For a lot of young adults, the process of first-time home buying can be both fun and stressful. Your home is one of the biggest purchases you'll ever make. It's also complex - with lots of laws, financial terms, and even physical aspects of the house and land you need to consider and understand.
But owning a home is incredibly rewarding. Homeownership is touted as the "American Dream", and a recent survey from Harvard found that 86% of people believed homeownership was better off than renting.
And if you're reading this article, buying a home is likely on your mind.
Here are a few tips to help you navigate the first-time home buyer waters in a successful manner:
First-Time Home Buying Starting Point
Here's where you need to start before you even start looking for a house! It's important that you do this pre-work so that you're ready to buy a house when the time comes.
I view the home buying process as "hurry up and wait". Things either move extremely fast (like you need to make an offer today or you'll lose the house), or you're sitting around and waiting for a response.
By having this pre-work completed, you'll be able to move fast when you need to.
First - Why Are You Buying A Home?
It's important to ask this question before you get started - why are you even buying a home. Seriously. Just because your mom and dad tell you it's the next step, it's not always worth it.
In fact, recent studies have shown that (financially) home ownership is no different than apartment rentals over the long run. While everyone's situation may vary, you have to keep in mind that homeownership is expensive.
When you own a home, you have:
- Property Taxes
- Upgrades (if you want to keep you property valuation high)
- Transaction costs (commissions, escrow, etc)
The main reasons people prefer homeownership over apartment rentals (or house rentals) include:
- Stability (nobody can evict you)
- Customization (it's yours, you can do what you want to it)
It's hard to put a monetary value on those - especially stability - but realize it comes at a cost.
Ready Your Finances
Buying a home is no easy feat if you're not truly financially ready to do so. Months before you decide to officially begin your house hunt, you should be getting your finances ready.
This means saving for a down payment and then some. Most lenders want to see not only a solid down payment, but 6 months or more of expenses for after you close escrow. Plus, what if repairs are needed right away.
You also should be working on your credit, and knowing how much mortgage you can afford.
Know Your Credit
If you're not already doing so, you should definitely be monitoring your credit report. While scores vary between the three major credit bureaus (TransUnion, Experian, and Equifax), it is beneficial to have a ballpark figure of where your score lies on the spectrum of how creditors rate their customers. You can get your score for free from companies like Credit Karma. See our full Credit Karma review here.
Make sure to check your credit report for any errors and if you find some, you need to file the necessary disputes/submit information to get these taken care of ASAP. It can take weeks or longer to get errors fixed on your credit report, so start early.
Whether you like it or not, your mortgage rate will be directly related to how high your credit score is so you need to do everything in your power to keep it as high as possible.
How Much Home Can You Afford?
One of the best things to do during this time is to calculate how much home you honestly can afford. Run some figures on one of the multitude of online mortgage calculators and then practice living that way--if your rent is less than your projected mortgage payment, send the difference to savings.
Also count on increased utility payments, condo fees if you'll be purchasing something other than a single-family home, insurance premiums, and general maintenance (after all, you'll no longer be able to rely on a management company or landlord if your water heater breaks in the middle of the night).
Once you've been able to comfortably live with this figure, you're one step closer to homeownership.
The Start Of The Process
Now that you've done the pre-work, it's time to start the process of actually getting ready to buy a home.
Get a Great Agent
When you're buying a home for the first time, education and research are two of your greatest allies. Additionally, choosing the correct agent is a great way to set yourself up for a much easier purchasing process.
Tips for choosing a real estate agent include finding someone who's licensed, can provide recommendations from satisfied customers, and is well-versed in the type of property you're seeking. The can also help you through road-bumps, such as if your home appraisal is wrong and you need to appeal.
Read this article as a primer - it's sparked some controversy among real estate agents but the comments are gold. Check it out: What Do Real Estate Agents Really Do?
Get Pre-Approved For A Mortgage
Next, you should get pre-approved for a mortgage. While this step isn't required, it's highly recommend. Plus, in competitive housing markets, sending in your pre-approval with your offer could be helpful (or even required to be considered). It basically tells the sellers that you can afford to get a mortgage, so they should consider your offer seriously.
