Two bikers are sitting next to each other at the bar. One says to his friend, “I’m thinking about getting a tattoo of my wife’s name on my chest or buying a house.” His friend says, “I’d get the tattoo. Buying a house seems so permanent.”
Being a first-time home buyer is an exciting time in life. It’s the perfect combination of over-the-top excitement and gut-wrenching terror. With the exception of having children, buying a home is announcing to the world that you are finally a grown-up. It is the single largest purchase you will make in your life.
Purchasing your first house isn’t for the faint of heart. You’ll quickly discover it’s nothing like picking out a laptop, television or even a car. You don’t just check off a list of features and choose from a selection in a store or online. Finding the right first home takes commitment, perseverance, fortitude, a bit of luck and most of all, patience.
Are You Really Ready for Your First Home?
Before you dive in, you have to decide if you are truly ready to become a homeowner. Having your own house means taking on responsibilities you never had to think of before. You have to become your own maintenance crew, landscaper, snow remover, painter, and plumber. You can call in the experts to do the work, but then you are still responsible for paying them for the work. Being a homeowner means having to learn new skills and if not excel, at least become proficient.
Why is it time to make the leap to home ownership? Are you tired of paying rent and never owning your place? Has your family grown and you need a larger place to live? Are you putting down roots in the town and are ready for the commitment of ownership? Whatever the reason you want to become a homeowner it has to be well thought out. You’ll discover home ownership, unlike renting, means you're there for the long-haul.
Where Do You Want to Live?
Part of finding the perfect house is determining where you want to live. There is no one size fits all answer for everyone.
- There are people who love city life and their first home can be a condo or apartment in a skyscraper.
- Many people like the comfort of a suburban neighborhood surrounded by similar type houses and conveniently located close, but not too close, to shopping and businesses.
- Some crave the wide open spaces and are looking for a piece of land to call their own surrounded by nothing but trees and the sky.
Are You Ready on Paper?
You might be emotionally ready to buy a house but how about financially? Since 99.99 percent of first time buyers will be getting a mortgage loan for their house, you not only need to convince yourself you are ready for home ownership, you need to convince a bank.
The recent housing and mortgage crisis has shone a spotlight on the mortgage industry like never before. There are fewer numbers of banks and financial institutions who are willing to approve mortgages. Those that still do offer mortgages have many more hoops to jump through.
To make sure you are in the best possible financial shape run a credit report on yourself. By law anyone is allowed to get a credit report on themselves for free. Check out FTC.gov for more details and don’t get duped into paying for a bogus “free” credit report. Also, be sure to get reports from the big three credit reporting agencies; Equifax, Experian, and TransUnion.
The credit report will give you the same information a bank will request when you apply for a loan. Your credit report and credit score will show you any red flags that may come up and give you the opportunity to fix them up before you apply for the loan. Credit reports aren’t infallible. Companies and people make mistakes and you have the right to challenge anything on your report.
Your credit score is a deceptively simple three digit number. But this number is extremely important as it determines how much you pay for insurance, what your interest rate is on borrowed money and other of life's financial necessities. Credit score ranges from 850 (perfect) down to 300. The official method on how they calculate the number is super secret but it is based on payment history, current debt, how long you've had credit, how much new credit you've requested and the variety of credit you have.
Like your grade in elementary school, your credit score rises when you do something good; pay bills on time, don't over extend yourself, etc., and goes down when you make mistakes; late payments, missed payments, default on bills, etc.
Even if you’ve never missed a credit card bill, rent payment, utility bill or anything, there may be errors on your report. Please note: if you have had some credit issues or missed payments on your bills, they will be on the report and you cannot get rid of them if they are legitimate. You can still get a loan with a bad credit report, but it will be more difficult and your loan terms won’t be as favorable.
