Wealth of Geeks has written this great post on buying a house which we have permission to republish here. Whatever your view on the direction on the housing market, whether we’re in a bubble and there’s going to be a fall in prices or even a crash, if you’re a first time home buyer, this post is for you.
If you’re a first-time buyer, there are some essential things to consider when buying a house. It’s a huge life-changing decision, both financially and in terms of lifestyle. Arm yourself with this information so you can make the best decision possible.
Buying a House: First Things To Do
First, essential “to-do” list items are needed when starting the home-buying process.
Outline Your Budget
Do this before doing anything else.
Head over to your bank and speak with a loan officer.
They will help you calculate your debt to income ratio (general rule of thumb, you want your monthly debt to be no more than 40% of your monthly gross income) and give you an approximate idea of the amount of house you can afford.
Use this to solidify the budget and aim to stay within this budget for the cost of the home.
A Comment on Loans
The affordability of your monthly payments is not determined just by the cost of the home itself. It is also affected by mortgage interest rates, closing costs, and various fees associated with the home-buying process.
While most people opt for conventional loans, there are also FHA, VA, and 5/5 ARM (adjustable-rate mortgage) loans. Conventional loans require 20% of the cost of the home, but other loans may need less.
Be aware that putting less than 20% down may include an extra cost of private mortgage insurance or PMI.
This additional fee is what the bank will charge you each month as an insurance payment to protect your loan.
Depending on your financial situation, your decision on the loan type, and cost of the home, can change.
Take the time to complete pre-approval, as this shows sellers that you are ready to make an offer. In addition, during the pre-approval process, you can obtain information on the different types of loans, compare interest rates, and see which would be the best for you.
Getting started on this process early also helps your bank expedite completing all the paperwork once you make an offer.
A Comment on Budgets
When determining your budget for a new home, be sure to calculate your new home expenses after the fact as well.
What are new home expenses? There are a few:
Before moving in, consider professionally cleaning the home, changing the locks, transferring services under your name (this can cost you transfer fees!), and any other monthly bills immediately due.
After moving in, you must budget for home maintenance costs, which are generally 1% of the home price. So if you pay $900,000 for a home, you should anticipate spending $9000 per year on house maintenance.
Plus, your monthly bills will go up, including gas and electricity.
Include these numbers in your calculations so there are no surprises once you move into your new home!
Determine Your Must-Haves
When buying a house, it’s important to recognize your must-haves. These are non-negotiable qualities of the home that you need in your life.
These deal-breakers can make or break your decision to pull the trigger on making an offer. A home with all the must-haves can also entice you to spend more than you originally anticipated.
When making this list, concentrate on aspects of the home that are difficult to change or add on later. For example, a must-have could be a master bedroom on the main floor.
If this isn’t already part of the home’s layout, adding it on or changing things around could be extremely expensive and time-consuming.
So then, as a must-have when buying a house, only look at homes with this feature or have the space that can be easily converted.
Other essential must-haves to consider:
- School district
- The layout of the home
- Number of bedrooms
- Outdoor space
- Age of the home
Gather Important Documents
Aggregate the necessary documents to send to the bank into one place.
These documents include bank statements for at least the last two months, income and salary documents from work, and other paperwork to prove your net worth and ability to finance a loan.
Having these ready to go in one easily accessible folder can save time and streamline the process with your bank.
Find The Right Real Estate Agent
Find the right real estate broker, or agent, as they can make or break the process of buying a house. Find one that you trust and has your best interests in mind.
Doing so will save you money and help teach you the nuances of inspecting homes and ensuring you are getting your money’s worth.
Keep in mind that when buying a house, a good real estate agent will also help you during the escrow process – calling the bank and the sellers to ensure that things are going smoothly.
Start Looking For A Home
To start house hunting:
- Look at sites like Zillow or Redfin and see what’s out there.
- Review different neighborhoods and school districts and see what is available in your price range.
- Once you have a list of homes you’re interested in seeing, ask your real estate agent to make appointments to see them. Alternatively, if open houses are available, then plan to take a look during those times.
Going through housing inventory will be the most time-consuming part of the home buying process. Find your patience, and don’t give up!
A Comment On The Search
Don’t rely on your real estate agent to give you available homes. Look around yourself as well as a form of research.
The more knowledgeable you are about neighborhoods and availability, the better you’ll be to ask questions and make the best decision.
Once You’ve Found A Home
Once you find something you love that fits your needs, the real work begins.
Make An Offer
As daunting and monumental as this purchase is, don’t be afraid to take the leap on at least putting in offers where you’re interested. The period after an offer is accepted is the Escrow.
Escrow often lasts for about a month, during which the bank processes paperwork, and you as the buyer can perform due diligence.
Some details about Escrow:
The first ten days after an offer is accepted is a contingency period. Contingency gives buyers the flexibility to claim the home and provides a window where they can change their minds. The breakdown of these ten days is as follows:
In the first three days, you’ll give an earnest money deposit in the form of a personal check or approximately 1% of the purchase price (some sellers demand more as a show of good faith).
Once the earnest money deposit is received, you have one week to perform due diligence, as mentioned above.
Once you complete due diligence and are satisfied, you sign a document to “remove contingencies.” Doing so tells your lender that you’re willing to move forward and the purchase becomes locked in.
You can pull out of the deal until that document is signed and get your deposit back. You’ll lose your earnest money deposit if you pull out after the document is signed.
Once your due diligence is complete, the bank performs its due diligence and property assessment, which can take another 10-14 days.
Your loan will go through if they determine that the property is worth the price. If they decide the property is worth less, you may not get the loan amount you need.
While the latter happens rarely, it is something to keep in mind and be prepared for.
Perform Due Diligence
As mentioned above, you have one week to perform due diligence, which includes completing a home inspection (never skip this!) and getting all the details on the home from the current owners.
Things to look for:
- History of major repairs
- Updates to the home – what was done and what it cost. Ask for before and after pictures as well to see the changes.
- History of issues with the home – any damages or if anything broke and needs fixing.
- Take a walk through the home and look for current issues. Bring anything out of place to the current owners’ attention. Ask for repairs or use this as leverage to negotiate a lower sale price.
Essentially, this time is meant for you to ensure everything with the home is up to par and that you are fully aware of everything you’ll get in the purchase.
Everything nowadays is done via DocuSign. It’s easy to skip over the content and sign. Take your time to read before you sign anything! Mistakes happen, and it’s better to catch them.
Ask everything and anything that comes to mind regarding the home. Speak with current owners, and ask for documentation, receipts, manuals, and anything else you want to have for your records.
The more you know about the property you’re purchasing, the better off you’ll be once you move in.
Buying a house for the first time can be very stressful. However, finding the right one can add to your quality of life.
No matter what you decide to buy, make sure to arm yourself with the information you need to make the best possible decision. Know your must-haves and deal-breakers; find a solid real estate agent you can trust; do your research and due diligence; prepare information and documents for the bank, and know what you can afford.
Final Thoughts on Buying a House
The real estate market can fluctuate, and home prices where you are can vary widely depending on inventory. Start your research early if you know you’re interested in buying a home. Take your time looking and understanding the options available in your area, as it will not be the same everywhere!
More Articles From Tim Thomas Partners
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Disclosure: The author is not a licensed or registered investment adviser or broker/dealer. They are not providing you with individual investment advice. Please consult with a licensed investment professional before you invest your money.
Tim Thomas has investments in real estate.
Featured image credit: Shutterstock.