We’ve all gone window shopping at a real-estate storefront or watched HGTV and imagined how we’d do our own redecorating. But actually starting the search for your first home can be daunting.
If you haven’t even begun saving for a down payment, the reality of purchasing a house can seem decades away, but with a little research, financial discipline and planning, you can make your dream home a reality.
Over the next few weeks, we’ll be providing the information you’ll need to become a well-informed homebuyer.
Our 6-part “First Time Homebuyer’s Guide” series will help you to start saving, searching, and even close on your first house with confidence.
But first, we want to lay the groundwork for five “Things to Know Before You Get Started”:
1. First things First: Do Your Homework Before You Begin the Process
If you already know your target city or neighborhood, start by doing your own online search, to get a sense of how much that dream home in your “must have” area may cost. Allowing yourself the time to make this realistic assessment will save you a lot of heartache down the line.
Who wants to price themselves out of their dream? No one.
But going into the process with a firm understanding of what is and isn’t a realistic neighborhood of choice is definitely a must.
Check the listings at local real estate offices. Or, get familiar with the online resources out there to help you expand your search. Sites like Zillow, Redfin and Realtor.com are a great place to start. Remember, at this point, you’re only researching – so click away.
Once you get an understanding of the general price range in your target area, you can use an online mortgage calculator to determine what you can realistically afford. Resources like Mortgage Calculator, Nerd Wallet and your bank or credit union may even offer Home Affordability or “How Much Home Can I Afford” calculators that break down the anticipated costs vs. your income and debt.
These calculators also allow you to play around with the implications of increasing or decreasing your down payment and credit score. Speaking of down payments…
2. Get Creative Gathering your Funds
You’ll also want to figure out your target down payment; a down payment is a percentage of the sale price, which is given to the seller at closing. It’s literally the money you “put down” or pay to make your initial payment toward the cost of your home.
The larger your down payment, the more appealing your offer will be to the buyer… and the less you’ll have to dish out on a monthly basis.
While it’s possible to purchase with as little as 3% down, the typical percentage required is 20%. Let’s say you find the home of your dreams and the list price $200,000. A 20% down payment means that you pay $40,000 and borrow $160,000. But where’s that $40K going to come from?
You have a variety of options for saving or gathering the money for your down payment. First time homebuyers are allowed to tap into your IRA at no fee, or even withdraw a loan from your 401K. You’re also allowed a gift of up to $12,000 tax-free from a relative or family friend.
If you’re starting from absolute 0, consider signing up for automatic withdrawals from your checking account, and investigating ways to cut your expenses or cash in on your belongings. There are also national resources like the National Homebuyers Fund, which provides assistance and grant options for homebuyers.
What’s the main takeaway here? The more you can save for your down payment, the better! And you’ll avoid the PMI payment that we’ll discuss later on in the series.
3. Determine Your Must-Haves
Now that you know what you can afford and what you’re able to put down, let’s get started on the fun stuff.
Take out a pen or paper and write down a list of things you’d love to have in your new home. You can also do this on your phone or computer but we find that writing things down can make them feel real.
A back yard? Open kitchen? Huge windows?
The location of your home is equally if not more important than the house itself. Some of the things you may want to consider are the job climate in the area, the distance you’re willing to commute, and if you’re a parent (or plan to be one) the quality of the schools. You also want to think about how easy it might be to resell your home when or if the time comes.
Are you willing to invest in an up-and-coming area while it’s still in the early stages of development? Is the area you’re looking to buy your home in actually headed downhill?
Once you have an idea of your must-haves, break your list down even further and figure out what you absolute needs vs. the things you may be able to compromise on. This will make it easier for your realtor to know what to look for. The more you know before you begin your process, the easier it will be to hone in on what will work best for you.
4. Getting Your First Mortgage Loan
Before your first chat with a banker or a mortgage broker, check up your credit.
We love resources like Nerdwallet for getting our free monthly credit score and tips on improving our credit. Sometimes improving your score can be as simple as expanding a line of your credit and paying something off.
Those extra points could mean thousands of dollars in interest saved over the life of your first mortgage!
There are dozens of brokerages and online resources you can use to find options for a mortgage – and many types. There are one year adjustable rate mortgages, fixed rate mortgages, 2-step mortgages, 10/1 adjustable rate mortgages, 5/5 and 5/1 adjustable rate mortgages 3/3 and 3/1 adjustable rate mortgages, 5/25 mortgages, and balloon mortgages.
Research the type that works best for your needs in crucial. Before you sign on the dotted line, it’s important to know what you’re signing up for. Resources like Home Buying Institute are good places to start.
These massive bank loans have interest rates at an all time low, but you may still want to consider getting a 15 over a 30-year mortgage to save yourself money on interest, depending on what kind of monthly payments you can afford.
5. Ready to Seal the Deal?
Once you’re ready to find an agent, look for a brokerage with a long history working in the neighborhood(s) of your choice. Look for agents with a lot of experience doing deals in a similar price range to yours.
Your agent may receive up to a 6% commission of the purchase price, so don’t settle for someone whose expertise you don’t trust.
They’re getting paid for this!
Take your time and find a home that fits within your price range and works well for you and your family.
6. You’ve Found It!
What’s that? You’ve already found the home of your dreams?
Deciding what to bid on a home and when, is the moment your real estate agent’s expertise will really be important. For fast-moving markets, you may need to swoop in and make an enticing offer right away. On the other hand, if a home has been on the market a very long time, the seller(s) might be overjoyed to receive any offer – even one with a low down payment.
If your offer has been accepted, you may be tempted to jump for joy. But don’t pop that champagne bottle just yet!
Closing day can be one of the most exciting days of your life – but it can also be stressful! There are dozens of things to get in order in time to close on your first home. You’ll need to get yourself mentally and financially ready for some taxes and fees – from a home inspection to the down payment to your real estate agent’s commission.
So – we just said a lot, but this overview is just the tip of the iceberg.
Are you ready to get serious about your dream home?
In this First Time Homebuyer’s Guide series, we will dig deeper into each of these sections and give you the lowdown on what to expect and do each step of the way. Stay tuned over the next 5 weeks for more quality tips on how you can best prepare yourself for perhaps the most exciting purchase of your life.
- Section One: Overview
- Section Two: Understanding The Financials
- Section Three: 5 Tips to Determine What You Want in a Home
- Section Four: The Mortgage Approval Process
- Section Five: Starting Your Search & Selecting an Agent
- Section Six: Making an Offer (Tuesday, 10/24)
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