Image Courtesy of Flickr
Take the time to clean up your credit report of any errors before you apply for the loan. You don’t want a forgotten late fee from a video store rental to prevent you from getting your dream house. Once you have checked your report and fixed any issues, it’s a wise rule of thumb to control anything that might affect the report. Don’t open or close any credit cards. Don’t apply for any other smaller loans. And whatever you do, don’t be late for, or miss, any debts you may have.
Saving for a Down Payment
You have probably seen countless used car commercials offering cars for “no money down.” There was a time when you could easily buy a house with no money down. Avoid this at all costs.
The more you can put down for a down payment on a house means the less amount of money you need to borrow from the bank. Your down payment will be the portion of the house you actually own as you slowly pay back the bank month after month. When a new owner puts zero dollars down or just a few thousand dollars down they have higher monthly payments, are subject to underwater mortgages (meaning the person owes the bank more money than the house is worth) and have to pay an extra monthly fee for Private Mortgage Insurance (PMI).
PMI is extra insurance you have to pay if your loan is for more than 80 percent of the home’s value. And while the idea of extra insurance might sound like a good idea, the insurance is for the bank or mortgage lender, not you. PMI means you are paying to protect the bank if you default on your own loan. The lender gets the money and the home, you get nothing.
Image Courtesy of Flickr
It is possible to buy a house with as little as 3-5% down, but your best bet is to save money so you can provide at least a 20% down payment for your new home. The sooner you start to save money for a down payment, the sooner you can become a home owner.
Setting a Budget
Before you can figure out your 20% magic number you need to determine how much you can afford to pay for your new house. It really comes down to your personal income or incomes if you are a couple. Your budget needs to be based on real numbers. Don’t add in bonuses you usually get. Don’t add in commissions you haven’t earned yet. When setting a budget don’t rely on potential money, only count what you know you will earn. If you have extra money each month you can use it to lower the principal on your loan and pay your house off faster.
Your budget also needs to be realistic. Don’t spend every extra dime, plan on saving some money each month. Accept that you need to eat out and go on vacation and not sink every penny into your monthly payment. It’s not easy but determining what is an affordable monthly payment will help you immensely in finding the right home.
Pre-Qualified vs. Pre-Approved
Before you look for a house get yourself pre-approved for a loan so you know how much you have to spend. There is a world of difference between being pre-qualified for a loan and being pre-approved. Being pre-qualified for a loan means a lender has estimated based on your income and debt the amount of a loan you probably should be able to get. A pre-approval means the lender has actually looked at your financial situation, run a credit report and has done an in-depth analysis. The pre-approval loan number is much more accurate and isn’t subject to surprise changes as much as a pre-qualified loan number.
When you are applying for a home loan it’s all about the bottom line. Don’t take the first offer. Try and get banks to compete for your business and ensure you get the best possible interest rate. Every tenth of a percentage point you can lower will save you thousands of dollars in the long run. For the loan process you will need to provide an accurate history of your finances including: pay stubs, bank statements, credit card bills, etc.
The interest rate you get will be mainly based on your credit score; the lower the number the better. Getting an interest rate lowered by a percentage point or even half a percentage will save you a substantial amount of money over the life of the loan. Compare a $250,000 loan for 30 years. At 6% monthly payments are approximately $1500 per month. Just dropping the rate by half a point to 5.5% means a monthly payment of $1419, almost a $100 savings every month equaling a $1200 savings every year or a $36,000 savings over the entire life of the loan.
Loan Payment Tip: You don't have to make your loan payment only once a month. Any extra you pay goes toward the principal of the loan and lowers the overall balance. If you have the money you can set up a bi-weekly mortgage payment to pay off the loan much faster than average. Simply put a bi-weekly mortgage payment means you pay 13 months of payments every year.
When approved for a loan please remember you don’t have to spend everything you are approved for. A loan amount isn’t a goal it’s an upper limit. Look for houses under your limit and leave yourself some wiggle room if you have to negotiate a higher price.
Where Will You Find a Home?
