September 6, 2018 by
Home ownership is a staple of the American Dream – and if you’re looking to make that dream a reality, congratulations! Buying a home is a significant milestone, and taking the steps to prepare yourself (and your finances) will help ensure the journey goes as smoothly as possible.
If you are having trouble getting started, or aren’t sure how to get started, consider these 5 things to do before buying your first home:
1. Make sure you understand the real cost of homeownership.
You’ve heard it before from overly cautious relatives, and the rumors are true: Owning a home is a big responsibility. This is particularly true if you’ve been renting and gotten used to the convenience of outsourcing repairs to your landlord. Still, for most, the benefits of homeownership outweigh the challenges – and the best way you can prepare is to come in with a comprehensive idea of how owning a home will financially impact your life.
The list of expenses oftentimes begins with a down payment, which could be anywhere from 3.5-20+ percent of a home’s purchase price. Your down payment should not deplete your bank account, because there are a number of other things that you, as a homeowner, will need to budget for, including:
- A home inspection, to ensure your future home is structurally sound and free of any lingering issues before you close on the purchase.
- Closing costs, which cover the transfer of a home’s title from seller to buyer, and are typically an additional 2-5 percent of the home’s purchase price.
- Moving expenses, including everything from boxes, bubble wrap and other packing supplies to rental of a truck, hiring movers or buying pizza and beer for your family and friends.
- Repairing and redecorating your new abode, which may or may not be planned – like when your old couch doesn’t fit on the wall across from the TV’s cable jack.
- Utility bills, sewage, trash, recycling and other services that may have been built into a monthly rent payment, or could be steeper than what you grew accustomed to previously.
- Homeowners insurance and property taxes, which will typically be paid as part of your mortgage if your home is financed.
- Homeowners association fees, depending on your new location.
Buying your first home is an investment of both your time and your hard-earned money. But the benefits are just as significant! You’re putting down roots in your community and creating a space for your family to call their own. When it comes time to sell your home down the road, you may even profit off of the sale!
2. Check out your credit score.
Figuring out your credit score and the snapshot of your overall financial health is an important step to becoming a homeowner. It is common for home loans to have a minimum score requirement – and the terms of a loan will be more favorable for those who have a healthy credit score.
If you are looking to finance with a spouse, then it’s important for both applicants to go through the credit discovery process together. When one person is struggling to repay student debt or build credit history, it may be necessary to take time to establish a “game plan” to improve their credit score before buying a home. You’re in this together, and it will be ideal for both applicants to come into this arrangement with a healthy credit score before taking on the financial responsibilities of home ownership.
TIP #1: Try not to be judgmental or embarrassed about credit scores. There are a variety of factors that go into this figure and just as many strategies to improve it, so don’t get discouraged if your credit score isn’t quite where you need it to be yet.
TIP #2: If credit, mortgages and other finance talk is over your head, get help from a qualified financial advisor. Your realtor should be able to provide you with referrals to a professional (or list of professionals) they trust.
TIP #3: There are certain mortgages that are designed for people with lower credit scores, such as the FHA loan for first-time homebuyers. This may help get you into a home sooner, but improving your credit score should still be on your radar.
Your credit score is simply a snapshot of your overall financial health at a moment in time. If your score is telling you to get healthier, a financial advisor can help you come up with strategies to make improvements fairly quickly. The only way to get “stuck” with bad credit is if you fail to make the necessary changes to do better. You can do it!
3. Location, location, location!
There’s a movie from the ’90s featuring Morgan Freeman, Brad Pitt and Gwyneth Paltrow, where Brad and Gwyn’s characters have to explain to their dinner party guest, Morgan, that their flat vibrates and becomes unbearably loud whenever the subway goes by – because their realtor never let them visit for more than 5 minutes at a time. While this is a pretty extreme example of the importance of location (and choosing a good realtor!) there’s no denying that it should be near the top of your priority list.
