Buying a home for the very first time can be scary, exhilarating and confusing — emotions that make sense when you’re about to embark on what might be the single biggest purchase of your life. Even with all the information available on home buying, there are still plenty of things first-time buyers wish they knew before they made the leap into homeownership.
Click through to learn from buyers that know best.
Take Time to Save
Eric Patrick and his wife purchased a home using an FHA loan product, which requires an attractive down payment of as little as 3.5 percent in exchange for the buyer carrying private mortgage insurance for a minimum of 11 years up to the life of the loan. Patrick explains the downside to this approach, “PMI can really add on quite a bit of money to your monthly mortgage, and it takes years for that to get paid off.”
To cancel FHA insurance, your only option is to refinance the loan into a conventional loan. Conventional loans might also require you to purchase PMI if you put less than 20 percent down — or have less than 20 percent equity in your current home when refinancing.
When financing a new conventional loan, consider saving at least 20 percent to put down to avoid having to purchase the insurance. When refinancing an FHA loan into a conventional loan, you’ll need 20 percent equity in your home to avoid a PMI purchase.
Study the Market
Chelsea Hudson is a public relations professional in New Jersey. She says that timing your home purchase can make a big difference in what you’ll pay for a home. In her opinion, first-time homeowners should know about the market conditions that could influence the price of a home.
“During a seller’s market, potential homeowners might find themselves bidding higher than what the house was originally listed for and outside of their budget. In a buyers’ market, potential homeowners have more room for bargaining and more options,” said Hudson.
Consider a Multiunit Home
Having a home with a separate unit allows you to share living expenses with a renter. Quilen and Hannah Blackwell moved to Chicago’s south side and renovated a two flat. This arrangement worked well for them because the rental unit covers their mortgage payment. “It’s nice to own a home, build equity in the property and not have it all come from your own income,” Quilen said.
Shop Around for Lenders
Obtain as many loan estimates as you can and compare terms like interest rate, origination fee and estimated monthly payment amounts. Jeff Proctor, a personal finance writer, said this step is important, “Take the extra time to shop around for the best lender. Even a tenth of a percentage point in your interest rate can mean tens of thousands of dollars in savings over the term of your mortgage.”
Discover and Save: How to Get the Best Mortgage Rate
In competitive markets, investors can swoop in with cash offers to beat out owner-occupant homebuyers. Would-be buyers can have a more competitive offer with pre-underwriting, according to Matt Hackett, an operations manager for a mortgage broker.
“Ask if the lender will pre-underwrite your income, assets and credit so that you will know exactly how large a loan you qualify for based on current underwriting standards,” Hackett said.
Research the Community
Many times, homebuyers fall in love with a home or neighborhood without a complete picture of how the community is changing — for better or worse. Justin Lavelle is a social media director and blogger with a background verification firm in Northern Virginia.
He says, “Check with local law enforcement about crime statistics in the area.” Lavelle adds, “There are also many good online services that will tell you details about the area and about people that might be living in proximity to the neighborhood you are looking at, such as sexual offenders.”
Worth Checking Out: Best Places to Buy a Home for First-Time Homebuyers
Jessica James is an accounting professional in the city of Chicago. She’s taking advantage of classes offered by lenders and nonprofit organizations for first-time homebuyers.
“Take courses that can provide information on topics like financing and property management offered by community groups. Many of these resources are low or no cost for first-time homebuyers,” James said.
Make Pricey Homes Affordable
House hacking is a way to cover your mortgage by renting out parts of your home to roommates or temporary visitors. Craig Curelop works for an online real-estate forum as a financial analyst in Colorado where he found a home with a $400,000 price tag.
The monthly payment, however, was more than he wanted to cough up. Craig did some research and found that he could earn an extra $1,000 a month by renting his bedroom on Airbnb while he camped out in the living room. It worked, and he now uses the proceeds from rental income to cover monthly mortgage payments.
Know Your Limits
Although you might be able to qualify for a hefty mortgage loan based on your debt-to-income ratio, income, savings and other factors, that doesn’t mean you should accept it.