There are many factors in deciding where to buy your first house. But there is one thing you should always keep in the back of your mind when looking for a house; “Will I be able to sell this house when I’m done with it?” You need to realize that in the 21st century there is very little chance that your first house will also be your last house. Eventually you will need to sell the house to someone else and if there is something about the house you don’t like and can’t change, it will be a problem later when you are the seller.
You can learn much about houses and neighborhoods on the Internet. You can see a variety of home prices, find out which school districts cover the area, and you can take a virtual tour street by street. But nothing beats being there and checking it out in person.
Factors as important as home prices and school district aren’t nearly as important as firsthand knowledge of the neighborhood and people who live there. If you already live in the town you plan on buying a home in and you don’t have an immediate need to buy a house, you have an amazing luxury. You have the ability to visit different neighborhoods at different times of the day and days of the week. An online listing of a nice house won’t let you know the next door neighbor likes to use his garage as practice space for his heavy metal tribute band six days a week. A virtual tour won’t show you the brewing battle between neighbors who support different college football teams. And nothing except a personal visit can let you see that the sewers have a tendency to back up into the street after a moderate rain storm.
What to Look for in a House
It’s important to remember a house isn’t a home until you move in it. So when looking as a first time home owner, look for a house you like, you can always make changes to make it your home.
At least you can usually make changes. Most things on a house are changeable: color, cabinets, appliances, flooring and carpet, bathroom fixtures. With enough money and time all of these can be fixed or replaced. Try to first focus on the items that can’t change which might cause problems.
- Location. Location. Location. The greatest house in the world can be ruined by its location such as being downwind of a paper mill.
- The Lot. A spectacular house on a hill with a driveway that slopes at 30 percent may not be much of an issue except in winter when trying to drive in and out when it is covered in ice and snow.
- The Neighborhood. There are places where million dollar homes are clustered together in tight knit groups. But if the community is bordered by a large trailer park full of homes often featured on the television show “Cops” you may want to pass.
- Energy Efficiency. Energy Star ratings are determined by guidelines set by the US Environmental Protection Agency. A home that has earned the Energy Star is at a minimun 15% more energy efficient than homes built according to the 2004 International Residential Code. Most Energy Star homes exceed the minimum 15% through additional energy saving features that will save the homeowner even more money in the long term.
Not all houses have horror stories attached to them but what might not bother one person is a nightmare scenario to another. And you don’t want to find out something bad about the house after you’ve already purchased it and moved in.
Time for a Real Estate Agent
You’ve done the legwork and know what your spending limit is on your first house. Now it’s time to find a qualified real estate agent and start looking for homes. If you are moving to a new city and don’t know anything about the area you may have to rely a lot more on the advice and expertise of a realtor. It is essential you choose a good agent and not just choose one at random.
Image Courtesy of Flickr
Look for a personal reference from a friend, family member or co-worker. Feel free to check out reviews on sites like Yelp.com and Angie’s List. And always remember, the realtor works for you. They should act as your representative and look out for your best interest. If you feel at any point the realtor isn’t meeting these requirements be prepared to find another one who will.
Why Do I Need a Realtor as a Buyer?
Despite what you may think a realtor as a buyer’s agent is not free. You don’t pay them money directly but the seller's and buyer's real estate agents split an average of 6% commission on the sale of a home. And as the eventual buyer of a home, some of that money will come from you. This is not to discourage you from getting a realtor but to remind you that they are providing a service you will ultimately pay for and you can expect a realtor to bring value to the home buying process.
While you may only buy two or three houses in your lifetime, an experienced realtor handles 50-100 home sales a year. They know the ins and outs of home buying and selling and are experts regarding homes in their local areas.
Realtors have access to databases of information and know which houses are for sale even if there is no sign advertised on the front lawn. They can also provide insider information about sellers, properties and neighborhoods.
A realtor should provide unbiased assistance during all steps of the process. Listen to their input but remember the final decision is yours. The realtor is your guide during the home buying experience but you are ultimately in charge.
