop for a home!
Now for the fun part!
Now that you know your budget and the type of home you need, you can start looking for your new home.
Talk with your real estate agent about the type of home you want, need, and can afford. Give them your maximum budget, provide your list of must-haves and deal breakers, and let them get to work.
While your agent is doing his or her search, you can look through online listings within your price range, using filters to narrow your search even more.
You can filter for number of bedrooms, number of bathrooms, zip codes, home types, etc. Don’t limit yourself too much, though. You may assume a specific type of home will be out of your price range, but you may be surprised at what you can find at the right price.
Send your real estate agent links to any listings that you love. This will give him or her a better idea of what you’re looking for. Have your agent set up a time to walk you through the homes you found online. Always visit the home in person before making an offer.
Walk through each room and see if the home is a good fit, ask questions, and get more information. Research red flags to look for and bring your list of deal breakers, so you can do an in-depth review of the home while you’re there.
9. Think Long Term and Be Patient
When it comes to buying a home, it’s smart to find the most affordable house in the best neighborhood. If you buy at the bottom of the price range in a good neighborhood, you’ll have more room to build home value. Future buyers who are shopping in a $200,000 neighborhood won’t be looking for a $300,000 home.
In order to accomplish this, make sure you pay attention to home values in different areas. Are home prices going up or down? Are new businesses popping up or are they closing?
You can tell a lot about how valuable a neighborhood is by what’s happening in the community. It may take a little longer to find a home that will be a good investment in the long run, but it is definitely worth it.
10. Read Disclosures Carefully And Ask For Clarification
Real estate disclosures will show you any problems with the home that can have a negative impact on its value or how you’ll experience living in it. Real estate disclosures will help you make an informed decision on whether or not to buy it. Disclosures also protect the seller from liability for any issue the buyer runs into after purchasing the home. That’s why it’s important for the seller to include any and all issues in the disclosure.
Legally, there are several things a seller has to include in the disclosure and some things they do not. Legal requirements vary by state. A few common things you may find in a disclosure include:
- Paranormal activity
- Lead paint
- Basement leaks
- Work that has been done without a permit
- Boundary line disputes
- Renovations and upgrades
- Asbestos
- Radon
Read disclosures carefully and ask for more information on anything you’re concerned about. Watch out for subjective language that can be hard to dispute in court. For example, if the disclosure says there’s a “small leak” in the basement, it’s a leak. And when that “small” leak causes big puddles, the seller could argue that the size of the leak is subjective and that they believed it was small.
In the end, you need to decide what you’re willing to live with and what you’re not. If you’re OK living in a haunted house, great! But, if there is a foundation issue in the disclosure, that’s a different story. Here are some things to think twice about if you find them listed in a disclosure:
- Any foundation issues or indications of foundation issues (leaks, cracks, bowed walls)
- Flood damage
- Liens on the property
- Work done without permits
- Environmental hazards
Moral of the story? FULLY read the disclosures and make solid decision about what you’re willing to deal with.
11. Make An Offer
When the real estate market is hot, it can be super tempting to make an impulse purchase. But this is probably the biggest purchase you’ll ever make, so do not be impulsive!
I know, I know. When you find your dream home, it’s so easy to want to offer anything to get it. But you don’t want to make the mistake of offering too much, especially when you can’t afford it. Make a competitive offer, yet, but also make it’s in your price range and makes for you and your family. Your real estate agent can help with that. Once you make an offer, the seller has three options:
- Accept the offer and continue on with the sale of the home.
- Reject the offer.
- Propose a counteroffer.
If the seller makes a counteroffer, you can work with your real estate agent to negotiate a fair price with the seller. If you’re unable to reach an agreement with the seller, you may have to walk away from the home.
Once the seller accepts your offer, you’ll make an earnest money deposit. This is a deposit that shows the seller you’re serious. It is typically 1 – 3% of the purchase price of the home. If you end up purchasing the home, the money is applied to your down payment or closing costs. If you back out of the deal for an acceptable reason, like a failed home inspection or low appraisal, you’ll get that money back. But, if you back out of the deal for something “unacceptable” like a change of heart, you will lose the money.
12. Get A Home Appraisal And Attend The Inspection
If you’re getting a mortgage, you’ll be required to get an appraisal on the home. The lender cannot lend more than the appraised value of the home. This will also keep you from paying more on the home than it’s worth. If the appraisal comes back lower than your offer, you have a few options:
- You can renegotiate the price with the seller. They will likely have a hard time selling the home above the appraised value to anyone else anyway.
- You can pay the difference with a larger down payment and borrow less money.
- You can request another appraisal, which you or the seller will need to pay for.
- You can walk away from the deal and start looking for another house.
While it may not be required, you’ll also want to get an inspection on the home. This is something you’ll have to pay for, but it’ll benefit you greatly to have one done.
An inspection will help uncover any issues with the home that the seller may have tried to cover up or maybe didn’t even know about. You’ll get a better idea of the internal operations of the home and get into areas of the home you won’t generally get to see during an open house. The inspector should test the electrical work and plumbing and examine important parts of the home, including the roof, basement, attic, and foundation.
You will want to walk through the home with the inspector so they can point out and explain any issues they see. This is your opportunity to have some of these things explained to you and become aware of any problems or potential issues that could arise in the future. If you have concerns about anything you read on the disclosure, make sure the inspector pays attention to those things.
If the inspector does list any red flags or repairs that are needed on the home, you can take these to the seller to have them fixed before the sale. Or, you could use these findings to negotiate a lower sale price. If the home fails the inspection, you may want to consider backing out of the deal unless the seller is willing to fix the problems.
13. Get The Right Homeowner’s Insurance
Before getting to the closing table, you’ll be required to get homeowner’s insurance. Just like a mortgage, you’ll want to shop around for your homeowner’s insurance to get the best rate.
Make sure you fully understand what is covered and how much your deductible will be if you need to file a claim. Cheaper insurance usually means less coverage and higher deductibles. Most people do not take these things into consideration and then have trouble coming up with the deductible when they need to use it.
Also, think about where you live in terms of what you need covered. If you live in a floodplain, you will need flood insurance. If you live in an area prone to storms and hurricanes, you may want to consider windstorm insurance to cover hurricane damage.
Buying a home for the first time can be scary and overwhelming. But it doesn’t have to be. With the right planning and the right real estate agent by your side, you can buy your dream home with zero stress.