The First-Time Home Buyer’s Survival Guide

I’m hugely excited for you to be buying a home for the first time. I’m so excited that I need you to slam on the brakes for a second to make sure you’re doing it right.

Whether you have lots of money or not very much, you’re buying a palace in your hometown or a condo in a new city, or you just decided you hate paying rent and you’re ready to own, you’ll want to know some key facts and important tips when buying your first home. Buying a house involves a lot of moving parts, and each and every misstep can cost you lots of time and money. Worse yet, you could buy a house you don’t love and end up selling it at a loss, leaving you with less wealth and no home.

You shouldn’t fear investing in real estate while young, but you should treat it as something that will have a profound impact on your life. In most cases, buying a home for the first time is a monumental event. Even if you have millions of dollars burning a hole in your pocket, you should approach this endeavor with caution and purpose. There’s no need to get tricked by a lender or misled by a realtor, some of who see first-time home buyers as easy prey.

Having bought properties and helped many others do the same, I’ve seen this process go extremely well and entirely wrong. Buying a house as a couple before you’re married, for instance, often turns out badly. Based on these experiences, I’ve compiled a list of the most important factors and details you should understand before getting your new keys. As long as you feel good about the items below, you can stop reading and get back to house hunting.

1. Get Your Down Payment Ready

If you have money set aside for a down payment but you don’t know what your mortgage will be, you don’t actually have a down payment ready. In many cases, you can get a home with relatively little upfront costs, but this usually isn’t a great financial move.

Maybe you believe 10% is the amount needed for a down payment. Maybe you’ve heard 20% makes the most sense. In either case, those numbers are just numbers – people who give tips for when buying your first home may mean well, but no single figure applies to every family. When it comes to home loans for first-time buyers, the more important part is the monthly cost you’ll be paying after that down payment is long gone.

Your mortgage is just like rent, in that you’ll pay money 12 times a year for a place to live. Of course, a mortgage and rent have vast differences between them, with mortgage terms having a notable impact on overall finances. Nevertheless, before you can entertain the thought of buying a house, you need to calculate what you can afford each month.

If you’re an aspiring first-time home buyer but you don’t have a budget in place, that’s where you should start. Once you have a solid spending plan that shows how much you earn and how that money gets spent each month, you can do some mortgage calculating. Figure out what you can pay for housing each month without taking on debt, and now you have a general idea of how much you can pay for a house.

With that info, the amount you put down becomes much more important and its effect on home loans for first-time buyers is hopefully much clearer. You could get approved for a mortgage with a 3.5% down payment, which is great if you don’t have much saved up. Unfortunately, the slimmer your down payment, the fatter your monthly fees and the longer you’ll be paying them.

You may think you have the financing to buy a house, but you need to be sure. Do the math to see how much you can really afford to put down, and how that will set you up for future costs. Don’t get caught up in the excitement of buying your first house and end up digging yourself a financial hole you’ll spend years climbing out of.

2. Check Your Credit

I occasionally get pushback when I share one of my favorite tips to follow when buying a first home, namely that prospective buyers look at their credit before applying for a mortgage loan. “It’s not like checking my credit score will change how much money is in my bank account, so why bother?”

It’s true that you can’t just look at your debt-to-credit ratio and then request to have your debt reduced and your credit elevated. However, you can uncover errors or see blemishes from closed credit accounts you’ve forgotten about. When you find small discrepancies affecting your credit score, you actually can make some changes.

Certain small efforts can impact your overall financial picture. Even if you don’t have the money to pay down all your outstanding debts, you could transfer a balance here or there and get at least one card paid off. You may be able to get a creditor on the phone and have an interest rate lowered or raise your credit limit so you have a higher ceiling.

Any of these efforts might lift your score by a few points, which will seem like a small percentage and feel negligible. However, the difference between a score of 685 and 701 is enormous when it comes to getting approved for home loans for first-time buyers. If you can make a small adjustment that moves you from the threshold of “fair credit” into “good credit,” you’ve just saved yourself thousands and thousands of dollars.

The significance of a credit score frustrates a lot of people, and that’s understandable. So many monetary dealings are boiled down to one number, and that figure can make or break your effort to buy a home. Like it or not, these are the rules we agree to play by; you don’t get to change the game because your credit score is lower than you thought. One of these rules is that, if you’re buying a house as a couple, both your credit scores matter – something that may unfortunately affect your marriage plans.

You know there’s value in having good credit. As such, you shouldn’t hesitate to check your score and make sure everything looks right before buying a house. The alternative – not checking and taking whatever mortgage rate comes your way – could cost you an entire bedroom or half an acre of yard space.

3. Location First, Square Footage Second

Close to work or an extra bathroom? Quiet neighborhood or a swimming pool? You will face some tough questions throughout your housing search, especially if you have kids or are planning to. Because sacrifices serve as a necessary evil in real estate purchasing, I urge you to skip some of the strife and put location first when you start your search.

