It’s really cool to be a first time home buyer! So I realize it can also feel overwhelming — especially when you see houses being bought at a median of $250,000 so affordable properties going off the market in just three weeks.
With developments like those in real estate, you may be tempted to make an impulsive buy that could affect your financial goals and keep you paying a mortgage well into retirement.
No-one needs it! Trust me, you guys, that is the right way to do this. And that means buying a home you enjoy and it doesn’t hurt your potential goals in terms of income.
You do tell, Oh, that’d be great, Rachel. But where can I even begin?
I’m and happy to hear you calling! I’ve put together 10 ideas for first-time home buyers when they start home-buying. Practice this now so your first home is a pleasure, not a pressure.
Tips for First Time home buyers
- Pay off all loans to build an emergency fund
- Determine how much you can afford to house
- Save Transaction Down
- Save to Price Closing
- Get a Loan Pre-approved
- In your price range, find a home for sale
- Neighborhoods with study for best fit
- Open house performance and long term vision
Create an emergency fund to pay off all debt
Owning a home is costly — much more expensive than renting, even if the annual house payment is equivalent to or less expensive than your current rent.
That is because you are liable for all the repairs and maintenance costs when you own a house. And those can add up quickly!
Just make sure you’re debt-free and have an emergency fund covering three to six months of costs in order before you even think about buying your first home.
You’ll have the cash to pay for huge expenses that suddenly come your way when you get into a home with no payments (besides the mortgage) and have a nice big emergency fund.
You will be able to love the life you set up for yourself as stress and worry are not going to be part of the equation!
I want you to be loans-free today, once you’re debt-free. So be mindful of your budget as you’re shopping for your first home and getting excited about decorating it and filling it with new furniture.
The spender in me thinks it’s stated better than done. When I moved into our first home with my husband, Winston, I had so many visions for what our home might look like!
I had difficulty accepting the fact that I could decorate only one room at a time. So I knew that our future money goals were more important than spending all our savings at home and furniture stores than me.
You may have some empty rooms for a while but thank you for your budget and for your future self! And if you say, Oh well, I’m just going to put it on credit — stop right now! Loans is persistent.
Furthermore, taking on new debt in the middle of buying a house could slow your mortgage acceptance and make you lose out on the perfect home. Do it not!
Determine how many houses can you buy
Before you become emotionally attached to a lovely house, check the monthly budget to find out how much house you can pay.
For other items, you need to leave room in your budget and make sure that your monthly housing expenses (counting HOA dues, taxation, benefits, etc.) will not reach 25 per cent of your monthly take-home pay.
For starters, let’s presume you’re taking $5,000 a month home. Multiply that by 25 per cent to measure the $1,250 average monthly house payment.
The home choices you can afford (not including taxes and insurance) are based on a 15-year mortgage with a 4 per cent fixed interest rate:
- $187,767 home with a 10% down payment ($18,777)
- $211,238 home with a 20% down payment ($42,248)
- $241,415 home with a 30% down payment ($72,424)
- $281,650 home with a 40% down payment ($112,660)
That’s a easy way of finding an amount in your ballpark. But don’t overlook your monthly payment will be impacted by property taxes and mortgage benefits. Once you opt for a fixed home price, you will also need to weigh certain figures in.
If you use the illustration above and insert $211,238 in our mortgage calculator, you can note that when you apply $194 for taxes and $71 for insurance, your average monthly payment of $1,250 rises to $1,515.
To reduce the number down to your $1,250 monthly housing budget, you’ll need to raise the house price you can pay so $172,600.
Since property tax rates and insurance costs differ, look for figures with your real estate agent and insurance company to determine how much house you can handle.
Set Up Investment
If saving up to paying cash for a house’s total price is not reasonable for the timeline of your family, save at least 20 percent or more for an down payment.
Then you’re not going to have to pay for private mortgage insurance (PMI), which will cover the mortgage company if you can’t make the payments and end up in bankruptcy. PMI usually costs 1% of the gross value of the loan and is added to your monthly payment.
If you seem out of reach with a 20 percent down payment, first-time home buyer programs offering single-digit down payments may sound tempting.
But just don’t need them! In the long run, those choices would cost you more. Here are some ways to stop low-to – no down payment mortgage:
- Adjustable-Rate Mortgages (ARMs): ARMs that look great with a low initial interest rate, but they enable borrowers to change the cost and move the risk of rising interest rates (and monthly payments) on to you.
- FHA Loans: You may be able to get a FHA mortgage with as little as 3.5 percent down, but for the life of the loan you have to pay a mortgage insurance premium (similar to PMI). That’s thousands of dollars that won’t pay off your mortgage.
- VA Loans: VA loans allow veterans to purchase a house with no down payment. Nevertheless, if the real estate market moves, you could potentially owe more than your home’s market value. These loans also carry a bunch of fees, and usually charge higher interest rates than conventional loans.
I consider only a fixed-rate conventional mortgage over 15 years with a down payment of 20 per cent. Here’s the explanation why:
- A fifteen-year period generates a higher monthly premium, but in half the duration you can pay off your debt, have a lower interest rate and save thousands of dollars in interest.
- A fixed-rate traditional loan holds the interest rate the same for the lifetime of the bond, which safeguards you from increasing tariff expenses.
And do not get a 30 year mortgage due to the lower monthly payment. Looking at the math on a 15-year versus a 30-year mortgage, you’ll realize that in the long run you’re paying a lot more money on a 30-year mortgage!
