Buying your first home is a major commitment psychologically and financially. With everything involved, it’s no wonder people get overwhelmed.
As one of the biggest purchases in your life and the process that comes with it is no easy task.
To make the process a little less stressful, we reached out to 11 experts in buying real estate to get their absolute essential first time home buyer tips that will help you get from browsing realtor.com to living in your dream home – all without missing a step.
Let’s dive in!
Don’t Blow All Your Savings on The Down Payment
I meet with many who’ve run into financial distress, and when I dig I usually find it starts with the house. They saved for a big down payment or got a loan that didn’t require a big down payment and were approved based only on debt to income ratio and credit score. After the purchase, there’s no savings left for furnishings, home repairs, or insurance deductibles when claims are made.
Suddenly, they’re left covering necessary expenses for repairs or deductibles; or, they make the mistake of furnishing the home using credit.
They find can’t afford it anymore.
My advice: In this low interest rate environment making a smaller down payment can be beneficial if the buyer can lock in the low rate and still have cash savings for emergencies and other expenses. It’s important to look for loans allow the buyer(s) to remove PMI when their equity is greater than 20% without refinancing. Some loans don’t allow this and buyers don’t want loans that require refinancing later a higher rate.
Decorate slowly. Don’t buy the most expensive home based on your pre-approval. You don’t have to keep up with everyone else on the block.
Contributed by: Erika Jensen
Founder, Respire Wealth Management LLC
One Step at a Time
One common mistake first-time buyers make is thinking that the first step is to start looking at houses.
Actually, the first step is to start saving money for down-payment and closing costs. Then, once you have a small nest egg, it’s time to get pre-qualified by a reputable lender so you know what you can afford.
It’s okay if you don’t have your own lender, a Realtor will be happy to connect you with a lender they know and trust to perform. THEN, once your pre-qualified, it’s time for the fun part: looking at houses
Speaking of Realtors, make sure you take time to find one who resonates with you. The purchase process can be drawn out, frustrating, and confusing – especially if you, the Buyer, don’t know where things stand throughout the process. So find a Realtor hungry, accessible, and communicative. Put a motivated Buyer with a strong lender, and a communicative Realtor, you’ve got a winning team. And team work makes the dream work!
Contributed by: Nikolas Allen
Realtor, J. Harris & Associates
Take Advantage of Your Living Situation
Saving up for a down payment is one of the biggest challenges for first time home buyers. Here’s a little-known fact: the Fannie Mae HomeReady program only requires 3% down up to 30% of the borrower’s qualifying income can come from roommates or boarders. If you are renting and sharing an apartment with a roommate but want to buy a home, you can keep that roommate situation when you buy a house and use the roommate’s rental payments as qualifying income.
Contributed by: Tony Mariotti
Factor Closing Costs Into Your Budget
First-time homebuyers are often shocked when I explain how much closing costs add up to during our initial consult. On average, closing costs amount to ~3-5% of the purchase price, depending on where you live and the home you’re buying. Be sure to talk to your local Realtor so you’ll know what to expect.
Contributed by: Mariea Murlowski
Realtor, Center Coast Realty
Always Put Quality of Life Over Investment Value
One of the biggest mistakes that first time buyers make is putting too much emphasis on the investment value of owning a home. While a home purchase can offer a great ROI, buyers need to remember that markets are mercurial – they can and often do change at the drop of a hat. For example, today’s low to mid-range single family home market has recently become very attractive for investors. While this may mean lower inventory and slightly higher prices in the short term, it may also mean potential bubbles and instability in the long term.
Now I’m not suggesting that buyers shouldn’t worry about getting a good deal, rather that a home should be thought of as a place to enjoy life first, and as an investment a distant second. For example, a slightly more expensive home in a more walkable neighborhood with a shorter commute will offer better long term value for most people than an amazing deal with a much longer commute. If the latter case, you’re essentially exchanging financial returns you may build over the decades for a lowered quality of life.
Contributed by: Emile L’Eplattenier
Real Estate Marketing Analyst, Fit Small Business
The Importance of Research and Proper Budgeting for First Time Home Buyers
When it comes to buying your first home, there are a number of ways to make sure you’re getting the best bang for your buck.
First, it’s very important that you spend time researching the local region to see if there are any kind of development, construction, or re-zoning projects going on that could have a positive or negative influence on the future worth of the property.
Next, you’ll want to make sure that you’ve created a budget while also getting any financing pre-approved in writing. It’s also important to have at least a 10% deposit ready to use as a down payment if you decide to make an offer.
If you’re in a competitive buying market, there are other ways aside from the sale price that can help you land your dream home. For example, try adjusting the proposed settlement period to appeal to the seller.
Contributed by: Chasen Nick
Digital Marketing Strategist, RAMS Home Loans
Make a List of What’s Important in Your New Home Search
Rank your selections, compare your list to your significant other’s list. Rewrite your list so that really meets everyone’s goals. Home buyers are unlikely to find a home, in their budget, with everything. So having a list that outlines what is really important will help prevent a great house from slipping away because it is missing a low priority feature. Likewise, it might help a buyer stay focused rather than jumping on a poor choice in the heat of an emotionally charged moment.
If you want a big yard, how big?
If schools are important, what grades are you children?
A specific list will assist your Realtor in locating the ideal home. And it will assist a first time home buyer in really getting the most important features in their first home!
