Buying your first is one of those milestones that you build up to for years. There are many questions to ask before making such a big commitment: Am I ready? How do I start the process? Do I have enough money saved? There are a lot of i's to dot and t's to cross. And, unfortunately, watching HGTV isn't enough to fully prepare you.
Let's get started, choose one of the five tips to dive deeper into or start from the very beginning.
- Get financially fit
- Build a strong real estate team
- Get a full pre-approval
- Evaluate what type of home you want
- Determine your priorities and deal breakers
1. Get financially fit
Not everyone knows how much money is enough for a decent down payment. There are misconceptions about the importance of credit scores as well as income requirements that can affect your loan approval as well.
Consistently save for your home
Regardless of how soon you plan to purchase a , it is beneficial to put aside a certain percent of your income to ensure that saving money becomes a consistent habit.
Saving at least 20 percent of your income is a good place to start. Depending on the housing market and your income, you could potentially be ready to purchase a in the next 12 to 16 months. If a 20 percent savings goal is unrealistic in your current situation, you can put aside a smaller amount for a longer period of time.
When saving money to buy a , it is also important to factor in closing costs in addition to the down payment. This is going to call for more money out of pocket—further planning and budgeting is essential. Closing costs usually account for about two to five percent of the purchase amount on the you are closing on.
Work on your credit score
Your credit score plays a significant role in the loan process. Although credit score requirements vary based on the type of loan and loan agency, anything below a 620 is most often considered poor. Having a credit score above 620 is going to increase your loan approval odds. Be aware of your credit score and do everything you can to increase it in order to get the best rates possible when .
Senior Loan Officer Kim Hankins advises prospective homebuyers on specific ways to protect and improve their credit score:
Treat your credit score like your adult GPA, and be organized and conservative with your finances — that’s all a lender could ever dream. First-time homebuyers often overlook the importance of a strong credit score. An 800 credit score is more valuable than $100,000 in the bank.
How to strengthen your credit score:
- Open credit ASAP — just two cards
- Don’t charge more than 30 percent of the high limit
- Pay monthly to 10 percent of the high limit and do that again and again
- Avoid late payments
Determine how much home you can realistically afford
Utilize financial calculators and consult with lenders about your financial situation to determine a reasonable loan amount and price cap. John Bodrozic, Co-Founder of HomeZada, recommends doing thorough research of the costs associated with homeownership:
Use mortgage calculators to estimate your monthly payments and estimate the annual household expenses such as utilities, taxes, and preventative and normal repair costs. Once you have these numbers, then you will know what of a your finances will support.
This method makes sure you are looking for that is within your budget, versus getting emotionally attached to homes you really love but financially you cannot afford them. It also helps you be a more competitive and ready because once you have the financial aspects down, you are ready to move quickly when you find a that works for you. Other competing buyers for the same may not have their financial in order so you can move quicker with your offer.
2. Build a strong real estate team
Shop around before committing to a lender
Doing research, talking to loan companies, and getting quotes is going to be the best way to discover what lender and loan type is best for you. You can consult our list of top-rated lenders to learn more about specific lenders and what they offer.
There are also several loan types, so it is important to find the one that best fits your individual situation. Determining factors on loan choice include loan length, payment choices, credit score, and interest rates. Keep in mind that not all lenders offer all loan types.
Kendra Barnes, Founder of The Key Resource, offers her best for lender shopping:
How to comparison shop for a loan:
How to comparison shop for a home loan:
- Shop around. Most buyers go with the first lender they call because they aren’t aware that they can shop around! Just because a bank gives you a pre-approval letter does not mean you have to stick with them!
- Ask about incentives. Ask the lender if they have any incentives such as lender credit at closing or fee waivers.
- Make them compete for your business. As you’re shopping around, be sure to tell each lender you call what the other lender is offering. Ask them if they are able to match or beat that lenders terms.
Find a realtor who is a good fit
is demanding enough. Consider using an expert to guide your decision making every step of the way.
They can take the pressure off of you by helping you find houses that are in your and meet your expectations. They also have extensive experience in the process as a whole, so they are invaluable resources for questions and advice.
