Home buying can be an exciting experience. Who doesn’t like shopping for a house? But sometimes it can be very stressful, especially if you are a first-time home buyer. Read these four tips to avoid getting caught off guard with surprise expenses and other unfavorable circumstances.
Start with carefully examining your credit history and score. It is one of the most important factors that will determine the interest rate on your home loan. Dispute any errors that may be lowering your credit standing. At this time, it’s a good idea to pause any new credit activity, such as making a large purchase, like a car, or applying for a new credit card. Keep in mind that even a very small difference in the interest rate can translate into thousands of dollars over the life of the loan, so you want to keep your rate as low as possible. To this end, be sure to shop around for a mortgage. Applying to 3-5 lenders simultaneously may be a good strategy to find the best rate possible despite getting the nick on your credit score from each application.
One way to get a lower interest rate is to put as much as money down possible. Most lenders would like you to put down at least 20%. A larger down payment can help you avoid some upfront as well as ongoing fees, such as PMI. You will also enjoy a lower monthly payment. However, don’t drop all of your cash as down payment. Don’t forget about closing costs, which can be significant and run about 2-5% of your loan amount. In addition, you may need to set aside some money for moving, for touching up a few things to your own taste in your new house, and for buying that stainless steel French-door fridge you’ve always wanted.
Lastly, decide on how much home you can afford. On the one hand, you don’t want to end up with a house that’s too small for your needs, especially if you expect your family to grow in the next few years or if you expect frequent visitors (we are in South Florida, after all!). On the other hand, buying a house that’s too large may leave you house poor, bringing down your ability to withstand financial emergencies or enjoy everyday things like eating out or buying your kids nicer phones. In general, experts recommend that your PITI (principal and interest on mortgage, taxes and insurance) should not exceed 28% of your gross monthly income. For example, if your monthly household income (before taxes) is $7,000, you should not spend more than $1,960 on your home.
Whether you’re buying or selling a home, you should (almost) always hire a real estate agent. The process of purchasing a home is far more daunting than buying, say, a laptop. You’re going to have to deal with a thick pile of paperwork, including the deed, title, loan pre-approvals, financial statements, HOA docs, disclosures, estoppel letters, etc., etc. You have to make sure that your new home passes the inspection and is free of termites, water damage, or other structural issues. And did I mention there is a large sum of money involved? So it’s imperative that you find someone who can represent you well. It’s not difficult to find a real estate agent, but finding a really good one can be a challenge. Look for an agent who is (i) knowledgeable about the area, (ii) easily reachable and communicates with you often, (iii) energetic and tech savvy, (iv) understands your needs, and (v) has the time to give you dedicated attention. Don’t just entrust the most expensive purchase in your life to a realtor friend or the first agent who cold calls you. Be sure to interview at least two or three agents to select the one you’re most comfortable with.
It is absolutely essential that you start your house hunting well-informed and educated about your choices. Nowadays, information isn’t difficult to get, if you know what you’re looking for. What’s important for you in a house? The list of items on your wishlist may be endless: best location, low price, perfect size, ideal layout, great schools, white kitchen cabinets, large backyard, CBS construction, high ceilings, etc., etc… You may have a clear picture of your dream home in your mind’s eye and you don’t
want to settle for anything less. I understand. But “perfect” is often the enemy of “good” or even “great.” If you are overly picky, an ideal house may turn into an evanescent unicorn.
Realistically, you can expect to satisfy only some items on your wishlist, so you should prioritize. Sometimes, it’s worth breaking up the wishlist into two categories: 2-3 features you must have in a house and things you can live without in an otherwise nice house. Focus on the features that cannot be changed or would be expensive to change, such as the location, size, and layout, and don’t get caught up on superficial details, like paint color, appliances, or outdated fixtures.
Once you’ve selected the house you like, your real estate agent will guide you through the process of making an offer that is money-saving yet competitive. The offer amount should be based on the recent sales of comparable houses in the area and the amount of inventory currently available on the market (Munara and I always pull comps before recommending an offer price). If a house has multiple bids, decide ahead of time how much extra you’re willing to add to outbid other buyers, and stick to that amount. Don’t let your emotions kick in that could result in the purchase becoming more expensive that it needs to be. Sometimes, a personalized letter to the seller can sway them in your favor. Also keep in mind that a lot can be up for negotiation, resulting in major savings. Are there any major repairs you can get the seller to cover? Can the seller cover some of your closing costs?
Don’t forget to protect yourself with contingencies on the offer contract. Contingencies basically mean that you have the right to back out of the contract without consequences if things go very wrong. One of the most common contract contingencies is the home inspection, which ensures that you are buying a house free of major issues, such as termites, mold, or roof leakage. It’s also important to add a financial contingency, which lets you back out of the deal if the bank does not approve your loan. This can happen even if you have a pre-approval. One more important type of contingency is an appraisal contingency. It lets you walk away if the house appraises for less than you offered. A lower appraisal will lower the amount of the loan you can get from the bank, forcing you to come up with the difference from your own pocket. This may put you in a bind if you were already tight with cash.