This won’t eliminate every problem, but it will take several important factors into account right off the bat:

• School district
• Relative pricing
• Moving costs
• Taxes
• General livability questions

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Here’s the thing: when you start house hunting, there’s a good chance you’re going to fall in love with one of the first places you see. The spotless interior, manicured lawn, freshly tiled kitchen and so many other elements will enamor you and cloud your judgment. Even as a first-time home buyer, very few houses will offend your taste and have you turning away with your nose up.

Because of this, searching in a broad radius may have you seriously considering a house you shouldn’t buy. You’ll pore over your finances, looking for ways to make an hour-long commute and excessive property taxes work, when it would make a lot more sense to move on to a different house.

Aside from avoiding a bad purchase, targeting a specific location can make life easier in a number of other ways. If you have kids, you can look near a specific school. If you don’t have kids, you can avoid a neighborhood where schools have driven up housing prices. The zoning of a particular area can influence property value and the associated taxes, something you should absolutely think about before making a purchase.

Neighborhood affects cost at the time of sale; it can also influence the value of your house down the road. You may not be able to predict exactly what’s going to happen in your town or suburb, but studying building trends and population growth can give you an idea of where a certain region is headed. You don’t have to go too far into the weeds to get this information, either. Talk to a realtor and fish for tips when buying your first home, or maybe read a couple of local government reports, and you’ll develop a much better understanding of future housing value.

Start with an area. If you can’t find a house that works in that vicinity, start expanding your search incrementally. This tactic will help you shop strategically and improve your chances of finding a house that meets all your needs.

4. Increase Your Appeal

If only buying a house were as easy as having enough money to do so! Unfortunately, every good property brings in busloads of potential buyers, and you have to be the lucky applicant the seller selects.

If possible, buy from family. If you have the option, go through a personal connection. Most of us don’t have such a luxury, and the only solution is to be the best applicant of the pack. Money plays a big role in this appeal, but it isn’t the only factor when buying a home for the first time.

One good way to rise above the competition is through preapproval. Go to a lender, let them analyze all your pertinent financials, then get a letter of preapproval showing the amount that the financier has agreed to lend. This eliminates a big question mark for the seller before they’ve even looked at your application. If the approval shows you can get access to solid terms and a good amount of money, the seller sees someone who could speed up the whole process. This is something that sellers greatly appreciate.

There’s also something to be said for appealing to homeowners on a personal level. While you walk through a house you’ve never seen before, the seller watches prospective buyers who want to take over a building that’s full of memories. Think of your childhood home and the attachment you might have to that building. Putting a house on the market is a big deal, and you have to treat it as such when you tour a property.

You can’t expect to blow past the financing thing. If you don’t have good credit, a lender who likes you, or an accessible cash flow, you’ll struggle to win over anyone handling a sale. That said, you shouldn’t ignore a property just because you’re not the richest person submitting an application. If your finances are in order and you make a good impression, you have as good a shot as anyone.

5. Budget for All the Expenses

Every house costs more than the sticker price. I repeat: every SINGLE house costs more than what it goes for at signing. Do not test this theory and find out the hard way that I’m correct.

Closing costs come to mind as the biggest reason for this. Closing costs slap you with charges that might be around 5% of the total home loan for a first-time buyer. “Closing” sounds like something in the distant future, so you could be tempted to ignore this when you’re putting together your budget; that’s a big mistake. Occasionally, these costs fall on the seller’s plate, and sometimes the fees are amortized over the life of the mortgage. More often than not, though a hefty expense lands at your feet right after settlement.

The additional costs don’t stop at closing. In fact, the fees start earlier when you have to cover the inspection. Skipping inspection isn’t an option, so don’t waste time thinking about how you could avoid this fee. Depending on when the house was built and when the last inspection took place, you may have to hire multiple inspectors, pushing the cost up further.

And, of course, don’t forget about those pesky maintenance and repair expenses. People say they understand the added costs of homeownership, but you really can’t grasp the responsibility until you’ve actually bought a home for the first time. Everything in need of a fix makes a dent in your wallet, from a loose doorknob to holes in the roof. Insurance will hopefully cover catastrophes, but the rest is up to you.

I don’t mean to say homeownership is a constraint money drain that will leave you broke. The upgrades and repairs you put into your home increase the property’s value and improve your family’s personal comfort. As long as you have the money set aside, you won’t regret the work. Nevertheless, you need to be prepared for it. Busted pipes in your basement should never result in bankruptcy.

Some costs are impossible to predict. You don’t know when an HVAC will break or a tree will crash through your fence. For these issues, you need to have a little cash reserve for incidentals. Other costs – taxes, closing, inspections, etc. – need to be researched and planned accordingly. Don’t get blindsided by fees that are hiding in plain sight.

Great news! You’ve read through the article and can get back to buying your first home. You’re now more prepared – and potentially a little more scared – but there’s far less of a chance you’ll fall victim to the rookie mistakes so many of us make with our first house. Enjoy the hunt and best of luck finding that dream home!

Make it happen!

Taylor & Megan Kovar

The Money Couple