Tips for First-Time Home Buyers

It’s exciting to be a first-time home buyer!

But I understand how difficult it can be, especially when homes are selling for nearly $350,000 on average and available homes are selling in less than two weeks.

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This could make you want to buy a house quickly, which could hurt your financial goals and keep you paying a mortgage well into your old age.

That is something no one wants!

Believe me when I say that buying your first home in the right manner is worthwhile.

And that means buying a home that you enjoy and that does not jeopardize your financial goals in the future.

You could be thinking, “Yeah, Rachel, that would be fantastic.”

But where should I begin?

I’m pleased you inquired!

I’ve compiled a list of 10 pointers for first-time home buyers as they navigate the home-buying process.

Put these tips into action right now to make your first home a blessing rather than a burden.

Ten Home Buyer Tips for First-Time Buyers

Pay off all of your debts and start saving for a rainy day.

Apply the 25% rule to determine how much house you can afford.

Put aside 10%–20% of the purchase price as a down payment.

Remember to set aside money for closing costs.

Before you go house hunting, be pre-approved for a loan.

Find a home that fits your budget.

Do some research in order to find the best neighborhood for you.

Consider the long term.

Make a Competitive Offer (That Isn’t Too Expensive!)

Make sure you’re ready for the big day.

1.Pay off all debts and put money aside for an emergency.

It may not be the first-time home-buying advice you expected, but it is without a doubt the most crucial.

Why?

Because buying a home is costly—much more so than renting—even if your monthly house payment will be comparable to or less expensive than your present rent.

You are liable for everything when you own a home.

All of the upkeep

All of the blunders

All of the maintenance

And it quickly adds up!

Before you even consider buying your first home, make sure you’re debt-free and have a three-to six-month emergency fund set aside.

When things go wrong, buying a debt-free (save for the mortgage) home with a large emergency fund shields you from major financial losses.

And believe me when I say that things will go wrong.

However, because your money won’t be locked up in payments and interest, you’ll have enough cash to cover any unexpected expenses.

That’s what I’m talking about when I say “peace of mind.”

Now that you’re debt-free, I want you to keep it that way.

As you look for your first home and get excited about decorating and furnishing it with new furniture, make these four words your mantra:

Stick to your spending plan.

That’s easier said than done, as the spender in me knows.

Especially if it means you’ll be left with some empty rooms for a while.

Your future self, on the other hand, will thank you!

Stop right there if you’re thinking, “Oh well, I’ll simply put it on credit!”

If you want the good ones you learnt while getting out of debt to persist, you need to stop repeating negative money habits.

2. Use the 25% Rule to Figure Out How Much House You Can Afford

Check your monthly budget to see how many houses you can afford before you become emotionally connected to a gorgeous home.

Make sure that your monthly housing costs (including HOA fees, taxes, and insurance) do not exceed 25% of your monthly take-home earnings.

As an example, suppose you earn $6,600 every month.

Calculate your maximum monthly housing payment of $1,650 by multiplying that figure by 25%.

Don’t forget that your monthly payment includes property taxes and homeowner’s insurance.

Here are the home alternatives you can afford based on a 15-year mortgage with a 4% fixed interest rate, a 1.14 percent property tax rate, and a $1,200 annual homeowner’s insurance policy:

home for $195,000 with a 10% down payment ($19,500).

home for $225,000 with a 20% down payment ($45,000).

home for $253,000 with a 30% down payment ($75,900).

A home for $288,00 with a down payment of 40% ($115,200).

Keep in mind that these are only estimations.

Try different combinations with our mortgage calculator to find the best mortgage amount, interest rate, and down payment for your budget.

Because property tax rates and homeowners’ insurance costs vary, get estimates from your real estate agent and insurance company to figure out how much house you can afford.

3. Save 10%–20% of the purchase price for a down payment.

At the very least, save for a 10–20 percent down payment if buying cash for the entire cost of a property isn’t feasible for your first home.

A 20% down payment eliminates the need for private mortgage insurance (PMI), which protects the mortgage in the event you default on your payments and wind up in foreclosure.

