Buying your first home.
It’s an awesome feeling thinking that you will soon own a place that will be your castle. You’ll have a spot to call your own where you’ll build lifelong memories.
But buying a home is not without worries.
A lot goes into buying a house — mentally, physically, and of course financially. You want to make sure you are prepared.
Here are six tips to help you as you look for your first home.
Truly Understand What You Can Afford
Banks and realtors will fill your head with lofty dollar amounts you can get away with spending for your home. These numbers will be roughly based on your finances. Know this – that limit they give you may not be truly what you can afford!
Your bank wants the biggest mortgage they can get so they can earn interest off of you. Your realtor wants you to get the most expensive house so he can earn a bigger commission.
Take a real look at where you are with your finances and be honest with yourselves in what you can truly afford. Remember, besides your mortgage, taxes, and home insurance there will be other expenses that pop up. Make sure you can handle them.
Another item to understand is PMI — Private Mortgage Insurance. This is often required by a mortgage lender when your down payment is less than 20% of the price of the home. This is insurance for the lender in case you can’t make your mortgage payments. Basically the lender gets concerned when you don’t have enough of your money, in this case 20% of the loan, in play. This results in an extra payment you have to make on top of your mortgage. You can usually stop your PMI once the principal amount of your loan is down to 80%. I say usually because some lenders require you to have this insurance for a set amount of time so even if you get to that 80% pretty quick you may still have to continue paying it for a bit.
I think you’re far better off having that 20% down in the first place. This way you don’t have to concern yourself with PMI and you make your financial picture look a little better to lenders since you have more money down for the loan.
Know What You Need and Want in a House
Workout a checklist of Needs and Wants for the house you’re looking for. What do you need to be comfortable and what is gravy? Do you need a basement? A big yard? All new renovations or a fixer-upper? Gas or oil? A den? A minimum number of bedrooms? You see where this can go.
This might take some time and your checklist might change as you see houses on the market. That’s OK.
Buying a home is a series of trade-offs. You might get a fixer-upper so you can be in a better school district. Or you might aim for a smaller home that’s been renovated rather than a bigger home that needs work.
Just consider this as you make your list — if there’s something you’re not sure about or dislike about a house how will you feel about it in five or ten years? You want to love your home, not resent it.
Love and Protect Your Credit Score
I hope you are checking your credit scores before you started looking for homes, right? Make sure those scores are in the excellent range (generally that’s a FICO score above 720).
Your credit score will be a big factor in the mortgage rate you get. The better your score the lower your risk for the bank. This means you’ll qualify for better rates. Getting the lowest mortgage interest rate possible can potentially save you tens of thousands over the life of a 30 year mortgage.
If your scores aren’t as great as you’d like then get to work fixing them. If your score is straight-up bad then you have to figure out why. It’s possible you have incorrect information on your credit report or even worse — fraud. It’s also possible your financial habits are to blame making the decision to buy a home now unwise.
Once you know you have that great score you better protect it. The mortgage lender will be keeping tabs on your score. The rate you were told you’d get when you started the home-buying process may be higher if you aren’t careful. That means no big purchases or additional loans before you close on the house.
“Who would do that,” you ask? It happens. Imagine you’re moving out to the ‘burbs and you’ll need a second car. All the paperwork looks like it’s in place and you’re closing in a week. Everything seems good to go, right? So you start to look for a new car. But if you get that car you just might have a new loan (or debt) as well. Well guess what, you now have another loan on your credit report and another payment you have to make. This makes you look a little more risky to the bank now. Next thing you know your mortgage rate will be higher and with that your monthly mortgage payment will be higher too.
And remember this means no new credit cards as well! When you send in a credit card application the card company will pull your credit. This will show up on your credit report and could affect your credit score.
If you know better than to do something like this then great. But a lot of people make the mistake of making a big purchase or they get new credit before they close on their house. Don’t make that mistake. Love and protect that credit score, your future self will thank you.
Inspect, Inspect, Inspect
Of course you will want a full house inspection from a qualified engineer. If you can, get a home inspector that is not connected to your realtor. You want someone who will be objective and doesn’t have any incentive to provide a good inspection (not that an inspector suggested by your realtor is always bad). You need to know all the dirt about the house.
But just getting it inspected isn’t enough. You need to be there with the inspector and understand everything he’s writing in his report. Make sure you ask questions and understand what he’s telling you. (For example: How old is the roof; what’s the condition of the boiler; how is the foundation?)
You need to be confident in what you know about the house and what expenses you can expect in the years to come. You’ll also want to know the critical items that need fixing and the estimated costs to fix them. Take this list to your lawyer for negotiations.
And while you’re going through the house inspection make sure to take pictures. You want to make sure everything is in the same condition when you do a final walk-through before closing.
One more thing — don’t be afraid to bring in someone for insects and another for mold, especially if the house inspector mentions any potential problems in those areas. Knowing all potential problem areas now can save you a lot of trouble and heartache later on once you own the home.
Put Together a Great Team
Do your research and find the best realtor, loan representative, and real estate lawyer you can. A good real estate lawyer will make sure you have a contract with terms that protect you and work for you. A good loan rep. will keep you aware of all the paperwork you’ll need to have (lots of income documents). And of course your realtor will help you find that perfect home and negotiate its price.
These guys are your team and are going to go to bat for you. At least that’s what you should expect. When these folks are doing their job things will go more smoothly for you and they will make sure to keep you in the loop. They’ll also communicate with each other. But don’t depend on them to tell you everything. Your team will start and end with you. Make sure you keep on top of them asking if there’s anything you need to do. You want to make sure that all steps and forms are getting taken care of and that each member is talking with the others.
Know the Neighborhood and Its Taxes
What do you know about the neighborhood you’re looking to move to? I mean really know?
If you have kids, or expect to have kids, you need to know how the school district is. How does it rate and compare to other towns nearby? What’s the graduation rate? What are the test scores like? How does the school district affect your taxes?
Where I live a good part of the local taxes I pay go to the school system. It’s fine with me since we have four kids and the school system is excellent but for someone who doesn’t have kids they would be paying high taxes to subsidize my kids’ education. Areas with good school districts also tend to be more desirable. This would affect the price of your house as well.
While you’re checking the schools make sure you look into things like: Is there kindergarten? Pre-school? How long are the school days? Is there bus service? What is the school zone?
In our town the school zone does not have the same borders as the town. So you could live in certain areas of my town and belong to a school district that isn’t as good. Or live in another town and be part of my school’s district. You need to make sure you understand little quirks like these if you have school-aged children.
While we’re talking quirks, take a look into the town’s local laws and see if there’s anything you need to know about. How’s the garbage pickup? Does the town do a good job when it snows? Are there any rules regarding the house you need to know? Towns have all sorts of laws you will be stuck with once you move in.
Buying your first home is an exciting time in your life. This can potentially be the place you spend the rest of your days, growing your family and planting roots in your community. Take the time to do your homework and don’t let the excitement of a new home get the best of you. I hope these tips can help you as you look for your first home.
Additional Financial Resources