Buying a home is the cornerstone of the American Dream, but it’s also one of the most expensive and confusing experiences most of us will ever go through.
If you’re thinking about buying a home, the most important piece of advice is this: Don’t panic. But beyond that, you need to understand the process so that you can set realistic expectations about your real estate journey.
Get a Buyer’s Agent
Many of us are addicted to browsing Zillow for available homes, but there’s much more to home buying than looking at pretty pictures. So here’s my best tip: get a buyer’s agent you can trust.
Buyer’s agents can help you find a home that meets your needs, set up viewings, help you understand the pros and cons of a property, and act as your advocate when it’s time to make an offer. They are paid by commission and will usually split the fee with the seller’s agent. This fee is rolled into the overall price of the home and is not paid directly out of your pocket.
Apartment Therapy has a much more detailed breakdown of how buyer’s and seller’s agents operate, but the bottom line is that it’s a good move to have a buyer’s agent by your side. If possible, get recommendations from people in your network.
When you put your information into a site like Zillow, it’ll send up a signal to all the real estate agents who have paid to get leads in your area. You’ll be inundated with calls and texts almost immediately, and choosing an agent at random from the ones who contact you might not lead to the best result.
Your First Home Probably Won’t Be Your Forever Home
Have you heard the term “starter home”? In the real estate industry, lower-priced, smaller houses are called starter homes because they appeal to first-time buyers. While some people might stay in their first home for decades, most people find themselves looking for different things in a home over time.
When you’re a first-time buyer, either as a single person or part of a young couple, your needs will be very different than if you have a houseful of kids or elderly parents to care for or when you are an empty-nester yourself. You might need to move for work or family, or you could find yourself needing more (or less) space.
Rather than trying to pick a home that will serve every single possible path your life might follow, choose something that works for you and your budget now. The good news is that your starter home will build equity and help you buy your next house when the time comes. It also means that you don’t need your first house to check every single box on your wishlist.
No House Is Perfect
When you’ve been dreaming about your first home for a while, you’re bound to end up with a long wishlist of features and amenities. Unfortunately, once you start house-hunting you’ll realize that finding everything you want in your budget is basically impossible.
First-time homebuyers need to brace themselves for compromise — and a certain amount of disappointment. Your dream house might not exist, especially when market inventory is tight.
Before you start seriously looking, organize your list into three categories: “dealbreakers,” “wants,” and “nice-to-haves.” Try to limit your dealbreakers to just two or three items. Many house hunters want to buy a house in a specific neighborhood, so it makes sense to put that at the top of the dealbreakers list. While you can remodel in the future, you can’t realistically move your house to a new neighborhood!
Many things on your wishlist could be added, changed, or updated later if the house otherwise meets your needs. For example, replacing kitchen appliances is a straightforward upgrade. Adding or updating a bathroom is a little more challenging, but it’s certainly possible to remodel before you move in. Redoing the floors is another remodeling task that you can take on before you move, so don’t be too turned off by that dated linoleum or carpet.
Do Your Homework
The more you know about the market in your area, the better prepared you’ll be to find a great home. Get an idea of how much homes are selling for–and how fast they are selling, too. At the time of this writing, the market is very hot. Many properties remain on the market for just a few days, so buyers need to be ready to make an offer quickly.
Besides getting an idea of the market as a whole, it’s smart to check up on any homes that catch your eye. Beyond getting an independent home inspection, you should also look at the history of the property. In addition, the crime and noise levels on the street could be a deciding factor.
One thing that too many homebuyers ignore is the property’s flood risk. Realtor.com now offers a flood risk rating, which can help you avoid an unpleasant surprise the first time it rains after you move in.
Realistic Budgeting and Planning for Hidden Costs
How much house can you actually afford? Chances are good that you may be approved for a mortgage that is higher than you can comfortably manage. Remember that the cost to rent a home doesn’t include property taxes, mortgage insurance, or routine upkeep. You’ll need to budget for those as well. It’s smart to buy a home that comes under budget if you can find one that meets your needs.
The cost due at closing isn’t limited to the down payment, either. While you should ideally put down the standard 20%, you also need to budget for closing costs. These are fees paid to the lender for your mortgage. According to Rocket Mortage, you can expect to pay anywhere from 3-6% of the total price of the home. You might be able to negotiate with the seller to cover all the closing costs, but in a hot market, you have less leverage to get those seller concessions.
You’ll also need to pay for an appraisal, which usually costs $300-$600. Depending on how your sale is structured and the requirements of your lender, other hidden fees might be paid for real estate attorneys, couriers, credit reporting, HOA transfers, and flood certification.
Don’t forget to leave money in your budget for moving expenses! Hiring a quality moving company isn’t cheap, and it’ll cost more the farther away you move. In addition, you may want to buy furniture, appliances, and other goodies for your new home. Buying those things before you close could damage your credit, so wait until after all the paperwork is completed and the keys are in your hands.
Get Preapproved Before You Look at a House
As you begin your homebuying journey, you’ll run into two important terms: prequalified and preapproved. Although they might sound similar, there’s a key difference between the two statuses.
To be prequalified means that you could theoretically borrow up to a certain amount of money for a home based on your current financial situation. A lender will look at your finances to determine how much house you can afford. This is a good starting, point, but it won’t allow you to make an offer. For that, you’ll need to get preapproved.
In this very competitive market, some real estate agents may require that you are preapproved before you make an appointment to see a house. This is a more involved process, but it also gives you a more accurate number. Be prepared to supply tax returns, pay stubs, and bank statements. The lender will also run your credit report, which could potentially count as a “hard inquiry” that impacts your score.
Once you are preapproved, you’ll have a letter in hand from the lender that details the amount you can borrow and the type of mortgage. When you show up to look at a home with a preapproval letter, it shows that you mean business. You will be able to make an offer much more quickly than someone who still needs to go through the process.
Nerdwallet recommends that you start the preapproval process right before you begin your home search in earnest. That way, you’ll know how much you can afford to borrow and be in a great position to snag your dream home.
The Costs Keep Coming After You Close
Once you sign the paperwork and pay all the closing costs, you will be the proud owner of your very first house! Take a moment to feel excited about reaching this milestone. Then get realistic about the costs to keep your lovely new home.
Your monthly mortgage payment doesn’t just pay down your loan. A large percentage of it will actually go to interest. You will also be paying property taxes each month, rather than as a lump sum, as well as a homeowner’s insurance premium. If you did not put 20% down on your home, you’ll also likely have to pay for private mortgage insurance.
Unlike renting, the responsibility to maintain your home is now yours alone. The Penny Hoarder recommends that you save 1-2% of the home’s total purchase price each year for maintenance and repairs. If you bought a $200,000 home, that means budgeting $2000-$4000 per year. This money should be used to pay for routine upkeep such as lawn care and HVAC service as well as any emergency repairs like replacing a roof or a hot water heater.
Although it might mean delaying your search or settling for a less expensive home, don’t put all your savings into the downpayment and closing costs. Begin your life in your new house with a cushion in place for repairs and maintenance, as well as any other emergencies that might come your way. Because as any homeowner can tell you, things will go wrong, and they’re always more expensive to fix than you think.
Despite the hassle of buying a home and the cost of ownership, the pride you’ll feel (and the equity you’ll build) makes it all worthwhile.