Buying your first home can be an overwhelming experience. There are so many new things to consider, so many questions to ask and so many things you simply don’t know. There are many home-buying guides out there that are very useful, but there are lots of little tactics you might miss along the way that can make everything easier and less expensive.
1. Renting offers more benefits than you might think
Apartment-dwellers who are ready to buy a home of their own are often keenly aware of the downsides of apartment living, but they sometimes overlook the upsides of living in a rental property. Consider some of the upsides of continuing to rent before leaping into homeownership.
With a rental, your property manager is responsible for maintenance and repairs, not you. If you have a reasonably responsible property manager, they take care of these issues for you with just a phone call. You don’t have to worry about fixing things yourself or finding your own repair person. If you own your own home, those things are your responsibility, and they’ll gobble time from your life and money from your wallet.
You aren’t facing extra expenses like property tax, homeowners insurance, or homeowners association fees. When you rent, these expenses are nonexistent — you may have renters insurance, of course, but it’s far less expensive than homeowners insurance.
The total monthly cost of living in an apartment is almost always drastically lower than the total monthly cost of living in a house. In terms of monthly expenses, it’s virtually always far cheaper to live in an apartment than to buy a house. There are exceptions to this, of course: once the mortgage is paid off, the equation changes drastically, for one. However, for people considering their first home purchase, it’s almost always going to be far more expensive in terms of monthly bills.
If you decide to move out, you don’t have a property to still deal with or sell. If you move frequently, moving out of a rental property is incredibly easy compared to moving out of a home that you own. You don’t have to worry about selling the property once you move out of a rental.
Don’t just assume that a house is the better option financially or otherwise. Think it through, and don’t ignore the pros of living in a rental property.
2. Use a real estate agent
In most situations, a real estate agent on your side during your first home purchase is a big benefit that offers no cost to you. Your agent is paid by commission, but that commission is paid by the seller, not by the buyer, and the cost of that commission is already baked into the home prices that you see. Further more, an agent can help you find a home more efficiently than you can on your own, even with online search tools. They can really hone in on what you’re looking for and use some of the services available only to realtors to find a home that matches your needs. Plus, they’re invaluable guides through all of the steps of the home purchasing process. They earn their commission.
3. No home is perfect
Most of us have a vision of the kind of home we’d like to live in. Some people may want tons of bedroom space for guests or an expanding family. Others may want a giant kitchen for hosting parties or a large backyard for the kids and dogs to roam around in. However, unless you’re building your own home, it’ll be very difficult to find a house that checks every item off the list.
Don’t let perfect be the enemy of the good. Define the handful of core things that really matter to you and don’t compromise on them, but don’t make such a long list of perfection that no house can ever live up to it. You’ll search forever and never find it.
4. You don’t need a down payment
Many people who might be ready to buy a home are shied away from it out of a feeling that they’re unable to come up with a 20% down payment in any realistic period of time. If homes in your area are $400,000 and up, that means a 20% down payment is $80,000 and up, and that’s a pretty hefty savings goal even for a family that’s doing really well.
A down payment is really useful — it not only means a smaller mortgage, but it also means avoiding private mortgage insurance which can cost hundreds of dollars more a month.
However, the real litmus test of homeownership is the gap between your typical monthly spending and your typical monthly income. The bigger that gap is, the more ready for homeownership you are. If you find yourself spending everything you make, then you’re going to struggle with homeownership. However, if you’re consistently able to spend a lot less than you earn, that’s a sure sign that you’re in good shape (or getting there) for buying a home. Make sure you’re using that money wisely, of course.
5. Location, location, location
When you’re first considering a home, it can be easy to overlook the value of the home’s location, but the right location makes a huge difference, but a “bad” house in a great location is better than the perfect home in a poor location.
Here are a few things to consider regarding home location:
- A shorter commute. This might be an obvious thing, but it’s hard to emphasize how important this is. You should aim for the shortest commute possible, not only from where you work now but also with some consideration of where you may work in the future. If you’re choosing between two homes and one is 15 minutes closer to work, that’s half an hour at home each and every workday instead of commuting, which adds up to a tremendous quality of life difference.
- A safe neighborhood. The ability to feel safe when going out of your home after dark makes a tremendous difference in terms of quality of life when you’re a homeowner, as does a lower likelihood of robbery and home invasion. A safer neighborhood will also give you better homeowners insurance rates, so even if you’re paying a little more, you may end up getting that money back on your insurance policy.
- Proximity to services. For example, if you don’t live anywhere close to a grocery store, you’ll either have to include a grocery shopping trip on your commute or you’ll have to invest regular time on regular grocery shopping trips. While many of your habits will change when you move, there are still some things you’ll consistently do, and having those conveniently located is valuable in terms of both time and money.
