For those who have not purchased a home before, they might find this process to be intimidating. There are a lot of considerations to make one purchase a home. For most people, this is going to be the biggest purchase that they make in their entire life. Furthermore, purchasing a home should also be viewed as a significant investment. When done correctly, homes have the potential to appreciate significantly in value. With this goal in mind, there are a handful of tips that everyone should follow when looking to purchase a home. These tips on buying a home for the first time can help make the home purchasing process a success.
Purchase a Home with the Future in Mind
First of all, a home is not just a purchase but also a significant investment. Those who are looking to purchase a home need to do so with the future in mind, as a home is also the lynchpin of a stable financial future. History has shown that the majority of people who live in a home hold on to it for at least a decade before deciding to sell it. When people stay in a home for this long, they have the potential to make a significant amount of money when they sell it to the next individual or family. Many people continue to live in the first and only home that they ever purchase. With this information in mind, people need to try to buy a home that meets the life goals and requirements of the next five years. This will help everyone stay financially stable in the future.
Purchase of Life Goals and Not Financial Speculation
People need to remember that a home, while it is an investment, is also much more than this. This is where people are going to go to sleep at night. The home is going to provide a roof above. People are going to eat most of their meals in their home. They are going to host friends for parties and other gatherings. They are also going to raise children within those walls. Therefore, this is where people’s lives are going to unfold. With this in mind, the housing market is far too unpredictable for people to purchase with the intent of making a large amount of money when they flip it in the future. People should instead view a home as a place that has been designed to meet their goals, dreams, and aspirations. If the home also appreciates in value over time, this is an added perk. Therefore, make sure that priority number one is met. The goal is to find a house that meets all of the life requirements.
Think About What is Important for the Family
Whether purchasing a home for yourself or your family, it is important to think about what matters. Yes, it would be nice to find a home that checks all the boxes; however, this might not be realistic. Currently, the housing market is running a little bit low on inventory. Therefore, it might be difficult to find a house that checks all the boxes. Instead, make a list and prioritize what matters most. Try not to get distracted by the various shiny objects that might pop up along the way.
Furthermore, when people get distracted by the luxury items, this often drives up the price of the house needlessly. Therefore, focus on what matters. The house needs to meet the basic needs, such as the school district and size requirements. Stay away from the added stuff that is going to drive up the price unnecessarily.
Set a Budget and Do Not Deviate
Right when someone is buying a home for the first time, it is important to set a budget early on in the process. Ideally, the budget needs to be set before someone ever starts to look at homes. About a quarter of people who buy a home say that they go over budget. The most common reason why people go over budget is that they end up buying a home in an urban area where the prices are always a little bit higher. This small difference can end up bumping up the cost significantly. Location matters. The commute, school district, and amenities all depend on the location. For this reason, location is one of the most important factors in the price of a home. At the same time, people also need to be realistic about what they can afford. Set a budget and stick to it. This will make a difference when trying to make the home buying process as painless as possible the first time around.
Aim for an Appropriate Down Payment
In addition, people need to make sure that they aren’t buying their first home before they are truly ready. This means having enough money in the bank to put down an appropriate down payment. For most people, this is going to be around 20 percent. When people do not put down 20 percent, the bank is probably going to ask them to purchase something in addition to the home. This is called private mortgage insurance (PMI). Essentially, this is an insurance policy that is going to allow the bank to get their money bank if the homeowner defaults on the house. People who need to purchase PMI are going to be facing a much higher monthly mortgage payment than the going rate. While not every bank is going to require someone to put down 20 percent to avoid PMI, this is the going rule of thumb.
In addition, those who put down more money upfront are more likely to purchase a house more quickly and with fewer counteroffers. Those who are looking to purchase a home quickly should try to put down more money. Finally, those who put down more money reduce their financial risk. This ultimately reduces the size of the loan and ensures that people get more money in return when they go to sell their home.
