Buying a house is exciting yet stressful. And if you want the process to go as smoothly as possible, you’ll want to have a clear plan in place. The question is, do you know what this plan should account for?
5 First-Time Homebuyer Tips
Your first home will be the single largest purchase of your life (to date). And while it almost certainly won’t be the last home you buy, it can have a significant impact on the financial trajectory you take over the next couple of decades.
Here are a few tips to ensure you make a smart decision:
1. Clean Up Your Finances
As soon as you think there’s a chance you’ll buy a house, you should begin cleaning up your finances and getting prepared. The more time you have to do this, the better off you’ll be. (A cushion of at least six months is advised.)
Cleaning up your finances looks like paying off bad debt, padding your savings account, increasing your income, and addressing your credit score. A few months of hardcore focus in these areas can make you a much more attractive borrower/buyer.
2. Set A Budget
Most people get approved for a home loan and then base their budget on the approval documents, when they should really be working in reverse. Your budget should be independent of the loan approval. Then, if the approval comes back for less than what you had anticipated, you can adjust your budget to meet these restrictions.
Every homeowner has to decide how much they’re willing to spend on a house, but we’d recommend being reasonably conservative with your first home. For best results, your mortgages should equal 25 percent or less of your monthly take-home pay. Thus if you bring home $4,000 per month after taxes, you’ll want a mortgage payment of $1,000 or less.
It’s also important to consider the price of the home and the down payment. Avoiding private mortgage insurance (PMI) should be a priority. And to avoid this added fee – which is roughly one percent of the total loan amount per year – you’ll be required to put at least 20 percent down.
While you certainly aren’t required to put 20 percent down on a house, buying a property where you can afford to do so is a wise choice. It indicates that you’re financially prepared.
3. Get Approved
Once you have your finances in order and have gone through the exercise of setting a budget, it’s time to apply for a home loan. This process can be a little stressful if you’ve never done it before, but doesn’t have to be overwhelming.
You can use this home loan checklist to see what sort of information and documentation you’ll need (including driver’s license, proof of income, tax returns, etc.).
You’ll typically get pre-approved for a certain amount. Then, once you have an offer accepted on a house, the lender will go through a more meticulous due diligence phase to approve you for the final loan.
4. Separate Needs And Wants
This is one of the most important steps in the process. (But it’s also something that most people overlook.)
Needs and wants are two very different sets of criteria. By taking the time to differentiate between the former and the latter, you can enter the home search process with greater clarity.
If you’re buying a house on your own, simply grab a sheet of paper, draw a line down the middle, and jot down needs on one side and wants on the other. If you’re buying a house as a couple/family, each decision-maker will want to do this exercise individually. Then you can convene together and create a master list.
Armed with a clear set of needs and wants, your priority is to find a house that checks off all of the “needs” boxes. Then – and only then – do you consider wants. (This is the icing on the cake. It’s nice to have, but it’s not necessary.) It’s likely that you’ll only get a fraction of your wants.
5. Hire An Experienced Agent
Everyone knows a real estate agent. You probably know a few in your area. But be wary of choosing an agent simply because you’re friends.
This is an important decision and you need someone who has experience and is a good negotiator. If that so happens to be your friend, great! If not, you’ll need to have a tough conversation and find someone else.
Develop A Clear Plan
Don’t go into the home buying process, assuming you can approach it with the same lax attitude you do with other purchases.
This is a serious investment with major ramifications in your financial life and family life. By addressing the points of emphasis in this article, you can increase your chances of making a wise decision.