9 Essential Tips for Buying Your First Home

Fran
Fran Majidi
June 26, 2019

As a first time home buyer, you’re probably excited to start nesting and making your new home all yours. You know you’re ready to settle down and have even saved up for a downpayment. However, there are many things you need to be aware of so you don’t make an emotional purchase that may hurt your financial goals. We’ve compiled some important details for you so that you can own the home of your dreams without getting behind in your finances.

Pay Off Debt

If you owe more than half your limit on credit cards, this may hurt your rating and adversely affect your mortgage rate. The first step in buying a home is to pay off (or pay down, at least) any and all credit card balances before you attend your first open house. The least amount of debt you have, the more likely that you’ll be approved for a mortgage loan and at a low rate. It really is that simple, so stop charging up a storm! 

Build an Emergency Fund

Remember that once you give up apartment-style living, you’re responsible for your own maintenance and upkeep. That all costs money, even more so if there are emergency repairs you didn’t anticipate. All year round, your goal should be to maintain upwards of six months worth of expenses. You have to figure in sudden job loss as well as hypothetical emergencies that may cost a pretty penny. A leaky faucet can easily turn into a bigger problem (flooding) if it’s not fixed right away, but with an emergency fund, you’ll have no reason to let the little fixes worsen into major catastrophes. 

This emergency fund should not be used to decorate your new home with new furniture and appliances. You’ll need to pull from this emergency fund every time you have repairs to make. It’s a good idea to always replenish this emergency fund and keep it close to full. You’ll be shocked by how fast this fund can shrink so always keep tabs on it so that it’s never depleted. 

Have a Sound Downpayment

Sound is the operative word and hopefully, you have been saving for at least a few years. Ideally you’ll save at least 20-40% of the total price of the home you want to buy. First time home buyer programs offer much lower down payments, but they cost much more in the long-run. It’s never advised that you put little or no downpayment on a home. Also, if you apply more than 20% as a downpayment, you may be able to skip private mortgage insurance (PMI). PMI usually costs about 1% of your loan value and is lobbed onto your monthly mortgage payments. There are other first time home buyer down payment assistance, like VA loans and FHA loans, which again require very little down. With both of these, however, you’ll be paying thousands of dollars in fees that will not go towards paying down your mortgage. Adjustable rate mortgages are also problematic because of the risk of rising interest rates, which would increase your monthly payments, sometimes considerably. When possible a fixed rate mortgage is the best option. When possible, a 20% downpayment should be paid at minimum. The longer your mortgage term is, the more you’ll be paying as well. Don’t just choose a mortgage term based on how low the payments are. A 15-year mortgage is much less expensive than a 30-year one -- to the tune of tens of thousands of dollars. 

First Time Home Buyer Down Payment Assistance

A large majority of first-time home buyers place less than 20% down as their downpayment on a mortgage. It’s not easy coming up with the money for a downpayment but there are assistance plans out there. Just know that you will be paying more all the way around if you opt for these as opposed to saving. Here are just a few ways you may be eligible for first time home buyer grants:

Decide What You Can Afford

Owning a home is expensive. When you look at monthly payments, remember that all expenses will be your responsibility, including landscaping, utilities, taxes, home insurance, HOA fees and repairs. Don’t think that  your monthly payments will be less expensive than the rent you’ve been paying because usually the reverse is true: It’ll likely be more expensive with all fees and taxes added in. 

Calculating how much you pay towards a mortgage is the same as calculating how much you should be paying in rent. Take your monthly take-home salary and multiply it by 25%. Basically, you should only be spending a quarter of your take-home pay on rent or a mortgage. You’ll want to factor in your HOA fees before deciding on your maximum price.

Don’t Forget Closing Costs on a Home

A first time home buyer loan is not the only thing you’re paying for when you take out a mortgage. There are costs that are not included in your loan balance, like your HOA fees (this can be hundreds of dollars a month) and closing costs that include an attorney, home appraisal, home inspection and homeowners insurance.

Your closing costs will be about 4% of the price of your home. You’ll need to pay these upfront too, and there’s no option to pay in installments with mortgage payments. You’ll need to save this amount and be prepared to pay these costs right away.

Getting Pre-approved for a Mortgage Loan

You’ll want to get a preapproval letter before you start searching for a home. This letter will help you get ahead of other home buyers. This may seem like the scariest part of buying a first home, but unless there’s something in your credit history that may come as a shocker, it should not be a complicated process. Getting preapproved feels something like getting taxes done. You’ll need to furnish the lender with paystubs, taxes, a social security number for a credit check, etcetera. If you do not get preapproved, your lender will tell you what you need to improve upon or fix in order to be eligible. Some people even choose to get preapproved while they are saving for a downpayment so that they have time to clear any discrepancies on their credit report. 

How to Buy Your First Home

In order to make a wise decision on which home to buy, research the neighborhoods you’re most interested in. The location of your home is probably the strongest determinant in home value. In a good neighborhood, you’ll also have an easier time selling the house if you decide not to stay. The foundation of your home matters too, but you’ll have an appraiser check that out if you’re ready to buy. Simple cosmetic touches should not make or break your decision, even if a move-in ready house is tempting. Don’t overpay for a home with beautiful fixtures that is sitting in the middle of a high-crime neighborhood because it won’t have much resale value. You’ll want to research the neighborhoods you’re interested in first to find out about the quality of local schools and crime rates. These two factors are the most heavily weighed ones by home shoppers. You’ll also want to make sure your neighborhood is a reasonable distance away from your job. 

Look for homes in your price range and in the neighborhoods you’ve selected both online and with the help of a real estate agent. Attend a few open houses to learn better about the areas you’re looking in and to see what types of houses are available to you according to your budget. Be prepared to not love every inch of a house that may be a great find. If you have to redo the countertops or floors, it may be worth the investment if the house is priced reasonably. Cosmetic fixes are not backbreaking most of the time, unless the home is just congested with too many personal touches that you want to be rid of.

Once you find the home you want, act fast because other shoppers may also be preapproved and interested in the same home. Since you’re a first-time home buyer, ask your agent to help you come up with a competitive offer on the home that is still in keeping with your budget. Some buyers write a personalized letter to make their application stand out in the eyes of the seller. 

If your offer is accepted, congratulations. The average closing process takes 43 days and during that time, you can schedule a home inspection and then a final walkthrough. If there are any major problems you’ll sort them through with the seller. Just make sure to read all documents relating to your home at this time. Refrain from signing anything you do not understand and ask your real estate agent for help along the way.

Home Insurance and Home Insurance Quotes

An underestimated monthly cost is home insurance. The average home insurance cost is about $35 per month for each $100,000 value of the home. So, if you’re buying a $300,000 home, expect to pay somewhere around $105 or more. Home and condo insurance are about the same while mobile home insurance runs between $250 to $1300 per year on average.
You should never overpay for homeowners insurance. Often, first-time home buyers get their home insurance through the lender, who isn’t overly concerned with saving the buyer money. The best home insurance companies offer competitive rates, but to get a good rate, you must compare insurance quotes from several home insurance companies. Instead of spending days doing this yourself, all you need to do is visit one site and fill out a form with SmartFinancial.com, who will then pair you up with an agent offering the best home insurance for the least amount of money.

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