Does your new year’s resolution involve purchasing your first home? Buying a home is a huge accomplishment and can be a fantastic investment in your future. Here are 7 tips to help with your home-buying journey!
- Talk to a lender early
The very first step towards buying a home is determining your budget by getting in touch with a lender. A lender will take into consideration your income, debts, and credit score. They will then give you a “Pre-approval letter” that states the bank will lend you up to a certain amount for your home purchase. If the amount is lower than you would like, your lender can advise on how you can increase your pre-approval limit by either increasing your income, saving a larger down payment, or paying off certain debts. When meeting with your lender, ask them how much to expect to pay for a monthly payment and ensure this is within your budget. It can also be helpful to talk to a lender in advance before you are ready to buy. They can advise on ways to build credit so that you are ready when the time comes.
2. You don’t always need a 20% down payment
It is a common myth that you need to have 20% to make a down payment on a home. This is far from true! Many factors are involved when determining the exact down payment needed such as property type and your credit score, but it is common for buyers to make down payments of 10%-15%. There are even FHA loan programs that require as little as 3.5% down. Sometimes home prices are going up more quickly than you could save for a larger downpayment and it can be more financially advantageous to buy sooner with a lower downpayment. One downside of having a down payment less than 20% is that you will need to pay Private Mortgage Insurance (PMI) on your loan. Talk to your lender about how much this would be–it might be less than your are expecting. PMI only needs to be paid until the loan-to-value ratio drops below 80%.
3. Interview Real Estate Agents
It is important that your agent is a good fit. Buying a home is the largest purchase most people will make in their lives and it’s crucial to work with an agent you feel comfortable with and trust. It can be helpful to interview several real estate agents to see who works best with you and your goals. Your real estate agent will be an invaluable resource to advise on local knowledge, market insights, and negotiation tactics.
4. Consider Condos and Single Family Homes
Single-family homes and condos each have their benefits. SFHs can be more desirable for buyers who require a yard/outdoor space. Condos can win in the low maintenance department–typically the HOA (home owners association) will take care of things like trash collection, snow removal, and exterior maintenance of the units. Condo owners pay a certain amount monthly or quarterly that goes toward general expenses for the complex and utilities. Both can be great options.
5. Budget for Closing Costs
One expense that some buyers don’t plan for is closing costs. Closing costs are typically split between the buyer and seller and include appraisal fee, title and escrow fees, and loan fees. Ask your lender what to expect for closing costs to ensure that you have adequate funds available for both closing costs and the down payment.
6. Plan for Updates & Renovations
Once you have made an offer on a home, it is important to get it inspected by a professional home inspector. The inspector will advise on any potential safety hazards as well as what might need to be updated or replaced in the near future. Home ownership always requires some level of budget for routine maintenance and “un-sexy” upgrades. Some older homes might need plumbing or electrical updates or a new furnace or hot water heater. And then, of course, you might want to change your home’s finishes to update the style. When watching HGTV, it can seem super easy to just tear down a wall or flip a kitchen. In reality, home updates can be costly and require the help of professionals. If you’re particularly handy you can probably do a lot yourself but be realistic about what isn’t in your wheelhouse and budget accordingly.
7. This doesn’t have to be your forever home
Buying a home feels like a very big step and it can be tempting to want your first home to be your dream home. If your dream home isn’t in the budget though, it can still be financially advantageous and a great experience to buy a home. You can build equity for 2-5 years and get that much closer to your long-term goals!