We’ve helped many first-time homebuyers purchase a home over the years. We’ve collected some of the best buying a house for the first time tips.
Starting from the pre-approval process, getting the docs ready for the lender to review. Until the closing date where they got the keys and move into their new home.
We’ve considered 14 of the best tips to help you, a first-time homebuyer navigate through the challenges of buying your first home.
Don’t Be Too Hard on Yourself
Many first-time home buyers want to buy the perfect home right away. They have to have all of the features that they have on their list. The home must be located in the best neighborhood and best school district.
The house must have the latest and greatest features. If it doesn’t have these items, then they are disappointed. Buying a house for the first time doesn’t have to be this way. No home is the perfect home, so there will be a couple of features that you want, but it won’t be checked off your list, and that’s okay.
It should be fun and exciting. It’s your first home! It might be the beginning place to raise your family. Also, it’s the place where you can finally make it yours, with no more rental restrictions!
The home that you are buying now will fit your needs now. Within a few years, your family will outgrow the home that you’re going to buy, or your taste will change about the house you are living in.
It is okay to select a home that doesn’t have everything on your list. Homebuyers usually achieve their dream house or get closer to the house that they really want with their second or third house, so don’t be so hard on yourself.
Pay Down Debt to Lower Interest Rate
Many first-time homebuyers don’t know this when they are buying their first house. Banks don’t like to see borrowers with ten maxed-out credit cards. They rate these borrowers as high risk and might give you the loan but will seek to be compensated for your higher risk. As a consequence, you may be only offered a higher interest rate, leaving you stuck with a higher monthly payment.
The number of credit cards you have is not as important as the amount that you are borrowing on those credit cards. You can have up to 20 credit cards, and that won’t have much impact on your credit score. If you have a lot of credit cards and are maxed out on all of them, this could be a red flag.
Banks use the ratio of what they call debt-income ratio, and this is just the amount of expense you pay each month as a percentage of income that you make.
Generally, a conventional loan that is 20% down will require a debt to income ratio of 43% or less. As for qualifying for an FHA loan to qualify, you will need a debt to income ratio of 50% or less.
Start Looking at your Credit Score One Year Before Buying
Having a great credit score to mean thousands of dollars saved in interest costs over the life of the loan. A credit score of 760 compared to 620 can see a difference of 1%.
Credit repair about three to six months, and to rebuild your credit can take up to a year. So, let’s say you had an error or mistake on your credit report.
Once it has been filed, it takes 30 days for the creditor to respond. After they respond, you will have to provide proper documentation to support that there was an error on your credit report.
Next, you will have to rebuild your credit score. This process can take up to a year because you must show a habit of being fiscally responsible, and it will take some time to show up on the credit report, which will, in turn, affect your credit score.
Myfico.com, Interest rates as of 11/19/2019
Know Your Closing Cost Upfront
Most first time home buyers are unaware of prepaid costs. The typical closing costs are the down payment, lending fees, appraisal, discount points, home insurance, title and escrow fees, and lastly private mortgage insurance.
So what are prepaid? This can be property, tax, homeowners insurance, and taxes paid in advance. The money is then put into the escrow account called an impound account.
Get a Feel for the Neighborhood
It can be horrible to live in an area where the neighbors are unfriendly and don’t get along.
Check online to see what the neighbors say about the neighborhood. Go there on a sunny day when people are outside and start a conversation. There could be a garage sale or an open house, any of these events will give you a good idea about the neighborhood. It’s also worth looking up the neighborhood to see if there’s a Facebook group, their posts can give you an insight into neighborhood problems.
The neighbors are likely to come and visit the open house. Ask them questions about the neighborhood to get a feel whether it’s the right place for your family.
The things you don’t want in a neighborhood are trash being left everywhere, unmaintained yards, and house exteriors looking shabby.Save for a Downpayment
A bigger down payment can help you win an offer over other buyers, lower monthly payments, and qualify for more.
Yes, you can be preapproved for a house by putting a deposit as low as 3.5% down. In a hot market, it can be challenging to get a house for a 3.5% deposit, so don’t bank on this being the case.
