Helpful Tips for Every Young Home Buyer This Year
Buying your first home is an incredibly exciting—and sometimes daunting—time in your life. It's a milestone and probably one of the biggest purchases you'll ever make. It makes sense to approach the entire process with wisdom, expert guidance, and a little bit of patience. It's easy to get caught up in the excitement of it all and before you know it, you've committed to something you're not so sure about. Please don't do that!
Today we're giving you some of the tops tips from financial experts (and our own experience in the Topsail realty field) and breaking them down for you. Here are the most helpful tips for first-time home buyers out there who are looking for a little guidance and a solid investment when purchasing a first home.
A budget is people telling their money where to go instead of wondering where it went.~Dave Ramsey
This is the time to prepare for the financial responsibility that lies ahead of you. It's time to take a good, honest look at your spending and where your money is going. It's also the time to cut out the unnecessary spending and focus on your financial goals. How do you do that? You have to create a budget, if you don't already have one. Once you do that, you'll know where you can cut back and how much you can start putting away for a downpayment, closing costs, and the other costs related to homeownership. Buckle down and budget hard because it will be worth it.
Pay Off Debt
Owning a home is going to be more expensive than you think it will be, even if the mortgage payment equates to what you were previously paying in rent. There is just more upkeep and maintenance that is required, and that all costs money of course. Experts recommend paying off as much debt off as possible before you even start thinking about buying a home—but really paying it all off is best. That allows you to focus on your monthly mortgage payments without worrying about the expected (and unexpected extras) that arise with home ownership. Once you are debt-free, you want to stay debt-free. So, as you’re shopping for your first home and getting excited about decorating and filling it with new furniture, be mindful of your budget. It's okay to have a few empty rooms for awhile.
Build an Emergency Fund
Being debt-free is not your only goal. At the same time, you want to be put enough money aside for an emergency fund. Your goal is to have 3-6 months of living expenses set aside. When you get into a home with no payments (besides the mortgage) and have a nice big emergency fund, you’ll have the cash to pay for huge expenses that suddenly come your way. (And there will be expenses that surprise you!) You’ll be able to love the life you’ve set up for yourself because stress and worry won’t be part of the equation.
Figure Out What You Can Really Afford
Before you get emotionally attached to a beautiful house, check your monthly budget to determine how much house you can afford. You need to leave room in your budget for other things, so make sure your monthly housing costs (including HOA fees, taxes, insurance, etc.) are going to be no more than 25% of your monthly take-home pay. Since property tax rates and the cost of homeowner’s insurance vary, check with your real estate agent and insurance company for estimates to calculate how much house you can afford. You can use this mortgage calculator to help you figure out what you really can afford.
Save for a Downpayment
If saving up to pay the total price of a house in cash isn’t reasonable for your family’s timeline, at least save for a down payment of 20% or more. Then you won’t have to pay for private mortgage insurance (PMI), which protects the mortgage company in case you can’t make your payments and end up in foreclosure. PMI usually costs 1% of the total loan value and is added to your monthly payment.
Most conservative financial experts recommend a 15-year, fixed-rate conventional mortgage with a 20% down payment, and here are the reasons why:
- A 15-year term creates a higher monthly payment, but you’ll pay off your mortgage in half the time, have a lower interest rate, and save thousands of dollars in interest.
- A fixed-rate conventional loan keeps your interest rate the same for the life of the loan, which protects you from the increasing expenses of rising rates.
Don't be tempted to get 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 run!
While I encourage people to save 100% down for a home, a mortgage is the one debt that I don't frown upon.~Dave Ramsey
Save for Closing Costs
Along with your down payment, you’ll also need to pay for closing costs. If you’re a first-time home buyer, you may be wondering how much it costs to close on a house. On average, closing costs are about 3–4% of the purchase price of your home. Your lender will give you a specific number so you know exactly what to bring on closing day. These fees pay for important steps in the home-buying process, including: appraisal, home inspection, credit report, attorney, and homeowner’s insurance. You want to save for your closing costs and down payment as quickly as possible, with the same amount of intensity when you’re getting out of debt and building a full emergency fund. In fact, it’s okay to put retirement savings on hold for a short period of time to save for a home—but you’ve got to hustle!
Get Pre-Approved for a Loan
Once you’re confident you have enough cash saved to pay for closing costs and 20% of your home, you’re ready to handle the other 80% by talking to a mortgage lender. Get prequalified for a loan and take the extra time to get a pre-approval letter before you start your home search. Pre-approval shows sellers that you’re a serious buyer, which is a great way for first-time home buyers to get ahead in a competitive market. To get pre-approved, your lender will need to verify your financial information (proof of income, taxes, etc.) and submit your loan for preliminary underwriting.
Shop for Houses You Can Afford
According to recent data reported by the National Association of Realtors (NAR), most buyers either found the home they purchased online (51%) or through a real estate agent (31%). Doing both sets you up for success! Find homes you like online (and that are within your price range) and send them to your real estate agent so they have a good idea of what you’re looking for. Then they can use the multiple listing service (MLS) to find homes that meet your criteria in your desired areas. An MLS is created, maintained and paid for by real estate professionals to help buyers view the largest pool of properties for sale in the marketplace. Real estate agents also provide valuable market expertise and can help you find great deals on homes as soon as (or before) they’re listed.
After you’ve found some homes for sale in your price range, be careful not to make a decision based on the property alone. According to a NAR survey, 78% of home buyers believe neighborhood quality is more important than the size of a home. And 57% of buyers would opt for a shorter commute over a larger yard. So make sure you factor neighborhood quality and location into your decision. Ask your real estate agent for information on crime rates and the quality of schools around your prospective neighborhoods. Calculate your new commute times to see if they seem manageable. Visit the neighborhood at different times and days to check for traffic conditions, noise levels, and if people are comfortable being outdoors.
Think Long Term
Once you’ve narrowed down the neighborhoods, attend a few open houses. Looking at homes that are for sale—even if they’re not a perfect fit for you—is a great way to learn more about the area. When you eventually do find a house you love, you’ll know how your place compares to better or worse homes in that neighborhood. When it comes to buying, a good strategy is to find the most affordable house in the best neighborhood. If you buy at the bottom of the price range in a good neighborhood, you’ll have more room to build home value.
Find the Right Real Estate Agent
Your first home is a big purchase—maybe even the biggest one you’ll have ever made up to this point in your life! Because of that, you don’t want to risk messing this up. A trusted, experienced real estate professional will take the weight off your shoulders by helping you find a home, negotiate a deal, and see the process through until closing. Check out our previous post on 10 Things You Should Look for in a Real Estate Agent.
The thing I have discovered about working with personal finance is that the good news is that it is not rocket science. Personal finance is about 80 percent behavior. It is only about 20 percent head knowledge.~Dave Ramsey
what advice would you give to a young first-time home buyer?
We'd love to hear your thoughts.