Several factors may go into choosing the right neighborhood for you. If you are a parent or plan on becoming one in the near future, you will probably be interested in the quality of a district’s school system. Older couples might not be interested in neighborhoods bustling with young families, and career enthusiasts might just be looking for something close to the office. Hone in on your ideal location by:
- Considering your commute, and what your new normal drive to the office, hobbies and friends could be. Tools like Google Maps provide advanced features to let you calculate how long your route will take at a specific time of day (i.e., 7:30 a.m. when you typically leave for work) so that you can see the impact of your drive.
- Visiting at different times of day, to get a sense of what it’s really like to live in the area. If you’ve only ever visited during the day, you may want to get a sense of the neighborhood when the sun goes down. Is the area bustling with children playing and people out walking their dogs before bed? Or is it a quiet neighborhood where you could find moments of evening relaxation outside? Regardless of your personal preference, just make sure it fits your lifestyle.
You can change just about anything about your house: the color, layout, backyard, landscaping . . . but you can’t change the location. So, before you plant your roots, make sure you’re happy with the ground where you will be growing them.
4. Make your realtor a list of “must-haves.”
Anyone who has ever watched HGTV knows that they won’t break for the first set of commercials before a future homebuyer has taken the time to carefully list out the things they are looking for in a home. In fact, this is one of the first things your realtor will ask, after you have decided on the location or neighborhood(s) you are interested in: What are you looking for, and are there any deal-breakers?
Part of this conversation, too, is your budget. You and your realtor will need a starting point for your price range – the home prices that, when broken down into monthly mortgage payments, still leave you with a healthy amount of cash flow left over for all of your other living expenses. All of your other “must-haves” will probably be based on personal preference, in terms of layout, amenities and other features you may desire.
TIP #1: There is such thing as too many “must-haves.” If your vision is very specific, you and your realtor are going to have a hard time finding homes that check off every single box on the list. Try to limit your essentials to those you can count on your hands, and preferably on one hand.
TIP #2: Be open to the possibility of renovation. Unless you are shopping for homes at the top of your price range, you could have a little money left over to dedicate to adding that backyard pergola you are dreaming of – even if it means considering a home that doesn’t already have one.
TIP #3: Try to be realistic about your expectations. A house that was built in the ’90s might not have those quartz countertops and all stainless-steel appliances that you were hoping for. Or an attached, three-car garage may be hard to come by in certain parts of town. But, that doesn’t mean you can’t find something you are genuinely happy with!
Your realtor wants you to find a home you will love, so giving them an honest sense of what you are looking for is key. Like people, no two homes are the same. Going on home tours and getting a sense of the property’s character should be enjoyable, and even fun!
5. Compare mortgage offers and get pre-approved.
There are many scenarios where it pays to be monogamous, but shopping for the best mortgage rates isn’t one of them. It may be easy to settle for the mortgage terms you receive from the lender who is tied to your online home loan calculator – but for a little time and effort, you can also easily quote a local bank or credit union to see how their offers compare. If you or your spouse’s primary checking and savings accounts are tied up with a particular institution, they should definitely be on your short list of potential suitors.
Another note about the pre-approval process: Pre-approved and pre-qualified are not the same thing:
- The process of getting “pre-qualified” requires only your very basic financial information, and shows you very quickly the amounts that you may be approved for.
- Pre-approval is the next step, which should require an official mortgage application and/or application fee, and an assessment of your credit. At this stage, you will receive approval for specific mortgage amounts and interest rates, conditional on finding an acceptable property. It’s a crucial difference that can help put you one step ahead of the competition when you’re shopping for a home.
There are a variety of institutions to shop around with and more information online than ever before to help you compare terms, fees, interest rates and a host of other potential deciding factors. As we mentioned above in the section about credit – if any of the financing information is making your eyes go crossed, bring in a financial advisor to help.
Ready to buy your first home?
If you are ready to own your first home, Meyer Real Estate is your house-hunting ally! We have been serving St. Charles City, County and surrounding areas for more than 50 years and are experienced with helping first-time homebuyers navigate their first home purchase.