When working with a realtor try to remember buying a home isn’t a quick process. It’s a long marathon that requires time, patience, trust and respect. You may see 30 different houses over the course of a few months and still not find the house for you. The more you communicate your needs to the realtor, the better job they can do in finding you the right home. And unless time is essential, the perfect house for you may not be for sale yet and you have to wait. If time is an issue be prepared to be flexible on price and on location.
An Important Note About Realtors: Since they do get paid as a percentage of the final selling price there may be a temptation by some realtors to try and raise your bottom-line price higher that you have planned. They might tell you the asking price can be lowered during negotiation. And while that may be true don’t ever let anyone talk you into spending more than you are comfortable with.
You Found a House – Now What?
You finally found a house that fits your needs and budget and are ready to make an offer. A few things to think about:
- Let the realtor lead the negotiation. This is one of the places where a realtor earns their money. They should be able to guide you with a solid bid that will be a fair offer.
- Don’t get emotionally attached. You may not get the house for your offer. Don’t get disappointed and overbid for a house.
- Be prepared to walk away. If you think your offer is fair and the seller won’t negotiate or refuses to consider an offer lower than asking accept the house may not be yours.
- Negotiate in good faith. Providing a lowball offer on a house is insulting and turns a negotiation into a confrontation. It begets bad blood that usually ends badly for both sides.
Realize with any negotiation few people usually take the first offer; plan for several phone calls and a few days to pass before it’s over.
They Accepted the Offer – It’s Not Over Yet
If your bid has been accepted by the buyer you’re almost in the clear. There are still a few steps to be taken. Every house needs an inspection by a certified home inspector. There are no ifs ands or buts on this. No matter how new or nice the house looks a home inspector will do a complete walk-through and check out the house from top to bottom. While the realtors you work with may have some inspectors they like you’re better off finding one on your own who has no relationship with anyone involved in the transaction except you. This way you can be sure the inspector is looking out for your best interest.
They check out everything from electrical work to roofs and potential pest problems. They will check in places you will never go even when you own the house. They crawl between walls and under foundations to inspect everything for problems or potential problems.
Hopefully the inspector report will be minimal or only reveal simple to solve issues. There is always the possibility the inspector will discover something about the house the owners may not know. They could discover a poor foundation or plumbing leaks or radon gas exposure.
Just because the inspector finds a problem with the house doesn’t mean it’s time to run away from the deal. Based on the estimate for repair you can negotiate with the owner to fix the problem or offer some money back to pay for the repairs when you become the owner.
If the owner won’t accept responsibility or refuses to help pay for repairs you may want to consider walking away from the deal and starting from scratch. It might be a hard decision but moving into a house with known structural or pest problems won’t be good in the long run.
Some realtors offer new home owners an insurance policy covering defect in appliances and other parts of the house for up to one year after they buy the house. The price is often negligible in relation to the price of the house and it can also be a negotiation tool when you are putting an offer on the house. For the price and what it covers you should usually buy it if it’s available.
Closing Time
Image Courtesy of Flickr
The deal has been closed, all repairs completed and you are ready to take possession of the house. It’s time for the final step: closing.
Closing is the final step in home buying where you will sign stacks of papers moving money from the lender to the buyer and all realtors involved. You will literally be signing documents for most of an hour. And as tempting as it might be to sign blindly, take the time and find out what they all mean. Usually everything is above board, but you don’t want any nasty surprises.
Make sure you don’t leave the closing without a copy of every piece of paper you signed for your records.
The Final Step
Image Courtesy of Flickr
Before you load up the moving van and call in favors from friends and family to help you move your furniture, make one last phone call. Call a certified locksmith to change the locks and/or re-key the locks in your new house. You never know how many keys were given out to friends and family or lost over the years by the previous owners and you don’t want to find out the hard way. One call will give you piece of mind and ensure your new house is safe and secure.
Enjoy
The key to success in home ownership is research and planning. As long as you take your time, follow your instincts, and be honest with yourself you’ll do great. Welcome to the wonderful world of home ownership. It might start out scary, but it’s a wonderful place to be.
]]>