The most common mistake a first time home buyer makes is not having a home inspection. The inspection is an opportunity to learn about the property. Buyers should expect to receive a detailed report, with color photography detailing every aspect of the home. With the current seller’s market in Boulder, a buyer is unlikely to get many items addressed by a seller. However, a home inspection can save a client from missing an expensive, major problem. Especially out of sight items such as a broken sewer line, structural issues with the foundation or a furnace with a cracked heat exchanger. A decent inspection costs a few hundred dollars; the investment is well worth the peace of mind for a 1st time home buyer.
Contributed by: Bob Gordon
Realtor, Berkshire Hathaway HomeServices
Read more first time home buyer tips from Bob here.
Consider Your Finances & Build Rapport
First time home buyers often make these two mistakes:
Mistake number 1: Buyers look for a house first and only afterwards consider their finances
Solution: Before you look at any house, get a pre-approval letter from a mortgage institution.
Buyers should not spend time shopping for a house which they have no clue whether they can afford or not. The pre-approval is also buyer’s commitment to the buying process and no seller, nor the agent would want to be involved without a clear understanding of buyer’s finances and intent. Sellers don’t accept bids without the pre-approval letter, so why go through months of home shopping only to get rejected at the very end. Moreover, seeking the pre-approval hours before you are to make a bid can be even more emotionally disheartening.
Mistake number 2: They never build a rapport with the agent.
Solution: Get an agent. Buyer’s agent is on buyer’s side. Listing agent is on the side of the seller.
Vast number of home buyers have no clue about the difference between a buyer’s agent and a listing agent, and misunderstand who is on their side. As a result, they never cultivate a relationship with their agent and view them as folk who are only good to open up homes so they can view it. It is bad enough that they have no pre-approval letter, but bad rapport with those who can help the most can be a total disaster.
A good buyer’s agent will first ask about the pre-approval, and would recommend talking to at least 3 different mortgage institutions. If an agent asks that, it means they know where this process starts and know how to get you to the finish line. A good agent will always know the right people that will get things done and get the buyer to close.
A general advice for all home buyers is to improve their financial literacy. In March of this year, for example, Fannie Mae published a study on financial literacy and the findings are stunning:
– 40% of consumers didn’t know what minimum down payment was required by lenders
– 75% of consumers had no clue about 3% mortgages
– 54% don’t know what is a good credit score
– 59% have no clue what is debt-to-income ratio
One need not go to school for this. Absent huge resources on the web, getting a pre-approval letter is also a great way to improve that financial literacy. A good Loan Officer will explain the meaning of all these lending terms, criteria needed and nice tips on how to improve them. It’s one more reason for first time homebuyers to start with the pre-approval.
Contributed by: Susan Bozinovic
Realtor, Century 21 Town & Country
Be Wary Of House Values & What You Commit To
Buying a house is a huge thing! Buyers should not take it lightly and trust everyone they work with knows what is best for them. No one knows the best decisions except the buyer and they must be proactive and educated. Here are some mistakes I often see as a Realtor and real estate investor.
Assuming Houses Will Always Go Up in Value
Houses historically go up in value, but that does not mean they will go up in value every year and make you rich. Houses may go up in value for two years and then decline, or vice versa. When you buy a home, do not count on it going up in value 10 or 20 percent the first couple of years so you can refinance the home or sell it. Be prepared to stay in the home at least a few years, especially if you are tight on cash. It is expensive to sell a home with real estate commissions and closing costs being up to 10 percent of the sales price. If you have to move quickly, you may be losing money when you buy a home for full retail value.
Be Careful What You Commit To
Some lenders may suggest an adjustable rate mortgage (ARM) or an FHA loan to help buyers qualify for a higher amount. These are not always bad loans, but they have drawbacks. FHA loans have mortgage insurance that is paid every month and cannot be removed from the loan. This can add $100’s a month to your house payment. Most conventional loans have mortgage insurance as well, but it can sometimes be removed in a few years. ARMs have lower payments in the beginning of the loan, but they can increase in the future. I would only suggest an ARM if you can afford the payments when they increase. Do not assume your house value will go up to bail you out.
Contributed by: Mark Ferguson
Realtor & Real Estate Investor, Invest Four More
Consider Having Roommates
Maybe it’s a little bit cheaper to rent than to own, but if you factor in that you’re buying a three-bedroom condo, and you can rent out two of the other rooms, it allows you to own your property for almost free.
However, you need to do a gut-check when you’re getting ready to purchase a home – would you be willing to rent out a couple of bedrooms as a safety net so you’re not burdened by this purchase?
You don’t need to always have roommates, but give it a year or two so you can save money and ease into the homeownership process and lifestyle.
Contributed by: Jason Shepherd
Co-Founder, Atlas Real Estate Group
Pay Attention To The Real Estate Cycle
Obviously if you’re buying a house to live in rather than as an investment, you may not be able to wait years for the best moment to make your move. However, if you have any flexibility it’s important to consider your market’s current phase of the real estate cycle.
The best time to buy is during a recession, when prices and demand are at their lowest and when a relatively high number of properties are vacant. That said, it can be risky to buy off-plan during a recession because developers often freeze new projects during these periods.
The worst time to buy is during the peak of the cycle, when property prices significantly exceed real buying capacity. In the United States, housing prices peaked in early 2006, and collapsed in 2007-2008. Those who bought during the peak in 2006 lost a lot of money in a flash. Underwater mortgages were very common during that period because houses subsequently lost a considerable portion of their value and the balances of mortgage loans often exceeded market value.
Contributed by: Yulia Kozhevnikova
Real Estate Expert & Analyst, Tranio