PMI typically costs 1% of the overall loan amount, and you’ll be charged that 1% each year.

As a result, it can significantly increase your monthly mortgage payment.

Mortgages for First-Time Home Buyers Are the Worst

If a 20% down payment is out of the question, first-time home buyer programs with single-digit down payments may be appealing.

But don’t put them to use!

In the long term, these solutions will cost you more.

And keep in mind that if it appears to be a good deal for you right now, it’s because it’s a better deal for your lender in the end.

Avoid the following low-to-no-down-payment mortgage options:

Adjustable-Rate Mortgages (ARMs): With a low initial interest rate, ARMs appear to be a good deal, but they allow lenders to alter the rate, transferring the risk of rising interest rates (and monthly payments) to you.

FHA Loans: You can acquire an FHA loan with as little as 3.5 percent down, but you’ll have to pay a mortgage insurance premium (equivalent to PMI) for the duration of the loan.

Thousands of dollars will be diverted from your mortgage repayment.

VA loans allow veterans to purchase a home with no money down.

However, if the real estate market changes, you may easily owe more than your home is worth.

These loans also come with a slew of fees and typically have higher interest rates than traditional loans.

The Best Mortgage for First-Time Home Buyers

Only a 15-year fixed-rate conventional mortgage with a down payment of 10–20 percent is advised.

The following are the reasons for this:

A 15-year mortgage has a larger monthly payment, but it will be paid off in half the time.

That means you’ll own your home outright in 15 years and can invest the money you’d have spent on mortgage payments over the next 15 years toward growing wealth and contributing.

A 15-year term also allows you to take advantage of a lower interest rate and save tens of thousands of dollars in interest.

A fixed-rate conventional loan locks in your interest rate for the duration of the loan, protecting you from the growing cost of interest rates.

What Does a 30-Year Mortgage Look Like?

If you’re thinking of getting a 30-year mortgage for your first home because it has a cheaper monthly payment, don’t.

When you compare the costs of a 15-year versus a 30-year mortgage, you’ll see that the 30-year mortgage is far more expensive in the long term.

Hundreds of thousands of dollars extra, to be exact.

Consider the following scenario: you want to buy a $225,000 house with a 20% down payment.

That means you’ll need a $180,000 mortgage.

Here’s how the cost differences between your 15-year and 30-year mortgage options are broken down.

At 4%, the 15-year bond is a good investment.

Vs.

The 30-year bond is a good investment at 4.5 percent.

180

Payment Amounts

360

$1,608

payment on a monthly basis.

$1,189

$59,658

Interest Paid in Total

$148,334

$239,658

The amount paid in total

$328,334

With a 15-year fixed-rate mortgage, you’ll save $88,676, not to mention the fact that you’ll be debt-free 15 years sooner.

I mean, a savings account with nearly $90,000 in it—hello!

4. Don’t Forget to Set Aside Money for Closing Expenses

You’ll have to pay closing expenses in addition to your down payment.

Closing costs account for roughly 3–4% of the home’s purchase price on average.

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Your lender will provide you with a particular number so that you know exactly what to bring to your closing.

These charges cover crucial aspects of the home-buying process, such as:

Appraisal

Inspection of the home

Credit report

Attorney

Insurance for homeowners

Let’s look at an example of a $225,000 home to see how this works.

You’ll need $9,000 in closing expenses if you multiply $225,000 by the higher 4 percent closing cost average.

Let’s now add it to your $45,000 down payment, which is a 20% down payment.

The two add up to $54,000, which is roughly how much you’ll need to save for a down payment and closing costs on your first home.

Save for your closing expenses and down payment with the same zeal I advise clients to use while getting out of debt and creating a full emergency fund to get it done as soon as feasible.

In reality, putting your retirement plans on hold for a short period of time to save for a home is acceptable—but you must work hard!

5. Before looking for a home, get pre-approved for a mortgage.

When you’re sure you’ve saved enough money to cover closing fees and 10–20 percent of your home’s cost, you’re ready to talk to a mortgage lender about the rest.

Before you begin your home hunt, get prequalified for a loan and take the time to obtain a preapproval letter.