Scott Alan Turner is a self-made millionaire who teaches the masses about attaining financial independence via his podcast and YouTube channel. He believes homebuyers should write out a budget with all expenses, such as food, vacations, investing and utilities. “Whatever is left over is what you can afford in terms of a house payment,” Turner said.
Consider reducing expenses and paying off more debt if your budget figures indicate that a house payment isn’t feasible.
Buy Beneath Your Means
Even if you’ve gone with the ultraconservative estimate of how much home you can afford, you might be even better off by spending less than that. Having more margin in your monthly budget means there’s more room to save money and more potential to deal with financial emergencies.
Matt Schulz, an industry analyst for CreditCards.com, chimes in about his personal experience regarding buying a more-than-affordable home, “The best piece of advice I can give around buying a house is to buy beneath your means.”
Make sure you understand the total cost of homeownership. Not only will you have to cover your mortgage payment each month, but there are many other home expenses to consider, too. Alison Bernstein, founder and president of The Suburban Jungle Realty Group, said, “Don’t bite off more than you can chew. Beyond the initial purchase, there are many hidden expenses associated with homeownership — from closing costs to insurance, furniture to landscaping, child care to car expenses and on and on.”
Consider the Long-Term
It can be hard to think long term when purchasing your first home, but it’s important to consider how your life might change and how your first home fits into that outlook.
Andrew Finney is a real-estate consultant in Las Vegas who urges first-time homebuyers to think about scenarios that can change their family housing needs such as live-in relatives or have kids, such as, “Do you have enough bedrooms for the kids? Is it in a good school district? Is it close to a major street?” The answers should give buyers more insight into their needs and help them choose a home accordingly, said Finney.
Remember Resale Value
Again, as a first-time homebuyer, you’re likely just trying to take care of the here and now, but try also to consider if you would be able to get back your investment or, even better, make a profit if you had to sell your home unexpectedly.
Alex Villacorta is an analytics expert on home values at HouseCanary. His firm’s analysis suggests there are many hidden characteristics that seem to influence a home’s value such as backyard views, how far a home is set back from the street, privacy features and others.
Savvy homebuyers should be mindful of what influences a home’s value and aim to purchase a property with good prospects for appreciation and higher valuations down the line.
Get a Home Inspector
You’ll likely get referrals from friends, family and even your Realtor for home inspection service. No matter how well-meaning people in your circle will be, make sure you take time to research and vet any home inspector you use. Find out the limitations on their liability and the total scope of what their services entail.
Ruben Izmailyan, a software engineer and developer of BudgitApp, recommends having a reputable home inspector in mind before putting in an offer on a home because things start to move really fast if your offer is accepted. He sums up the experience like this, “Trust your Realtor with what she does best: Finding your dream home, helping you put in an offer and guiding you through closing. Finding an inspector should be on you.”
Understand Lending Qualifications
Before you start the homebuying process, know what it takes to qualify for a mortgage. Banks want to know that you are qualified to borrow money and pay it back. Be knowledgeable of requirements around income, debt-to-income ratios, credit scores, assets and more. Then, be prepared to meet those requirements.
According to Jack Chapple, a real-estate investor, your credit score is one of the most important factors to qualify for a mortgage, and if it’s low, it doesn’t work in your favor. “The bank doesn’t trust you, and you are going to pay a higher interest rate,” Chapple said.
Have Your Paperwork In Order
When applying for a mortgage, the burden of proof is on you, and you’ll need the paperwork to support your qualifications. Valencia Caigano is a small-business owner who shares how important it is to have a consistent income and a job.
In her experience, she says banks like to see that you’ve been at the same job for at least two to three years. “You want to show that you are a stable adult,” Caigano said. She believes that your pay stubs, tax returns, bank statements and other documents should be kept on hand to prove your stability and ability to be a responsible borrower.
Keep reading to make sure you have the correct paperwork.
More on Real Estate
- 13 Best First-Time Homebuyer Programs
- Craziest Things That Kill Your Home’s Value
- Why You Should Buy Your Home During the Winter Despite What Experts Say
- Watch: Even Beyoncé and Jay-Z Mortgaged Their $88M California Mansion
We make money easy. Get weekly email updates, including expert advice to help you Live Richer™.