Buying your first home demands a lot of considerations. It is a big decision, and you will have to be aware of many things to make the most out of your investment such as community, types of neighbors, nearby facilities, house features, how long will you be living here, and more.
Before looking for a home, consider how much you can afford using the 30% rule detailed below. Once you have an idea of your budget, it will be much easier for you to narrow down your choices such as neighborhoods and desired square footage. Keep reading on; we will help you with these and more home buying tips that you can consider to ensure your first home buying experience will be a pleasant one!
Learn your desired housing market
Start your search by researching the market conditions for the nearby neighborhoods. Is it a buyers market where there are more houses for sale than people looking to buy in which case you can often get houses cheaper without many competing bids? Or is it a sellers market where there are less houses than buyers and to get your offer accepted you will need to compete with many other buyers and potentially need to waive your inspection contingency and guarantee financing. I don’t recommend this for a first time buyer but it may be needed to be considered a serious buyer in hot markets like Seattle, Arlington, New York, and other areas where people are flocking to for high income jobs.
Other things that will influence the housing prices in certain neighborhoods is quality of schools, crime rates, proximity to public transit stations and shopping areas, and how far away you are from the major city centers. So if you don’t mind a longer commute to your job downtown and desire a slightly larger house consider looking into housing markets further away.
To help with your search you can hire a real estate agent who will be able to help you with their decades of experience. An experienced agent can help in the following ways.
- Showing you listings that may not even be on the market yet
- Point out neighborhoods that are known to be up and coming where you will have a chance at higher appreciation on your property
- Help you find fixer uppers if you plan to live in the house while improving it to use as an investment down the road
- Search for houses for you that meet your must have lists and schedule private showings. When you tour the house imagine you are already living in it. Visualize yourself tidying the kitchen or having friends over. House is the function, flow, and atmosphere?
- Help you put together a buying offer for the house to lock in your commitment to purchase the house if it is accepted
- With their relationships to other real estate agents your offer could be more likely to be viewed as a serious offer for the sellers
- Inspect the home with you to tell you if the listing price is fair
- Be able to network you with financial institutions that are offering the best mortgage plans
- Know if the market is trending to a sellers market or a buyers market and use that information to come up with the best offer to give you the highest chance of getting a house you’re interested in
Your real estate agent will also be your point of contact for negotiations with the sellers in the event there are repairs that need to be done to the house before you will agree to buy it. Finding a great agent will really go a long ways towards finding the best deal in your market and avoid the hidden money pit houses and decaying neighborhoods.
Search for the best available financing
Now that you have an idea of the houses you will want to potentially buy; the next step is to figure out how in the hell you are going to pay for this big stack of wood, nails, wires, and plumbing that costs hundreds of thousands of dollars. The steps I recommend following are listed below.
- Ensure you have a clean credit history before going to banks for a mortgage. They will review all your debts before you are approved of the loan. High credit debts also cause lower credit scores which result in worse loan offers costing you more money. If you have a credit score below 720 consider improving this before getting a home or you WILL pay thousands of dollars more from higher interest rates.
- Get recommendations on banks that have the best mortgage promotions for first time buyers from trusted friends or your real estate agent
- Get a pre-approval from the bank where they will consider your income and credit report and score to tell you how much money you would be likely to be loans for your new home
- Use your pre-approvals to go to other banks and see what better interest rates and discounts to loan fees they can give you
- Look for a loan that can allow you an affordable down payment, low interest rate, and low private mortgage insurance (PMI) or lender paid PMI for a slight bump in your offered interest rate. There are some loans available to veterans and other qualified individuals that may allow you to pay close to 0% down-payment if you can find those. However, be aware your down payment does reduce your monthly payment since it lowers your loan responsibility. Your down payment also goes directly into the ‘equity’ of the house which in most cases you can expect to get back when you sell the house.
- Consider if you want a 15 year loan or a 30 year loan. A 15 year loan is better if you are able to put down a higher down payment and can afford the larger monthly payments. This loan will save you 10’s of thousands of dollars and you get to quit making mortgage payments in half the time.
- The better 30 year loans available as of 2020/2021 should allow you to put 5% down-payment and get a ~3.1% interest rate for people with good credit scores (720+). Even just 0.1% difference in the interest rate you are offered can save you hundreds to thousands of dollars during the lifetime of your loan.