But every a . Shawn Breyer, Owner of is not a good fit for every , there are practical considerations to keep in mind when choosing Breyer Buyers, describes what buyers can do to maximize efficiency and success within the -client relationship in a fast paced market:
You should be find properties online and then do a drive-by as soon as possible before reaching out to your . When you do this, you will quickly weed out homes that don't match your criteria. Imagine that you're trying to find a in a well-maintained and a couple of the have cars parked in the yard that they are working on.
These are things that Google Maps or the listing may not show. You will weed out properties much quicker with this approach while respecting your 's time by not making them meet you at houses that you instantly realize you don't want to buy when you pull up. In a competitive market, speed is king.
Find a highly recommended property inspector
Alex Romanov, iwillbuyhouse.com Co-Founder, emphasizes the importance of an oft-overlooked aspect of :
Prior to , every should find a highly recommended inspector. A careful inspection done by an expert can save you tens of thousands of dollars of costly repairs. Therefore, the top inspectors are highly sought after and are often booked for weeks in advance, so it helps to get one on your team as soon as possible.
3. Get a full pre-approval
Prepare paperwork and complete a loan application
Senior Loan Officer Amy Tierce describes why it's smart for prospective buyers to work with a lender from the very beginning:
Speak with a competent mortgage lender if the borrower is not looking to purchase for as long as a year out. Why? Because there are many items that can impact qualification, starting with credit.
If there is a error on the credit, getting it corrected can take weeks, which is often too late if you have an accepted offer on a . Self employed (Schedule C) buyers need to look at year over year income and may want to change the way they file to maximize income.
Multiple asset accounts or complicated down payment strategies may also need to be addressed. For example, if a borrower is getting a gift, or has money in a trust or other financial vehicle, some adjustments may need to be addressed prior to buying.
Imrad Poladi, Vice President of NextHome, describes what the ideal pre-approval process looks like:
It's been said before, but having a complete pre-approval process with a reputable lender is critical in the early stages of a search. Buyers should aim to have as deep of an approval as possible.
Do your best to get what is known as underwriting approval, which basically means that the loan. has been vetted to buy a up to a certain purchase price and all that is left to do is find the right . The lender sees no current red flags on providing the a
Talk to your lender about buying down your rate
Poladi also suggests buyers look into buying down the interest rate on their loan:
Depending on the type of loan, every $1,000 negotiated down only saves the buyer a few dollars per month. But if the buyer buys down the rate, the savings could be far more significant on a monthly basis. I suggest that a buyer talk to an agent and/or lender for further clarification on how this would work.
4. Evaluate what type of home you want
Before deciding what you want and need in your , it's a good idea to compare the pros and cons of buying a move-in-ready versus a fixer upper.
Compare the benefits of a turn-key home or fixer upper
John Bodrozic, Co-Founder of HomeZada, explains how buyers can compare the implications of the choice between a turn-key or a fixer upper:
How to choose the right kind of home:
Turn-key: A ready to move-in house commands a premium purchase price. So as an example, with a $400,000 house with a 20 percent down payment of $80,000, your mortgage would be $320,000. At current market rates, with a 30-year fixed-rate loan of 4.5 percent, the buyer’s monthly mortgage payment would be $1,620 and you would pay approximately $263,000 in total interest over the 30-year loan.
Fixer-upper: Let’s assume the same size home might sell for $325,000. A 20 percent down payment would be $65,000, which would be upfront cash savings of $15,000. The mortgage would be $260,000, which at the same 4.5 percent interest rate would be a $1,317 monthly payment, which is a savings of $303 every month. The total interest on this loan would be $214,000, which is an overall $49,000 savings from the other scenario. The ability to pay for those renovations could come from the savings in down payment along with the savings over time of having a lower monthly mortgage payment
Tania Isacoff Friedland of Warburg Realty weighs in on the question of how much capital and time is realistic to invest in a :
Some first-time buyers think they'll like the excitement of a renovation, but it's important to take into consideration the realistic cost and time involved to complete the work. In addition, renovating to your taste level or specifications is not always what someone else will want, so I caution first-time buyers doing a renovation not to "over-renovate" and to keep things simple. When it comes time to re-sell, no one wants to overpay for someone else's renovation. Many first-time buyers don't have the time or energy to endure a renovation and will pay up for modern conveniences in a new development. Don't be misled, as there's still work to be done in new construction aside from decorating. For example, you will most likely have to outfit the closets and wire for audio-visual technology.