6. Size isn’t as important.
The size of your home is good for two things: one is space for guests and the other is storage space for your stuff. For more space, you pay a lot more in terms of the price of the home, heating and cooling and property taxes. With guests, unless you are very frequently having large gatherings, you should not buy a larger home just to accommodate guests.
With physical items, consider for a moment the level of clutter and rarely-touched items you have in your apartment. The truth is that most people only use a relatively small number of items each day or even each week, and moving to a larger home won’t increase the number of items you frequently use. Rather, it will just provide more storage space for things you don’t use at all or rarely use, which basically means space for accumulating rarely-used and unused items and the money sink that becomes.
Think very carefully before buying a home that’s larger than what you need, particularly for your first home. A home somewhat larger than your apartment is fine, but there comes a point where bigger is no longer better.
[Read: How Much House Can You Afford?]
7. Consider easy cosmetic changes
When you’re shopping around, it’s easy to have a more positive or more negative feeling about a home than it deserves because of elements that are easily modified, like the colors of the walls and the décor of the previous owner. You might dislike a home because of something like a shade of blue on a wall, when that wall can be painted over in a couple of hours and become whatever color you like.
If you see something you don’t like when looking at pictures of a home or touring one, ask yourself whether that feature can be trivially changed with paint or with different décor. Try to visualize walls in different colors or the furniture arranged differently.
Similarly, make sure you don’t like a house more than you should just because a wall’s painted in your favorite color or someone is a good decorator. Try to visualize your own stuff in the room instead and think about how you would actually use it if you lived there.
8. Shop around for a pre-approval
Shopping around for mortgage preapproval is a must. Not only do you need to find the best rate on your mortgage, but the act of getting preapproved will also let you know how much you can spend when buying a home.
As you’re going through this process, make sure that you’re searching in lots of places for good rates. In particular, if you have anything unusual about your employment history or about your credit history, I would make sure to include some credit unions in your search.
A credit union is much more likely to perform manual underwriting on your mortgage, which means that a person actually sits down and looks at your situation in detail before deciding whether to lend to you and how much. Quite often, banks do automated underwriting, which means a computer algorithm determines how much to lend, and while that works fine in some situations, banks are risk-averse and will often avoid lending to people in situations that aren’t exactly the norm.
9. 15-year vs. 30-year mortgages
15-year mortgages offer several big advantages over 30-year mortgages; 15-year mortgages offer lower interest rates than 30-year mortgages, and, combined with the shorter term of the loan, that means you’ll pay a lot less in interest over the lifetime of the loan. Plus, since even your early payments will see a higher portion of the payment go toward the principal, you’ll build equity in your home much faster with a 15-year mortgage.
The sole advantage of a 30-year mortgage is that it offers lower monthly payments, which is why they can be attractive to some home buyers. The problem is that by taking those lower monthly payments, you’re paying a lot more in interest overall and a lot less toward your principal every month.
If you can’t afford a 15-year mortgage, you probably can’t afford the home. If you’re in a situation where a 15-year mortgage feels impossible but you might be able to make it work if you got a 30-year mortgage, then the truth is that you probably can’t afford the home anyway.
The reason is simple: if your situation is such that a somewhat higher monthly payment takes your situation from “difficult” to “impossible,” then you’re in a risky situation to begin with, even with the 30-year mortgage with lower payments. You don’t want to be in a situation where making your normal monthly mortgage payments is already difficult right off the bat because in that situation any unexpected event could easily mean the loss of your home. Trust your gut. If a 15-year mortgage feels impossible, then you’re trying to borrow too much, no matter what the terms of the mortgage are.
If your preapproval process tells you that you can only borrow a certain amount, borrowing above that is a recipe for disaster.
Banks and credit unions are pretty good at assessing risk and they’re willing to lend you an amount that you’re very likely to be able to repay. They’re not interested in lending more than that because lending more becomes a risk for them. Why? The risk is that you won’t be able to make the payments. In other words, trust the amount of your preapproval and stay within it. Don’t start shopping for a home as though you believe the bank or credit union will lend you a little more. Not only are they very unlikely to do so, even if they did, but you’d also be in a situation where it’s difficult to make the payments.
What if you can’t find a home you want within that amount? In that situation, you may want to wait a while to buy a home. Focus on paying off debts, building up a down payment and improving your earnings so that in a year or two, you may be pre-approved for a higher amount that will help you buy the home you want.
[More: The Best Mortgage Rates of 2020]
10. If interest rates are low, avoid adjustable-rate mortgages
Because of the coronavirus pandemic, home mortgage rates are incredibly low, and banks are rarely promoting adjustable-rate mortgages at all, but they do still exist and are sometimes offered by lenders.
An adjustable-rate mortgage means that at some point in the future, your lender can adjust the interest rate on your mortgage upward, usually in line with some change in federal lending rates. Because of that ability, banks will often offer slightly lower initial rates for adjustable-rate mortgages, under the logic that if interest rates go up in the future, they’ll be able to raise the interest rate on your mortgage.
