In the current economy, everyone can agree that it is hard to buy a house. From the looming housing crisis in various cities to the sheer cost of living, settling down in a fulfilling home has become much harder. If you are lucky enough to be in the market for a house, you should understand the process to get the best value for your money.
First-time buyers are usually less familiar with the home-buying process and often find themselves deep into problems they could avoid with research. This article presents ten of the most helpful tips to help not only spot but avoid such pitfalls. Read on for more!
1. Use a realtor
It is understandable if you would like to do your house search. Realtors are, after all, an added cost. When you think about it, it is as easy as spotting a house and asking to see it.
However, determining whether a home is a good investment is more technical. When you see a stunning patio, a realtor can tell whether that design is a valuable addition or has been quickly put together to sell the house soon. They are trained for such reasons and can easily save you years of repairs and a huge loss in resale.
A realtor not only represents your interest but also makes buying much easier, especially when dealing with other, more complicated aspects such as lawyers, mortgages, and insurance.
2. Research your mortgage options
Getting a mortgage is almost inevitable unless you purchase your home with full financing from your savings (or gifts). Many mortgage options are available, and your bank may send a representative to help you choose the right one. The most common are:
- Federal Housing Administration loans – FHA-insured loans are specially formulated for low to medium-income families and are very popular among first-time home buyers.
- USDA – The US Department of Agriculture loans require no down payment and are offered to families looking to buy land in rural areas.
- Conventional mortgages – These are not guaranteed by the government and require a down payment, sometimes as little as 3%.
- VA loans – The Veteran Affairs department offers a no-down payment mortgage to current military service members and veterans.
As the saying goes – if the deal is too good, think twice. If you come across an incredible offer, especially when other houses are much more expensive, you should take your time to get clarity. It is understandable if the prices for individual homes in the same neighborhood are slightly different; each house has its unique features and attractions. If the realtor or owner avoids some questions or provides vague answers, you should have another look and a second opinion.
4. Look into the closing costs.
Sometimes home buyers get overjoyed and excited after finding their dream home but forget about closing costs. Those can sneak up on you and make it even harder to get to the end of the road.
Closing costs are payments that are due on top of the property’s value after ending the transaction to purchase the home. Check your location for extra fees such as land transfer taxes, prepay property tax, and unpaid appraiser/surveyor fees. Budgeting for these as part of the house payment is advisable to avoid running out of money just before becoming a homeowner.
5. Get pre-approved
Don’t wait till you find your dream home to get your mortgage approved. Imagine the disappointment when you have found the perfect home and have saved up enough for a down payment, but your mortgage application just won’t get approved. This could mean waiting for longer, losing your home to more prepared buyers, and, consequently, embarking on another house hunt.
Getting pre-approved allows you to draw a realistic budget and work within your range while searching for a home. With a limit, you know exactly when to bargain and what you’re willing to pay for any house.
6. Assess Your Debt To Income Ratio
As a general rule of thumb, do not take out any debt you aren’t sure how to pay back. Lenders will almost always look at your financial records to know whether or not you’ll be able to pay back their money at the right time.
Before applying for a mortgage, you should assess all your debt and repayment plans. If, for instance, your monthly debt payment already takes up a large part of your monthly income, maybe there are better times to take out a mortgage. The Consumer Financial Protection Bureau recently reported that one could only take out mortgages with a maximum debt-to-income of 45% and lower for some institutions. You can calculate yours here.
To be safe, ensure your current debt-to-income ratio does not exceed 35% of your monthly income.
As mentioned earlier, extra expenses, such as closing costs, should also be included in your total budget. This is why it is important to get your mortgage pre-approved. With an exact figure, you know how much is required from you at every stage of the buying process.
It is also important to understand that there will almost always be more costs to cater to beyond taxes, property value, and closing costs. For instance, you will need to pay the survey fees, homeowner’s insurance, prepaid property taxes, and appraisal fees. You may also need to take on some maintenance after purchasing your home.
For this reason, most mortgage lenders require a reserve to cater for the mortgage and extra costs for the first two months. The amount varies depending on the loan amount and lender, but even if you somehow land one that doesn’t require a reserve, it is very beneficial to set one aside.
8. Know the type of home you want
Some people tend to ‘go with the flow’ and visit dozens of houses with no real idea of the kind of home they want. As with the case of shopping without any item in mind, such people may likely get overwhelmed by the sheer number of options that will be presented to them. In that situation, people tend to settle, especially when they get tired of looking.
There are several different types of houses, and they are all designed for different kinds of families. Before choosing your next home, here are some factors you may want to consider:
- Your non-negotiables, for example, a backyard
- The location of the house
- Access to social amenities and infrastructure
- Amount of usable space
- Size of your family
9. You are maintaining your credit score.
Your credit score is important if you need loans or buy items without cash. It is calculated based on several factors, such as your debt payment history and current debt amount. A credit score tells a lender if you can be trusted to pay back the money you borrow.
When you apply for a mortgage, your lender will pull your score, which tanks it down by a few points. They will also do it again before you finally close on the house. To avoid making things worse, it is advisable to avoid opening any new credit at this point. It could increase your credit balance and lead to a significant delay, if not a rejection for your mortgage.
10. Save for the down payment.
Some mortgage lenders, such as USDA and VA loans, do not require a down payment. Other offer some assistance programs that provide grants or additional loans for the down payment.
Saving up for one is always a great idea, in case you need more preparation for the extra debt or if your lender requires one. The FHA-insured loans, for instance, require a 3-4% payment on the down payment. With at least 20%, you can avoid associated costs and expenses, such as the private mortgage insurance often required on conventional loans.
In conclusion, these are some of the most important things to know before buying a home. The financial aspects are particularly important as they determine your financial freedom before and after purchasing your home. Make sure to research these home-buying concepts and processes involved, and get professional counsel if you can access it!