First-Time Buyers Guide: Purchasing Your First Home
Thinking about buying your first home can be an intimidating prospect. Between mortgages, credit reports and down payments, it can all get a little overwhelming. We'll walk you through the basics of getting into a place to call your own.
We’ve all heard the news that millennials aren’t buying homes the way previous generations did. Following the crash of the real estate market in the early 2000s, it makes sense. The process can be intimidating. Saving up for down payments can be daunting. Buying in cities — where many millennials are choosing to live long-term — is complicated and expensive. But the trend isn’t all that it seems. Plenty of millennials are interested in buying, but may be far more pragmatic about whether or not it’s the best choice for them. If you’re wondering how to go about buying your first home, know that being armed with the right information is more than half the battle.
Decide If Buying Makes Sense for You
This may seem like an obvious thing to consider, but until you do the math and research, the answer may not be as straight-forward as it seems. In many large cities, buying doesn’t always get you the same value as renting. In places with competitive real estate markets, where large down payments are required to be an attractive buyer, sometimes you'll find that renting means less money out of pocket every month with benefits like landlords to make necessary and costly repairs.
Because real estate markets vary widely from place to place, do a little digging where you live. See what a suitable home costs. When you find a reasonably priced home, use a handy mortgage calculator to determine what it would cost you on a monthly basis. This just gives you an estimate of actual costs, but how does it compare to what you can afford to rent? Are you getting more house for your money, or less? If you plan on living in one place for a long time and want to invest your money in a property rather than losing your money on rent, maybe buying is the right choice, even if it costs more.
Save for a Down Payment
This is probably the biggest hurdle of all for first-time homebuyers. Whether you are young and haven’t been in the workforce for long enough to build a nest egg or older and just can’t save what you’d need, a down payment can be a huge deal breaker. There is no easy answer for how to save thousands upon thousands of dollars.
An unspoken secret about first-time buyers is that many of them borrow money from family to get into their first home. If you have family that's willing and able to do so, it’s often the easiest way. But this isn’t an option for all first timers. Cutting down on non-essential expenses is a good place to start. Take every penny that could’ve gone to a lovely latte and put it in your house fund. You may need to skip on shopping for new clothes or become a coupon queen to build a decent savings. It may be laborious, but tracking your budget closely (every penny you spend) for a month will let see where your money is going.
The standard requirement for down payments is around 10% of the purchase price of the home. The more money you are able to put down, the lower your monthly payments will be. But this is just a starting point. Some lenders require a larger down payment (especially for co-ops if you’re consider those), but there are also federal loan programs for first-time buyers, like FHA, that will accept as little as 3.5% down for well-qualified buyers.
Get Your Credit in Order
To be a "well-qualified buyer" you need to have good credit. If you don't know your credit history or your credit score, find out what it is. There is a free annual credit report available to start the process. You’ll be able to see what the three major credit reporting agencies have on file for you. You won’t get your credit score from these reports; however, just your history. A report that includes your score can be purchased from the three agencies if you want to learn how lenders see you. The minimum a lender like FHA wants to see is 580, but a score of 740 or higher makes you a very good candidate for a mortgage.
When you get your report, first check that everything is accurate. If you find something that isn’t right — like a credit card you didn't open — you can dispute the history and have your report amended. Having a good history involves things like paying your bills on time over a period of months to years. Your debt-to-income ratio is also an indicator of how good a risk you’d be to a lender. How much money you owe to how many places — credit cards, loans, and car payments — is another big factor. Ultimately, you want to be able to show that you’ve established that you can handle a debt, you’ve paid it on time and have enough money for any outstanding debts you do have.
Fixing bad credit can take years, but it’s an investment that will pay off in the long run. The better your credit, the easier it will be to qualify for mortgages at more lenders at a lower interest rate. While you’re saving up for that down payment, work on your credit at the same time. If you’ve already got stellar credit, you’re way ahead of the game!