The truth is that if you have an adjustable-rate mortgage and interest rates go up, you’ll either have the expense of higher mortgage payments or you’ll have the expense of needing to refinance your home into a fixed-rate mortgage at a higher rate than you have right now. Neither one of those things is a good option, especially since the savings from an adjustable-rate mortgage during a time of very low-interest rates is small.
11. Never go above 40% of your take-home pay with debt payments
One very useful quick check when it comes to making sure you can actually afford this mortgage is to figure out how much your total monthly debt payments will be – your mortgage, plus all of your other debts. If that total exceeds 40% of your take-home pay, you’re exceeding your debt-to-income ratio and are putting yourself into a very risky financial situation that’s best avoided.
Truth be told, most banks will not lend you enough money to put yourself in such a situation, but it’s a good way to make sure for yourself that you’re going to be in a good place when you’re making those mortgage payments.
Struggling with the math? Just add up the paychecks that you receive in a typical month, multiply that total by 0.4, then start subtracting your monthly debt payments from that number. The remaining number is how much of a monthly mortgage payment you can realistically afford.
12. Fixer-uppers are great if you really love DIY projects
It can be tempting and exciting to have your first home be a fixer-upper. It can feel like a way to get a big home for a low price, and you’ll be able to improve the value by making lots of improvements to it along the way. Don’t do this unless you are seriously passionate about DIY projects. If you aren’t passionate about home improvement projects or landscaping projects, you’ll end up not doing them or you’ll pay someone else to do them, which will end up costing you more in the long run.
Do you truly envision yourself spending weekends doing heavy landscaping work or tearing down drywall or installing cabinets or revamping a whole bathroom? If that sounds awesome, a fixer-upper is great. If it sounds anything less than awesome, be very careful about taking that leap.
13. Before you move, downsize your life
The time before you move is perhaps the best time in your life to get rid of unwanted clutter. You have to pack up all of your possessions anyway, so instead of taking a bunch of things you don’t want with you, get rid of anything you’re not absolutely certain that you want to keep. Remember, the more you keep, the more expense and time you’ll invest in moving. This doesn’t mean taking endless trips to the dumpster. Rather, try to sell off possessions that may have some value to others. Getting a few dollars out of something is better than getting nothing at all.
A good place to start is by posting things in buy/sell/trade groups for your local community on Facebook as well as on Craigslist. Put reasonable prices on things and be open to negotiation. Saying no to an offer can mean that the item ends up unsold, and you’re better off saying yes to a lower offer on something you don’t want to keep rather than having to throw it away or take it with you.
14. Start your packing as early as possible
Why should you start packing so early? The earlier you start packing, the more time you have to seriously evaluate all of your stuff to decide if you really need it, plus it gives you more time to sell off those items without a time crunch.
The best part? The items that you box up first are likely to be the ones that make the most sense to sell, because those are items you rarely or never use.
15. Save 3% of your home’s value for closing costs.
One big advantage of selling off possessions in the months before the move is that it generates some cash, and you’re going to need that cash when you actually close the deal. The big reason is closing costs.
Closing costs refer to the various expenses that come with doing all of the legal transferring of the title and the initiation of the mortgage. Lots of different people have time invested in making this sale happen, and they all need to get paid.
To be safe, expect that the total of all of the closing costs will be about 3% of the value of your home. Often, it’s a little lower than that, but if you aim for 3%, you should have the closing costs well in hand. You can get an estimate of the total from your lender in the days leading up to the close, but you’ll want to start preparing for this well in advance.
[Read more: What Are Closing Costs and How Much Will You Pay?]
16. Save money for the actual move
There will be tons of little expenses when you move. There will be all kinds of little things that you didn’t think about that will come up at the last minute that simply need $20 or $50 or $100 to take care of. Deposits. Items you didn’t think about needing. Tons of gas from running lots of little errands. Pizza and beer for the people who helped you move. A nice tip for the people from the moving company. Light bulbs. The list goes on and on and on.
The more cash you have on hand for the week of your move, the better. You’ll find that there’s almost no point in your life that will see quite as many little unexpected expenses as the week of the first time you move into a house. Be prepared for it.
When you move in, aim to minimally furnish at first and upgrade from those basics slowly.
There’s a temptation when you first move into your new home to furnish it with lots of beautiful furnishings in each room. You want each room to look like you imagined it and you want that as quick as possible.
17. Enjoy buying and settling into your new home
While the process can seem daunting, buying your first home is an exciting time. While sifting through financials, paperwork and going to open houses, try your best to enjoy the process. Additionally, it’s a fresh start when you move into a new house. You have a clean slate to decorate, paint and organize your life just the way you want it. Enjoy it as much as you can.