Sellers who have many buyers competing for their house, of course, love to get the highest price. But, the bank won’t lend them any amount of money. So, price is important but also other factors. A buyer who puts 20% down versus a buyer 3.5% can be viewed as a more qualified buyer in the seller’s and lender’s view.
So, in a multiple offer situation if the offering price is the same. The other factor that would determine the winning offer is the amount of the down payment. Can’t afford the house you want? Having a bigger down payment can help with this.
Having a bigger down payment means you don’t have to borrow so much money from the bank. Therefore, they are willing to lend you more money. A low down payment means you have to pay Private Mortgage Insurance (PMI) which is $300-$400 depending on your loan amount. So, when it comes to saving for your down payment start very early.
Find Out Major Repairs with an Inspection Contingency
Buying a house for the first time can be scary if you don’t know what you’re doing. A home inspection contingency allows you to have a certain time frame to hire an inspector, inspect the home, and respond to the seller.
In response to the seller, you’ll have the option to not buy the house, buy the house as it is or request some of the items to be repaired or replaced.
It doesn’t mean you can do the inspection at any time and respond anytime. If you don’t respond in time, you may lose the earnest money. Earnest money is a term used to describe the deposit payment that you put down with your offer.
In a low inventory housing market, contract timelines can be squeezed or shortened. You’ll have many other home buyers wanting the same house as you do, and a lot of competition to be successful
The seller might receive three or four offers. Other offers will shorten their time frame, as they must do a pre-inspection, or they will waive the inspection to make their offer more appealing. So, using home inspection as a contingency is not always possible.
Your First Home Might be Further Out
Buying a house for the first time a challenge homebuyers have is matching location to their ideal price. Almost every home buyer wants a home in a great location close to the area that they work. A home in a great location means a higher price, the same as a home closer to the city is more expensive. Popular areas will always fetch higher prices because they are in greater demand. If you’re looking for a place close to the city, and a great school district, you will see more expensive properties.
So, when it comes to buying your first home, you might have to drive a little further each day to get the house you want. The median property price for Seattle is currently $688,000. That means you will be paying approximately $4,000 a month, assuming a 10% down payment with a 4% interest rate.
But let’s say we move out to the outskirts of Seattle. In Burien, the median home price is $459,000, the monthly payment would about $2,590 a month so about $1500 less than Seattle.
In Renton, the median is $495,000 which means your monthly payment would be about $2,791 per month. In Kent, the median is $415,000, and your monthly payment would be around $2,400 a month.
Further, you’re willing to have a commute of about 30 minutes. In Federal Way, the median is 384,000 and the monthly payment will be about $1,775 a month.
Tacoma is about 45 minutes south of Seattle. The median home price is $315,000 so your monthly payment will be about $1500 a month.
Don’t Try to Time the Market
Buying a home is similar to investing in the stock market, as both require patience and research. You can’t invest in stocks and expect to turn a profit in a short period of time. While some may succeed, it is unlikely that you will turn a profit. The most common scenario is that you will lose your investment.
Some home buyers are waiting for the next recession to buy homes, but you will have lost thousands of dollars while trying to get into the home that you want.
We’ve had buyers who decide not to buy and did not want to be in a multiple offer situation. They chose not to buy a home at all and waited for four years. Now, the housing prices have increased tremendously and what they’re paying now is greater than it would have been in the past.
If we look at the median from 2014 until 2019, home prices have increased from $410,000 to $640,000. So that means for the same house, you have to pay $230,000 more.
If you look at the short term within a year to five years, home prices will go up and down but if you look at 20 or 30 years, home prices will increase dramatically.
Saving for a 20% Down Might Cost You More
Let’s say in 2015, you wanted to save for a down payment of 20%. How much will that cost you? It’s saying 2015, you had a 10% down and wanted to save 20% so you don’t have to pay PMI. How much would that cost in a period of five years?
Private mortgage insurance is insurance that you pay as a buyer when you have less than 20% down for a home. The amount is paid each month until you reach 20% equity in your home. The fee can be removed by refinancing or depending on your loan if you drop it off when you reach 20% equity in your home.
