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For most people, their most expensive purchase will be their house. This decision can be emotional most of the time – proximity to the office, school district, closeness to a certain highway, location in the city, etc. It also depends on your financial status – what’s your target price, how much home can you afford, what down payment are you going to pay? What’s the tax rates in the city where you want to buy etc. Many people make this decision on impulse, and the home that should give them peace and make them happy will end up being a source of financial struggle for them, hurting their financial goals, and keeping them paying mortgage well into retirement. 

I am writing this post to share 7 for first time home buyers. You may also find this useful if you are not a first-time buyer. 

1. Pay Off All Debt and Build an Emergency Saving

As stated earlier, homes are costly. The total cost of homeownership includes much more than the price you paid when you bought your house. There are other costs that you must be aware of, and also ensure that you can afford. Homeowners insurance, HOA fees, taxes, maintenance cost & upkeep cost – A/C repair, roof leak, are just but a few. All these other expenses make Owning a home more expensive—much more expensive than renting. Although in the long term, owning your own home will be beneficial because it can be an excellent wealth-building tool, doing it right will ensure you reap the benefits of homeownership. 

To have peace in the house you are planning to buy, you, therefore, need to make sure you are debt-free and have an emergency fund of three to six months of income in place.

If you are debt-free when you buy your home, you will be in a position of less stress when making your mortgage payment, because you will not have to worry about other payments like auto loan, student loan, or credit card debt. 

2. Establish How Much House You Can Afford

This is very important. When shopping for your first home, you need to make sure you are buying what you can afford. Buying the right home will ensure you have financial peace when paying your mortgage. If you buy too much house that you cannot afford, then it will bring you too much stress and pain – that you don’t want. 

So before you go out there to start shopping for your home, you need to determine how much home you can afford, you need to work based on your income, and your budget. Experts recommend that the total monthly housing costs, including all the associated expenses Maintenance cost, HOA fees, taxes, insurance, etc.), should be no more than 25% of your monthly take-home pay. 

For example, if your monthly income is $5,000, your recommended housing expenses should not be more than $1250. 

There is another rule of thumb that says the amount you spend on buying your home should not be more than 3X your annual income. If for example, your annual salary is $60,000, you should not buy a home that is more than $180,000. This is to ensure you are buying what you can comfortably afford without too much stress, and be able to pay the home off within the shortest time possible. It is not to your benefit to pay a mortgage for 30 years. You are making your banker richer by doing so.

3. Save a Down Payment

I know it can be exciting to buy a new home, but don’t let the excitement get in your way and prevent you from saving a down payment for the home. In America today, you can bring as low as 3% and still be able to get a home mortgage. However, you must know that the higher you can pay towards the home, the better it is for you (not your bank). 

Experts recommend having 20% down payment in order to avoid private mortgage insurance (PMI). The PMI is protection against default charge by your lender to protect them in case you default on your mortgage. It is, in a way wasted money, because it is not going towards your principal payment. If you put down any amount lower than 20% of your home value, you will pay the PMI, until you crossed the 20% threshold. For example, if your home value is $200,000, you should attempt to save $40,000 towards the down payment.

This will ensure that your monthly mortgage payment is lower than if you only put 5% down payment. 

It is also recommended, if at all possible to only take out a 15-year, fixed-rate conventional mortgage with a 20% down payment. Here is the reasons why:

  • A 15-year term offers a lower interest rate than the 30-year mortgage, although your monthly mortgage payment will be higher with the 15-year option in the long term, you will be able to save thousands of dollars in interest. 

Please don’t be tempted to take out a 30-year mortgage because of the lower monthly payment. When you look at the math on a 15-year versus a 30-year, you’ll realize you pay a whole lot more money on a 30-year mortgage in the long term.

4. Get Pre-approved & Compare mortgage rates

Once you have your 20% saved up, and you have established the value of the home you can afford. Then you need to get pre-approved and compare mortgage rates:

Many home buyers get a rate quote from only one lender; this is not a good practice because you may be leaving money on the table. Comparing mortgage rates from at least three lenders can save you more than $3,500 over the first five years of your loan, according to the Consumer Financial Protection Bureau. You should endeavor to get at least three quotes and compare both rates and fees.