If you don't know where to start, check out our list of the best online mortgage lenders. It's a great place to start and get pre-approved for a loan. Plus, since everything is done online, you can likely get your pre-approval lender online in minutes.
Depending on your down payment, you may be able to qualify for different mortgage offers (especially first-time home buyer programs):
- FHA Loan: Get a low 3.5% down payment for first time home buyers
- VA Loan: Specifically for veterans to purchase a home with no down payment requirements
- USDA Loan: No down payment required but must purchase a home in an eligible area
- Conventional 97: A program from Fannie Mae that allows just 3% down
- Good Neighbor Next Door Program: A program for public servants who buy homes in eligible areas and can get a grant for 50% of the purchase price
- HomePath Ready Buyer Program: Complete an online training from Fannie Mae and get 3% towards closing costs
Start The Home Buying Search
Next, it's time so start the home buying search! A good realtor can set you up with a search on the MLS for homes that meet your criteria. You'll get email updates as new homes are listed. A really good realtor will also have a heads-up on homes that will be listed soon.
The Process Of Buying Your First Home
You've done the pre-work, you've found the house, now you need to buy it!
Making Your Offer
Once you find the house you want to buy, it's time to make your offer and hope it's accepted.
When you make your offer, you need to disclose your down payment, loan type, and any terms that may be important to you or the seller. This is also where you put down an earnest money amount if your offer is accepted.
Some common contingencies that we recommend for buyers include maintaining a financing contingency and inspection contingency. These allow you to back out without losing your earnest money.
Another request example is you can ask to have the refrigerator and washer/dryer left behind. Or you can grant the seller a rent-back for up to 30 days.
There are pretty limitless opportunities for crafting an offer, so work with your agent to make your offer compelling.
Home Inspections are Mandatory!
Anyone who has seen HGTV's Holmes Inspection knows the horrors that can lurk in a seemingly beautiful home. Regardless of your DIY expertise, there's no way you should ever forgo a home inspection.
Not only do they give you an "out" after you sign the Purchase & Sale agreement if issues are found with the house, but they give you a better idea of what you'll have to invest in the property beyond the purchase price and closing costs. Do yourself a favor and seek a licensed, experienced home inspector who will tour your potential home with a fine-tooth comb.
Expect to pay upwards of $200 - $1,500 depending on the size of your home.
Locking In Your Mortgage
Once your offer is accepted, it's also time to finalize your mortgage. You can use the company you got pre-approved with, or you can continue to search and find another lender.
However, time is ticking - and you usually only have 17 days for your financing contingency (on average). If you delay too long in finding a lender, you might have to ask for an extension (and the seller doesn't have to grant it).
You want your lender to confirm you can remove the financing contingency before you do so. This means your lender is set and you're totally approved and locked in on your mortgage.
At this point, you also need to get your homeowners insurance lined up.
We recommend you shop around a little bit, as homeowners insurance is pretty quick and easy to line up. Check out this guide to finding homeowners insurance.
You'll also have to have your mortgage company coordinate with your insurance company prior to the closing, as both have to endorse each other.
Finally, it's time to close on your house. The closing process is where the escrow company (or lawyer, depending on your state), make sure everything is set and you sign the documents and process the paperwork.
Before closing, you'll need to wire your money into escrow - usually about 3 days before the close date. Your mortgage company will also fund your loan, and your insurance needs to go into effect on the closing date.
Once you close and sign, the property deed change will be recorded and the house will be yours!
Unless you had a rent back agreement, you'll get the keys and can move in! Then, check out this amazing New House Checklist for moving in.
Celebrate the Process
Buying a home is a wonderful yet stressful process. Make sure to slow down when things get crazy so that you're fully able to appreciate--and enjoy--every step of the way.
And remember that even if the "dream" house you've found doesn't actually end up being yours, your home is out there. Keep a smile on your face and celebrate finding it to the fullest. After all, you only get to be a first-time home buyer once!
What tips do you have for first-time home buyers?
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him on the About Page, or on his personal site RobertFarrington.com.
He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.
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