Determine what and yard maintenance you can handle
, Broker, and GRI Frances Dawson reminds first-time buyers to consider yard maintenance:
One common pitfall for first time homebuyers is not considering the maintenance of properties compared to the time they want to spend. A condo or townhome has a monthly fee for maintenance, but frees the homeowner's time for other pursuits. A with a big yard or acreage, while appealing, can quickly become an overwhelming drudge or an expensive chore to hire out.
5. Determine your priorities and deal breakers
Dream up what you want (and what you don’t)!
Knowing what you want may sound like the easiest task of them all, but this can be difficult to decide, especially if you are buying a with someone else. If that is the case, our best would be do find middle ground on both your wishlists.
Here are a few questions that you can asks yourself to nail down your must-have for you .
- Do you want a quaint, petite ? A large, sprawling one?
- How many bedrooms are you looking for?
- Where do you want the to be located?
- Do you want a big yard?
- Do you want to live in a populated or a secluded area?
- And underlying all of these important questions: do your wants match your ?
If you know what you want ahead of time, the process of buying a is going to be less grueling.
If you are buying the with someone, make sure you communicate with each other your deal breakers. Decide together what you can and can't live without to create a vision of your future .
Tracey Hampson recommends the whole family participate in this part of the :
I always recommend doing a want list and a need list with the whole family. It helps so much! I wish my previous buyers had listened to me and done this. We had been looking for homes for about six months and they finally decided on a gorgeous , but when they told their children they burst into tears because they did not want a swimming pool! I know, what kid doesn't want a swimming pool? So including the whole family is always a good idea!
Aside from the essentials (i.e., number of bedrooms, bathrooms, , versatility of the , proximity to schools or work, gated communities, outdoor , as well as additional storage in the building.), some features to consider when you're making your are ceiling height,
Study cities and neighborhoods in-depth
Suburban Jungle Founder and CEO Alison Bernstein shares three recommendations for town and neighborhood hunting:
How to find the right location for your home:
- Don’t prioritize the house over the town in which it resides. The goal is to find a place where the culture and values of the town match yours. You can always trade up or down for a new home, add a third bathroom, or renovate a basement.
- Don’t excessively limit your search area by your commute. Just 10 more minutes on the train or bus could perhaps score you a lot more for your money.
- Don’t over romanticize walkability. Often, buyers coming from more urban centers feel they need a house as close to the shops and restaurants as possible. The reality is that schooling, sporting events, and other activities often take place out of the town center, limiting the importance of this feature.
From a purely non-subjective standpoint, Heroes Co-Founder Earl White recommends looking into neighborhoods that are most likely to hold value over time:
Nobody wants to buy in the process of depreciating. Sales comparison prices and online estimates look back in time, not forward. The clearest sign that a will continue to hold its value is average days on the market.
The days on market part of a listing tells you how long properties take to sell - it is an objective measure of demand. If properties are sitting around for long periods of time at a certain list price, market values will fall below that price.
When houses are "flying off the shelf," it's a good sign values will be stable or even appreciate. Similarly, regardless of sales comps, if houses are sitting on the market and not moving, it's a sign prices are on the way down from those list prices.
Take a deep breath
Are you feeling overwhelmed? Second-guessing your pursuit of buying a home?
Focus on the benefits of homeownership
It's a big deal to buy a and there's a lot to consider and prepare. If you follow these steps and are in a financial position to purchase, you can do this!
Real Living Reserve Realtors Associate Broker Christine Allocca brings attention to the fact that paying a mortgage has significant benefits over paying rent:
Remember that comparing a rent payment to a is not apples to apples. buyers can deduct mortgage interest on up to $375,000 of debt for individuals and up to $750,000 for married couples. Additionally, rents always go up in the long term while mortgages don't.
Steve DiMarco, President of Key Mortgage Services, reminds first-time buyers of the long-term benefits and achievability of homeownership:
While it's a seemingly large investment at the time of purchase, this is an investment in your future and your overall wealth. The investment goes beyond the physical . You're not just purchasing a piece of , you are building wealth. Homeownership is the first very toward that wealth creation.
I tell first-time buyers that they are overlooking how achievable homeownership is. There are so many programs for first-time buyers - programs that require as little as three percent down. That's a few months of savings right there to get you into your .
Don't forget to get your handy home buying process checklist below.