Let’s say you put a $172,600 home down payment of 20 per cent ($34,520). Your monthly payment at 4 per cent for a 15-year fixed-rate mortgage would be $1,250.
When you count up the interest you are going to pay over the 15 years, that’s going to hit $45,765.
15-year fixed-rate mortgage at 4% interest on a $172,600 home = $45,765
But maybe you didn’t want to pay that much every month and instead went down your monthly payment to $888 with a 30-year fixed-rate mortgage at 4 per cent.
You’ll be paying $99,236 in interest after 30 years — which makes it $53,471 more than the 15-year mortgage! And, you’re going to be 15 more years in debt!
30-year fixed-rate mortgage at 4% interest on a $172,600 home = $99,236
Save to Price Closing
You will also have to compensate for closing costs along with the down payment. If you’re a home buyer for the first time, you may wonder how much it costs to close a building.
Closing costs are on average around 3–4 percent of your home’s selling price.2 The broker will send you a specific number and you know exactly what to carry on closing day.
Such premiums pay for major steps in the process of home buying, including:
- Home inspection
- Credit report
- Homeowner’s insurance
Let’s see how our illustration of a $172,600 home carries that out. When you subtract the average cost of closing $172,600 by the low 4 per cent, you would note that you need $6,904 to close expenses.
Now let’s apply that to the $34,520 20 percent down payment. Together, the two are equivalent to $41,424, which is about what you will need to borrow on your first house to pay for the down payment and closing costs.
$172,600 x 4% = $6,904
$6,904 + $34,520 = $41,424
They want to save as quickly as possible for your closing costs and down payment— with the same level of pressure I tell people to use when they get out of debt and set up a full emergency fund.
In reality, placing retirement savings on hold for a short time to save for a house is all right — but you have to hustle!
Take a second job, sell anything that isn’t nailed down, transfer into a smaller space, attach a friend and charge rent — do whatever you need to do to save as quickly as you can for your closing costs and down payment.
Get a Loan Pre-approved
Once you’re confident that you’ve saved enough cash to pay for closing costs and 20 per cent of your home, by talking to a mortgage lender you’re ready to handle the other 80 percent.
Before you continue your home search, get pre-qualified for a loan and take the extra time to get a letter of prior approval. Preapproval shows sellers that you’re a serious buyer, which is a smart way to get ahead in a competitive market for first-time home buyers.
The lender will need to review the financial information (proof of wages, taxation, etc.) and apply your loan for conditional underwriting in order to get pre-approved.
If you’re living a debt-free lifestyle like I’m teaching, you might need to find a lender who believes in debt-free homeownership and will work with first-time home buyers without credit score.
Find a property for sale within your price range
According to recent data published by the National Association of Realtors (NAR), the majority of buyers either find the home you bought online (50 percent) or through a real estate agent (28 percent)3.
Find homes that you like online, and give them to your real estate agent to get a good idea of what you’re searching for.
You can then use a Multiple Listing Service (MLS) to find homes in your desired areas which meet your criteria.
An MLS is developed, managed so compensated for by real estate experts and it can really benefit home buyers like you see the largest list of properties for sale on the marketplace for the first time.
Real estate agents also provide important industry insight, and can help you find great home prices as soon as they are identified (or before).
Neighborhoods Research for Best Fit
Upon locating any homes for sale in your price range, be careful not to make a choice that is dependent on the house itself.
According to an NAR survey, home buyers are more willing to compromise on the condition of a home (20 percent) and size (17 percent) than on the quality of their neighborhood (6 percent) and distance from a school (2 percent). So make sure you factor the quality and location of the neighborhood into your choice.
Ask your real estate agent for information about crime rates and school quality around your prospective neighbourhoods.
Calculate your new commute times to see whether they appear to be manageable. Visit the neighborhood to check for traffic conditions and noise levels at different times and days, and see if people are comfortable outdoors. Only choose a neighborhood that you feel good about and your family.
Join Open Houses and Think Long
Once you’ve got the areas narrowed down, host any open houses. Looking at homes for sale — even if they’re not a perfect fit for you — is a great way to get more details about the city.
Once you finally find a house that you enjoy, you would realize if your position in that area is equivalent to great or worse houses.
When it comes to buying, considering the most affordable house in the right neighborhood is a good strategy.
When you purchase in a good neighborhood at the bottom of the price range, you will be granted more room to build home value.
For starters, let’s assume you’re finding a home without wood floors and granite countertops which is the only one on the market. If you have the cash to make such improvements, you can bring immediate value to your house!
Create a competitive bid (within the budget!)
Let’s presume you’ve located and can manage the house you love. You are ready to make an offer because you are already pre-approved for a loan.
If you’re a home buyer for the first time, it can be hard to know how much you should be offering. This is when you can rely on your real estate agent’s expertise.
Ask your agent to help ensure that your offer is competitive but also within your budget and the value of the house.
Be careful not to make a higher impulsive offer than you can afford, just to knock out the competition. In a hot market, a customized letter might make your offer stick out among multiple bids.
Get ready for closure
When the offer is accepted by a seller, the closing process begins. Keep things running smoothly when you close a house knowing what to expect.
The average closing process takes 43 days, giving you plenty of time to deal with closing items.
A real estate agent will schedule the remaining steps from home inspection to final walkthrough, and they will keep you informed of any roadblocks.
As you prepare to close, make sure that you read every contract and ask your real estate agent to explain anything you don’t understand — especially before you write the home transaction official contract.
It’s supposed to be your document signature, so you’re going to be the one accountable for anything you sign.