Establish a Liquidity Fund
People should be careful not to drain their entire savings account when they buy the home. It is still important to have a strategic reserve in place. When people look at the savings account, they often view this as money that is solely meant for the down payment. This is not the case. A liquidity fund should be in place to cover living expenses in case someone gets sick, faces an unexpected expense (such as a home repair bill), or loses their job. This reserve should cover groceries, gas, mortgage payments, and utilities. If someone runs into financial difficulties, this reserve is going to prevent someone from losing their home. This is a fund that is better to have and not need than to need and not have. If someone doesn’t have the money to furnish both a down payment and a liquidity fund, then he or she might not be ready to buy a home.
Go with a Pre-Approved, Fixed-Rate Mortgage
People should get pre-approved before they even think about looking at homes. The pre-approval process is going to require a substantial amount of paperwork. This means documentation of any debt, credit, and any additional paperwork (such as proof of income). This process also means that the potential borrower needs to understand all the options at his or her disposal. While some people might balk at the pre-approval process, this will save time later and will also make someone a more competitive homebuyer. Those who get pre-approved demonstrate that they are a responsible borrower with a strong financial history.
There are numerous mortgage types available. They range in both their length and the style of the interest rate. The most common types of mortgage repayment plans are 15-year and 30-year plans. While these might sound boring, they also have their advantages. First, people should go with a fixed interest rate that doesn’t change. While some people might have heard about adjustable-rate mortgages, these are often meant to tempt the buyer with a lower interest rate in the beginning. However, the interest rate is more than likely to increase over the life of the loan. This will mean that someone might end up being priced out of their home without doing anything wrong. Stick with a fixed-rate mortgage option.
Shop the Market and Look at Other Options
Just as there are lots of houses to choose from, there are lots of lenders to choose from as well. One of the biggest mistakes that first-time homebuyers (and home buyers in general) make is only looking at a single lender. Research has shown that more than half of those looking for a home will only look at a single lender.
While going with the first lender can save people a lot of time and hassle, it can also cost people a lot of money. Those who don’t look at other options might end up paying an extra $50 per month for decades. Trying to find that lender who is willing to drop the interest rate on the mortgage, even a quarter of one percent might end up saving someone thousands of dollars during the duration of the loan. Try to look at all the options available and find someone willing to waive points, origination fees, and offer a lower interest rate.
Consider the After-Tax Income in an Appropriate Manner
It is always better for someone to spend too little on a home than to spend too much. A good rule of thumb is to try to spend about a third of the after-tax income on the home. Remember, there are going to be real estate taxes and homeowners’ insurance in addition to the mortgage payment. Therefore, try to plan for these expenses accordingly. While spending only a third of someone’s after-tax income might not be feasible in large cities, this is a good target for most people who are looking to buy a home for the first time. People will be left with a manageable monthly payment with enough left over to continue to contribute to savings.
Don’t Be Afraid to Walk Away from the Table
When someone is buying a home, this is a time-consuming process. It can be tempting for someone to rush through the process as quickly as possible just to put it all behind them. The idea of walking away from the table and starting the process over again is not enjoyable; however, buying a home is a big decision. People need to find a home that is going to meet all of their needs. Walk away if the seller does not present an acceptable offer. Stick to the list of needs because the right house is out there somewhere. Remember to plan for the future. The goal is to be happy in the future. While that might mean sacrificing a little bit of the happiness on the front end, it will end up paying off in the long run. Take your time, find the right home, negotiate, and watch the happiness appreciate with the value of your home.
A Successful Home Purchasing Experience
These are only a few of the many tips on buying a home for the first time that people can follow. Without a doubt, there are lots of options to choose from. People need to take the time to find the house that is right for them. Following the steps will help every home purchaser, including those who have not been through this process before, make the right decision. Make sure to have enough money to put down and be wary of the current market and interest rates on home mortgages. The more information people have going into the process, the more likely it is they are going to end up with the right house at a fair price. Follow these tips that have been designed for the first-time homebuyer, and it will pay off in the end.