As you’re comparing quotes, ask whether any of the lenders would allow you to buy discount points, which means you’d prepay interest upfront to secure a lower interest rate on your loan.

When shopping for a new home, if you are going to need a loan, then it makes sense to get loan preapproval before you start your adventure. How much is the bank willing to give you? Your credit history and credit score will play a huge role in determining how much the bank will be willing to lend you. 

If for instance, you got pre-approved for $150k loan, it does not make sense to look for a home with a value of $300k; you will simply not be able to afford it. It does not also mean you should use up all the amount you are prequalified for. For example, if your bank prequalified you for $200k, try to not go beyond $180k.

Also, shop around and talk to multiple lenders; at a minimum, you should speak to two or three different lenders. They have various programs and incentives that they can use to get you to get your mortgage loan through them. I will say you should explore all the different options out there, and also learn about the overall closing cost from each of the lenders before finally making your choice. You are not only looking for who will give you the lowest mortgage rate, but you are looking at the overall cost of the loan as well.

(By the way, if your credit score is nothing than stellar, you should check out episode 23 of this Podcast – How to boost your credit score).

5. Hire a professional real estate agent

If you are going to need a doctor, you go to a qualified one, not a quack. So also, when you want to buy your home, why trust a non-professional to do the job for you? Again, your home is one of the most expensive investment for most people; it is, therefore, reasonable and beneficial to ensure you have people with the right knowledge on your side when shopping for your home. Make sure you get an experienced real estate agent to help you find your dream home and negotiate with the seller on your behalf to ensure you are getting a good deal. Your real estate agent should represent your best interest, helping you make informed decisions and refer you to other professionals like title companies, home inspectors, or any contractor you may need to ensure that the property is in good condition before you can finally move in. 

6. See multiple homes

Now that you have a professional real estate agent on your side, you should provide clear instruction in terms of location where you want to buy, when you want to buy, what you can buy, specification (2 bed/3 bed/4 bed etc). You should have an idea about school ratings in the area, the crime level, and so on. Your agent will then set up automatic searches for homes that meet your criteria using your local Multiple Listing Service which contains all listings of houses for sale in your area. You should have a good knowledge of the school quality, especially if you have kids, or planning to have someday. Ensure you get information about crime rates around your prospective neighborhoods. 

It’s also a good idea to drive through neighborhoods you want to live in to get to know the environment and familiarize yourself with the terrain. You should try and have a sense of your commute times to ensure they are satisfactory. Visit the neighborhood at different times and days to check for traffic conditions, noise levels, and look around the neighborhood to make sure you will be comfortable there. Only choose a community that you and your family feel good about and will be comfortable to live in.

7. Make an offer & Prepare for closing

By now, you must realize that the home buying process is nerve-racking. Look at everything you have to do before you can get to the final step. But you’ve got to do it right so that you can enjoy the house because you and your family will be spending a lot of time in the house. We want to make sure it’s the right one for you. 

So now, you need to request a home inspection. I know you’ve seen the outside of the property, you have familiarized yourself with the neighborhood, but you still need a professional home inspector to examine the structural conditions (inside and out), of the property. The home inspection will include foundation check, roof, attic space, exterior checks, electrical panels, light switches, power outlets, water heater, thermostat and heating, cooling, and ventilation. They will also check all your plumbing to make sure everything is in good working condition. You don’t want to get to your new house and immediately start repairing stuff.

If the inspection report came out, and everything looks good to your satisfaction. Then you should make an offer. You can get the guidance of your agent on what he/she considers competitive and fair value on the home. If your offer was accepted, then you go to the final step – You close, sign the agreement. The closing is the last step before you will be given the key to your new property. This step can take about a month or more because your lender will now need to verify all the information you have provided, your loan will go through the underwritten process. Except of course you are buying with cash. Closing is where you sign the contract, and assume ownership of the property. Whoops And that’s it.

Congratulations – By the way, make sure you insure your new home. Check out episode 22 of this Podcast for information about how to save money on your insurance premium.

Closing Thoughts

Buying a home can be both emotional and stressful, especially if you’re a first-time homebuyer.

These tips will help you navigate the process, save money, and avoid common mistakes.

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