Preapproval shows sellers that you’re a serious buyer, which is a great way for first-time homebuyers to get an edge in a competitive market.

Your lender will need to check your financial details (proof of income, taxes, etc.) and submit your loan for preliminary underwriting in order to get preapproved.

If you follow my advice and live a debt-free lifestyle, you may need to find a lender who believes in debt-free homeownership and will deal with first-time home buyers with no credit.

6. Search for a home in your price range to purchase.

The majority of first-time home purchasers find their home online or through a real estate agent.

You’ll have a better chance of succeeding if you do both!

Find homes you like on the internet and send them to your real estate agent so they know what you’re searching for.

Then they can use a multiple listing service (MLS) to find homes in the areas you’ve chosen that meet your needs.

Real estate agents build, maintain, and pay for an MLS, which can greatly assist first-time home buyers like you in viewing the largest pool of houses for sale in the marketplace.

Real estate brokers can also help you find amazing offers on homes as soon as (or before) they’re listed, thanks to their extensive market knowledge.

7. Take a look around a few neighborhoods to see which one is the best fit for you.

Don’t buy a home only on the basis of its location and price.

According to a National Association of Realtors survey, home buyers are more willing to compromise on a property’s condition (20%) and size (18%) than on the neighborhood’s quality (6%) or distance from a school (2 percent).

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As a result, make sure to consider the quality of the area and its location when making your pick.

Inquire with your real estate agent about crime rates and the quality of schools in the areas you’re considering.

Make a rough estimate of your new commute times to evaluate if they’re feasible.

Visit the neighborhood at various times and days to assess traffic and noise levels, as well as whether or not residents are comfortable being outside.

You can only live in a neighborhood that makes you and your family happy.

Attend a few open homes once you’ve narrowed down the area.

Looking at homes for sale is a terrific way to learn more about the region, even if they aren’t a perfect fit for you.

When you do locate a home you like, you’ll be able to see how it compares to other homes in the area that are better or worse.

8. Be patient and think long-term.

When it comes to buying a home, a wise technique is to look for the cheapest house in the best area.

You’ll have more room to develop your home’s value if you buy at the bottom of the price range in a nice area.

Future buyers in a $200,000 area are unlikely to hunt for a $300,000 home.

Let’s imagine you come upon a home that is the only one on the block without hardwood floors or granite countertops.

If you have the funds to make those improvements, you’ll be able to increase the value of your home right away!

Keep an eye on the neighborhood’s home values and economic activity.

Is the value of your home increasing or decreasing?

Are businesses expanding or contracting?

What’s going on in the neighborhood might tell you a lot about how valuable it is.

It may take a bit longer to discover a home that will be a solid long-term investment, but it will be well worth it, especially if this is your first home.

9. Make a Reasonable Offer (Within Your Financial Capacity!)

Assume you’ve discovered a home you like and can afford.

You’re ready to make an offer because you’ve already been preapproved for a loan.

It can be difficult to know how much to offer if you’re a first-time home buyer.

That’s when you can rely on your real estate agent’s knowledge.

Request that your agent assist you in ensuring that your offer is not only competitive, but also fits within your budget and the home’s worth.

Make sure not to make an impetuous, higher-than-you-can-afford offer just to get ahead of the competition.

In a competitive market, a personalized letter may make your offer stand out among several offers.

10. Make sure you’re ready to close.

The closing procedure will commence if the seller accepts your offer.

To keep things flowing smoothly, you need to know what to expect when buying a home.

The average closing takes 53 days, giving you plenty of time to finish up any loose ends.

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From the home inspection through the final walkthrough, a real estate agent will schedule the remaining stages and keep you updated on any delays.

Make sure you read every document and ask your real estate agent to explain anything you don’t understand as you get ready for closing, especially before signing the official contract for the home transaction.

Because the documents will bear your signature, you will be held accountable for anything you sign.

Are you ready to begin?

Your first home is a significant investment—possibly the most significant you’ve ever made in your life!

As a result, you don’t want to take any chances.

A real estate professional will take the burden off your shoulders by assisting you in finding a home, negotiating a bargain, and seeing the process through to completion.