Congratulations on making the decision to buy your first home! This is a big step in your life, both personally and financially. And with the market looking the way it does, you're best off preparing yourself financially before purchasing your home.
Here are some things you should know and do before signing your life away on a mortgage!
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So this might not be exactly what you want to hear if you think you've made the decision to become a first-time home owner. But there are some factors to consider before purchasing a new home, and you may find that renting will be better for you short-term while you continue to think about purchasing a home.
First of all, how long do you plan to stay in your targeted location? If you're thinking about buying a home, you should plan on staying in that home for at least 3 to 5 years, since that's about how long it takes to really start building some equity on the house. If you can't yet see yourself living in one place for that long, you should really think about continuing to rent.
Depending on the houses that you are looking to purchase, your monthly mortgage may end up being less than you currently pay in rent for an apartment or condo. That's not always the case, though. If you'd like a more modern, upgrade house, those things are going to cost more money, and continuing to rent for a little while longer may allow you to save up the necessary money to buy that newer house you've always wanted.
Also consider the debt that you're working to pay down. How much money per month do you budget to paying off debt like college loans and credit cards? It might be a good idea for you to pay off all of your debt in full before buying a new home, that way when you sign a mortgage agreement, you have more money to go toward a monthly payment. That will likely also mean that you'll be able to afford a more expensive house.
If you're still dead set on buying your first home, read on.
Set A Realistic Budget
With the help of some professional financial resources, it is easy to set yourself a housing budget. You can even go online now, enter your gross yearly income, your monthly debt payments, how much you have to offer as a down payment, and a desired mortgage rate and quickly and easily get a good estimate of how much house you can afford.
For a more accurate number, though, turn to the professionals. Your bank or a lending institution is there for the purpose of helping you determine what you can afford. Bankers recommend that homeowners spend no more than 30% of their gross monthly income on house payments (mortgage and fees, maintenance fees, etc.). You can get an idea of what sort of budget you'll be on before you even start your house search.
So what are the lenders looking for? First and foremost they look at your credit history. The better your credit, the lower your mortgage rate. Don't have the best credit score in the world? It's OK, but start working on improving your numbers now. You don't want to end up spending obscene amounts on interest on your mortgage, so improve your credit score to get a better mortgage rate.
Lenders will also consider how much money you have to offer as a down payment. This is where that savings account your parents started for you when you were 5 just might come in handy. The more you can offer as a down payment to your bank or lender, the more they'll trust you, and the more they'll give you. When you're trying to budget at home, plan for about a 10% down payment. If you can put down at least 20% up front, you will avoid having to pay private mortgage insurance, which can add up to almost an extra $1,000 per year. Save more ahead of time to avoid paying more in the future.
Your income is the other important thing a lender will look at. To determine how much of a loan they'll offer you, they closely examine and analyze your income and what you can afford in terms of monthly payments. They also take into account any debt you may have, so again, it's a good idea to lower that before you go looking for a mortgage loan.
Hire A Realtor
Once you've made the decisions of buying a home and where you want that home to be located, you want to find a real estate agent. Choosing a realtor can be difficult, as you need to find someone who you can trust and who can represent you and your interests in the search for homes.
A good realtor will understand both your budget and what you are looking for, and work to find those houses on the market that fit both criteria. They should also have good negotiation skills, as they will be the ones who work most closely with the seller during sale negotiations. Hiring a friend or relative that is a realtor is not a bad idea. People who you are closer with probably know you better than if you were to hire a random real estate agent, and can probably catch on to your tastes more quickly, making the house search that much easier.
Make An Offer They Can't Refuse!
When you find the house you love and you're ready to start negotiations, put in an offer to the seller that's reasonable, but certainly not too low. You don't want a seller to take a quick glance at your offer and then move on. You want to put in an offer that is competitive and will provoke the seller to make a counter offer.
That said, you also don't want to make an offer that's too high. The seller may very well accept your first offer, you never know.
There is no general rule, really, for determining what kind of a number to offer. It depends on the house. If you feel the house is overpriced for what you'll be getting, make an offer on the low side. If you feel it's fairly priced, offer close to the asking price, but try to stay below it.
Keep in mind that it's important to do this step quickly. Once you've decided to buy, make an offer that same day. You never know if or when any competition is going to step in and make an offer that is higher, and therefore more desirable to the seller, than yours. Your agent will help you greatly in this step, both in determining a reasonable offer and working with the sellers' agent to come to an agreement for a final price.
Have the Home Inspected
This is an important step before you decide to close on the house of your dreams. And it's not something you can do yourself!
No matter how clean and flawless a house may appear, bring in a professional to do a thorough inspection. A home inspector can find things like mold between the walls, termites in any of the wood work, fire hazards hidden in the electrical wiring, and other potential safety hazards you may not be able to see or find with your own eye.
If you find anything that is not to yours or the inspector's standards, you can usually either revoke your offer or include any necessary repairs in the sale price of the house (essentially the seller pays for the damages).
Go With Your Gut
This isn't something that you can be taught. It's not something your lender can teach you or help you with, and it's certainly not something your realtor will help you with. This is up to you, the home owner.
If you walk into a house and it just feels right, go for it. If there are tiny problems with the house that make you hesitate a bit at buying, do keep in mind that changes, upgrades and small fixes here and there are quick and easy to do on your own once you're settled in.
No one can make the choice but you. If it's your dream, as it is many Americans', to own your own home, find one that is totally you, and put an offer in on it. But keep in mind these few tiny details, and set yourself up for a successful first home buying process. Congratulations on the decision to purchase your first home, and best of luck finding the perfect house, getting a fair price on it, and moving in and starting your new life!