- Save extra money to pay for movers, extra furniture, and any home repairs you may run into in the first several months of owning your new home
The 30% Rule for Home Buying
When buying your first home, it is helpful to understand the 30 percent rule. The 30 percent rule means you should not spend more than thirty percent of your gross monthly income toward your mortgage. This will allow you to have 70% for your vehicle, living expenses, utilities, and other general savings without much stress. Just imagine what will happen if you spend more than fifty percent on your house. You will have difficulties to meet other expenses and saving towards an emergency fund that can help you pay your mortgage during any emergencies that may come up. With a large mortgage payment compared to your income you may not even be able to pay your home loan on time under normal circumstances and this puts you at risk of having the bank foreclose on your property. If this occurs, you will be forced to move and forfeit any equity you have in the property. So, act smart and plan intelligently to avoid going bankrupt and stay safe in a financial crisis.
The 30 percent rule seems reasonable, right? You will have a new home, and at the same time you will be unlikely to face financial difficulties from your new purchase. Sadly, many homeowners do not stick to this 30 percent rule from being drawn in by fancy big houses they don’t need yet and face many financial complications. It is not about your financial commitments only. It is about your financial confidence as well to be able to provide for yourself and family. Also to have even more financial confidence consider living a more minimalist lifestyle.
If you are planning to buy a new home, you will have to manage your budget responsibly. First, follow the thirty percent rule to estimate the monthly payment you can comfortably afford. Figure out how much money you will be able to pay for your down payment. Then use a mortgage calculator to determine how much total will be able to afford that allows you to follow the 30% rule. Often a bank will grant you way more than this on your approval and the number the bank gives you will tempt you to look at houses out of this budget. And of course more expensive houses will have bigger spaces, better finishes, extra bonus rooms and features and it will be hard to resist. It’s better to not use the number on the pre-approval when you look at houses and go with the total price you can afford that you calculated based on the 30$ rule.
Find A Home That Fits Your Expectations
While looking for a home, you should never compromise your unique requirements but also don’t buy more house than you need too soon. You should always pick a home that meets your needs. Ask yourself a few questions before deciding on one. Do you need an office, a basement, open concept? Prepare your check list and then search for a home that meets your end needs or give this information to an agent and have them search for you. Know the amenities and available facilities. If you are looking for a home office, make sure that it has enough room to accommodate all your stuff. Also if you are a bachelor with no kids or no plans to rent out rooms then consider if you really need 4 bedrooms and 3 baths? If not then go for a smaller house and invest the money you save to help set you up for success later on when you do buy your first family home instead of just sinking money into bank interest.
Also consider if you want a house that is move in ready, has several small projects, or is a total fixer upper. The move in ready house will obviously be more expensive but if you have a busy lifestyle this is the way to go. If you have any carpenters in your family and don’t mind going hands on with renovation and design improvements then a house that needs improvements could be a better long-term investment.
Consider Using House Hacking To Improve Your Financial Situation
As you are buying a home for the first time, you might not be aware of the positives and negatives of house hacking. House hacking is a term for buying a duplex then living in one side while renting out the other half. This is a great way to start building long term wealth by building equity in your property and reducing your monthly out of pocket expenses for your mortgage from the rent you will collect from the person that rents the other side.
The drawback to house hacking is you will have someone living right on the other side of you if you have any loud evenings but at least it is someone you get to pick who lives there. Also you may have to go knock on their door once in a while to collect rent if they are late. If this is a family member that might be awkward to some people if you don’t want to be a landlord. Another drawback is if your tenant runs into any late night problems you may get woken up when they knock on your door to take care of the leaky toilet spewing water all over.
Generally those are short term inconveniences which are minor compared to the long term investment benefits of house hacking. This is also a great approach to home ownership if you are single as it allows you lower rent than an apartment; an asset you are generating equity in; and when you finally do meet a spouse you can rent the half you were living in and use the cash flow from the two units to buy a nicer single-family detached house than what you would have if you didn’t buy a duplex.
Are You Buying As An Unmarried Couple?
Many prefer to buy a house as a couple to be able to combine money for a down-payment and reduce the monthly payment. It is often a good decision since both of you are going to share the expenses. When you and your partner are able to come together you can also buy a more luxurious property. However if you are doing this before marriage be aware of the potential if things don’t work out and the potential added strain on a growing relationship of managing a household together.
If things do go awry you will be left with two options. You will have to sell the property and pay off your mortgage and then split the proceeds. If one of you wants to keep the property, then he/she will have to buy out the partner and find roommates to help pay the other part of the mortgage. This will likely occur additional fees to transfer the ownership of the loan and the title.
These same problems will also come up if you are buying a home with a friend or a relative if the buyers are looking to get into something nicer than they could afford on your own. Just have an exit strategy and an agreement in place before closing on the home when you are buying with someone else.
Wrapping Up
These are a few home buying tips that millennials can consider while buying their first home. Intelligent planning and thorough research can be effective to make a smart decision. Know your budget and preferences and hire an experienced agent. Explore all the available financing options and follow the 30 percent rule.