Get Pre-Approved for a Mortgage
Once you’ve got your credit in good order, you want to get pre-approved for a mortgage. This may seem like the most intimidating part of the process, but it actually will help you when you’re looking for a home. Many realtors require that you get pre-approved before showing you homes because they want to know that you’re serious, and that if you do find a place, you’ve got all your ducks in a row to make an offer.
You can shop around for lenders online or at your bank or credit union and compare interest rates, or sometimes realtors have mortgage brokers they work with regularly who can help you through the process. Basically a lender will tell you the maximum amount of money they’re willing to lend you based on your income, your credit history, and any assets you have (your savings or a "gift letter" if a family member is giving you the money). You'll need to have all your paperwork in order to give to the lender so they can give their pre-approval. So, yes, maybe it is the most intimidating part of the process after all! You’re being judged by what you look like on paper and have to hold your breath a little while you wait for the decision. But once you have it, the fun part of the process can finally begin.
Find a Real Estate Broker You Trust
Because looking at houses has become so easy since the glorious invention of the online real estate listing, it may seem like you don’t need a real estate broker. Truth be told, the realtor can be your biggest ally in finding a home. Armed with information about what neighborhoods you’d consider, how many bedrooms and bathrooms you require (and a whole host of must-haves and nice-to-haves), a real estate agent will offer up options that fit the bill. Sometimes, once they’ve gotten to know you a bit, they’ll even bring you options you wouldn’t have otherwise considered.
Agents make their money when you buy a home, which at first glance can seem a little shady. But look at that prospect from the other point of view: if they don’t find you a home you like, they don’t make any money. You’re both working toward the same goal. Gather up listings that you’ve found yourself and share them with your real estate broker. It’ll give them a good sense of what you’re looking for. And be sure to give useful feedback on why you do or don’t like a place you’ve been shown. If the commute would be too far, that’s great feedback. If you have no desire to do any renovation, that’s also necessary info. It’ll help your professional really hone in on what is most important to you.
Consider the Diamond in the Rough
As a first-time buyer, you may not be able to get exactly what you envision. Between buyer competition and steep prices for high-end finishes, you may need to be willing to compromise on what you want in a first home. Remember, it's your first. If it’s not where you see yourself living forever, don’t let that be an impediment. You can always buy a second home years down the road that is a bit more perfect for you. (Plus, you’ll have already learned all this good home-buying info and will have a house as an asset!)
Certainly make sure you’re aware of easy-to-change problems with a home. Number one competitor for an easy-to-fix problem: paint color! Purple walls may not be your choice for a living room, but that’s a very, very easy fix. It takes a little training to not let yourself be turned off by a place because of decor choices, but it can be done. Even if hardcore renovations are not an option for you, putting in a little elbow grease for easy fixes like paint, fixtures, or ripping out old carpets can turn a lackluster listing into just the right home for you.
Think About All the Costs
All those "small" fixes can add up quickly. Giving yourself a good idea about what you would need to spend on a home outside of your mortgage payment is a really critical factor that can be easy to gloss over. Not only home repairs, but taxes, insurance, closing costs and any home association or condo fees need to be factored into your spend.
It's often advised not to spend "all" your money on your house and down payment. While that may seem like an entitled proviso, it's recommended because of unexpected costs that are bound to creep up. You don't want to find yourself in the position of having to make a repair but no longer having the money to do so. Ultimately that may mean getting into a cheaper house that will leave you with a little cushion.
Make Your Offer
This is where that real estate broker comes in again and is worth their weight in gold. They work in the market day in and day out and will be able to advise you on what a good offer is for a particular home. Whether a house is listed over-market or under, they will be able to tell you what sort of offer you can present that will make you the strongest contender.
There is often back-and-forth negotiating that owners and their brokers will engage in with you. Knowing your absolute maximum budget and your desire for a particular home will help you and your broker decide how to handle this part of the process. Sometimes small things like writing a letter to the homeowner and telling them about yourself can make the difference. And sometimes another buyer will swoop in with an all-cash offer that you can't compete against.
It can be exhausting! But once you hear those magical words, "they've accepted your offer," it will all have been worth it.