Buying your first home is super exciting, but can also be overwhelming – especially when homes are being purchased at a median of $275,000 and they are flying off the market like hot cakes in just a few weeks.
With home sales trends like those, you could be tempted to make an impulse buy that could setback your financial goals and have you paying for a home well into your retirement years.
Nobody wants that, trust me when I say that it is worth doing it right the first time. That means buying a house that you will love and doesn’t impede your financial goals for the future.
But where should you start? Great question! Here are nine tips for first-time homebuyers as they enter the home purchase process. If you put these tips to work for you, they can help your first home purchase be a blessing instead of a burden.
1) Pay off your debt and start an emergency fund.
2) Save for down payment and closing costs.
3) Find an expert agent.
4) Determine what price range home you can afford.
5) Get preapproved for a mortgage.
6) Find homes in your price range.
7) Research neighborhoods for a good fit.
8) Make a competitive offer.
9) Closing preparation.
1. Pay off your debt and start an emergency fund.
Owning a home can be more expensive than renting, especially considering that you will be responsible for all the maintenance and upkeep costs of the home as the homeowner. Those can add up quickly, so make sure you have an emergency fund of at least 3 months worth of expenses in savings before jumping into your first home purchase.
2. Save for a down payment and closing costs.
If saving up to pay cash for your first home buyer isn’t a reasonable option in your circumstances, you should at least save for a down payment of 20% or so. Then you will not have to purchase PMI or private mortgage insurance, a policy that protects the mortgage company in case you end up in foreclosure. PMI policies can cost up to 1% of the loan value and it is calculated into your monthly mortgage payment.
Avoid Adjustable-Rate Mortgages or (ARMs). The initial low-interest-rate may seem appealing, but these loans are designed to transfer the risk of rising interest rates on to you. With FHA loans you can get away with down payments as low as 3.5%, but the mortgage insurance required will be thousands of dollars that will not go towards paying off your loan. Be careful with VA loans and no down payment as they can leave buying owing more than the market value during a market shift, they also usually have higher interest rates than a conventional mortgage. We recommend a 15 year fixed rate with 20% down and here is why.
The 15-year mortgage term causes a higher monthly payment, but the loan will be paid off in half the time and have a lower interest rate which will save you thousands of dollars. The fixed-rate protects you from interest rate increases. A 30-year mortgage term will carry a lower monthly payment, but you will also be making that payment for 15 additional years so you will pay more on a 30 year fixed than a 15 year fixed.
You will also need to save up for closing costs. Closing costs can average from 3-4% of the price of a home. Your lender will give you a specific amount to bring to the closing table. But some of the other fees that you will need to pay for during the home buying process will also include your home appraisal, your home inspection, your credit report, attorney fees, homeowners insurance, etc.
3. Find an expert agent.
An expert real estate agent is an agent that sells more than 35 homes a year. They are well versed in the real estate trends in your specific area and can help guide first-time homebuyers through the process without making any of the common mistakes one could make.
4. Determine what price range home you can afford.
You don’t want to get attached to a beautiful home that you can’t afford, so make sure you set a budget and it includes any HOA fees, taxes, and insurance needed for that neighborhood. This total should be no more than 25% of your monthly income.
5. Get preapproved for a mortgage
Once you have your emergency fund, your down payment and closing costs, you are ready to find a mortgage partner for the 80% home loan. Your expert realtor may be able to assist you in finding the best mortgage loan officers in your area with the best rates.
The mortgage loan officer will pre-qualify you for a home mortgage loan and give you a preapproval letter to being your home search. These letters show sellers that you are serious about buying and are a great help in competitive markets. Your lender will verify your personal information, income, taxes, etc and submit your loan to underwriting.
6. Find homes in your price range.
Your expert realtor should have a website that you can get set up with MLS searches that will alert you when a home that fits your preferences becomes available. The agent will provide you with valuable market expertise and can also have knowledge of homes coming into the market that you can get an early jump on.
7. Research neighborhoods for a good fit.
Most homebuyers are willing to compromise on the condition of a home over the quality of the neighborhood it is located. Distance from schools is also a big factor for a lot of first time home buyers looking for neighborhoods that fit their family.
Your real estate agent can also provide you with local facts like the quality ratings of the schools for the specific prospective neighborhood as well as crime rates for the area. If your work commute times are manageable, the noise levels and traffic conditions favorable then it may be a neighborhood where you can feel good about.
8. Make a competitive offer.
Do you’ve found the home you want to purchase, you can afford it, you’re approved for the loan and ready to make an offer. This is where an expert agent is worth their weight in gold for a first time homebuyer, their expertise can help you make a competitive offer that you can afford and not just an impulse buy.
9. Closing preparations
When the seller accepts your offer, the process of closing begins. Knowing what to expect can help things run smoother. Preparation is key, and this is why you are here. Thankfully you hired an expert real estate agent to help with this process and will keep you informed of any obstacles. Your agent will send you a lot of documents to read and sign, please read them all and ask the agent to explain anything you don’t understand before you sign.
Are you ready to get started in the home buying process? Got your savings in place? Good luck and happy house hunting!