Let’s say you wanted to buy in Seattle. In January 2015, Seattle’s median home price was $415,000. The interest rate what about 3.5%, a down payment was $41,500, your monthly payment is $2,317 and your PMI was about $242 per month.
Let’s say you didn’t want to pay for the PMI per month and decide to save 20% and then buy a home five years later, that means you will be paying no private mortgage insurance. But you will be paying about $200,000 more for the house.
Thus, trying to save for a 20% down can cost you more overall. Sometimes, home prices increase faster than the amount you would be paying for private mortgage insurance.
Photo by Serpstat from Pexels
Have the Right Expectations of the Market
A seller’s market refers to when you have a lot of demand and not enough supply, so many buyers are competing for a small number of homes.
On the other hand, a buyer’s market is when the market has a high supply and the demand is low. In other words, a lot of homes are available but there are only a small amount of buyers.
In a seller’s market, homes go into pending very quickly, typically within a week of being on the market. You’ll have to compete on the price of the home. Contingencies and addendums will be removed or lessened. You might have to write a letter to the seller and tell them how much you love the home or even sell your soul.
The strategy is different in a buyer’s market. A lot of homes are available for you to choose from. You’ll have more time to look at homes. Contingencies should be included to protect yourself. Negotiations on price and terms will be less difficult than in a seller’s market.
Don’t go into a seller’s market expecting a buyer’s market. You will lose out on the house that you want.
The same applies to a buyer’s market. Don’t go into a buyer’s market and think that it’s a seller’s market. You can overpay for a home and leave a lot of money on the table.
Your Representation is Free, Use It.
When a seller lists a property, they usually pay for the listing agent fee and the buyer’s agent fee.
The listing agent only represents the seller. They are working in the seller’s interest which is to get the best price and terms.
The buyer’s agent represents you as the buyer. They are there to protect you from disclosing information that will adversely affect you as the buyer. They can prevent you from buying the wrong house in a bad neighborhood or have many major repairs.
A great agent can tell you ahead of time that a house is not worth your time because he can foresee many problems going into the transaction and saving you money from doing the inspection and appraisal.
The Buyer Agency Agreement is beneficial to the buyer’s agent and the buyer. This is an agreement between you and the buyer’s agent saying that you are hiring them as the agent, and they are authorized to find you a house.
The agreement will show that you are serious and great agents will work super hard for you.
Photo by Naim Benjelloun from Pexels
New Construction and Used Home
When you’re buying a house for the first time, this is one of the choices you’re going to have to make. You’re either going to buy a brand new home or a used home. There are a lot of differences between the two.
The median price for a used home and a newly constructed home are very different. Below, we compare the median home price, and benefits between a used home and a newly built one.
The main difference when you’re buying a new construction home versus a used home is when you move in. In a used home, the home is already built so moving in can be about a month after signing the Purchase and Sale Agreement.
However, with a newly constructed home, after you sign the Purchase and Sale Agreement you might not move in until six months later.
A new home will have all of the latest features, an open floor plan, high ceilings, new appliances, barn sinks, quartz countertops, and the list goes on and on. Having new items means less maintenance in the near future. But these will cost you more money and are less affordable.
A used home won’t have all of the latest upgrades and that means budgeting for maintenance soon. However, these homes are more affordable.
The Types of Homes
Condos are the most affordable, low maintenance but they don’t have a lot of privacy. You own everything inside the walls and you don’t own the land. The Homeowners Association takes care of the maintenance outside. You will have neighbors all around you unless you have an end unit.
Townhouses are between a condo and a single-family house in affordability, privacy, and maintenance. However, you do own the townhouse and the land beneath.
Owning the land means that your expenses are a little higher than a condo. You will either have neighbors attached to the left or right of you but never on top or below you. So, you’ll have a little more privacy. Some townhouses have HOA maintaining yard and for some, you will have to maintain it yourself. The yard is usually not very large, so maintenance is easier than a single-family home.
Finally, a single-family home offers the most privacy, lots of maintenance, and costs the highest out of the three choices. The lots are usually bigger so maintenance is required. If privacy is what you want, then this will come at a cost. Neither the sides, top. or the bottom of your house is attached to any other house.