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10 Things to Consider Before Buying Your First Home

10 Things to Consider Before Buying Your First Home - TaxAct Blog

For most individuals and families, buying a home represents the biggest purchase they will ever make.

While buying a house can be a terrific investment, it should be done with great prudence, planning and comparison shopping.

When is the best time to buy? How can you get the lowest interest rate on a mortgage? How much should you save up for a down payment?

We’ve assembled a list of the 10 things you should know before taking the big plunge in buying your first home.

Is it a “buyer’s” or “seller’s” market?

House prices can fluctuate dramatically depending on the supply and demand for housing in your area.

When the economy is strong and unemployment is low, more people are looking for houses. If there’s a shortage of available housing, prices tend to go up.

That’s known as a “seller’s market.”

As a potential homebuyer, it’s better to shop around during a slump in housing prices when demand is lower and prices are reduced.

In some regions of the country, home prices generally remain stable. Start by doing some research about trends in the real estate market in your area.

Understand the process.

Buying a house is different from buying a new TV.

Since most homebuyers don’t have hundreds of thousands of dollars saved up to pay for the house in cash, you’ll need to secure a mortgage.

Here are the general steps in the home buying process:

  • Save up enough for a down payment, generally 20% of the home value.
  • Apply for pre-approval for a mortgage to know how much house you can afford.
  • Once you find a place that you like, make an offer.
  • If the seller accepts your offer, sign a purchase agreement along with a non-refundable deposit.
  • Officially apply for the mortgage loan and hire a home inspector to make sure the house is in good shape.
  • Attend the closing, during which you sign all the mortgage paperwork, make the down payment and get the keys.

Figure out what you want from a house.

Before contacting a real estate agent or browsing online listings, sit down with your spouse, partner or family to figure out exactly what you’re looking for in a house.

Location is a critical consideration — city, suburbs, out in the country, closer to work? How many bedrooms and bathrooms will you need? Do you want extra space for a workshop or home office? How about parking or a two-car garage?

You may not find a house with absolutely everything on your wish list, but identifying your top priorities is a good place to start.

Determine what you can really afford.

Getting pre-approval for a mortgage loan is an important step toward knowing the maximum you can afford to pay each month.

But not all mortgages are structured the same.

Will your monthly mortgage payment include property taxes and home insurance payments? Is the interest rate fixed, or will it adjust after a certain number of years? What about closing costs?

Those can be substantial depending on lender and lawyer fees or other required payments. Take all of these costs into account when determining what you can realistically afford to pay.

And remember, just because you are pre-approved for a maximum amount doesn’t mean you have to spend the maximum!

10 Things to Consider Before Buying Your First Home - TaxAct Blog

Review your credit report and credit score.

Your individual credit score will affect the interest rates you are offered from prospective mortgage lenders.

The credit score is largely based on your credit history, which is detailed in documents called credit reports.

All Americans are entitled to a free copy of their credit report from each of the three major credit reporting companies: Experian, TransUnion and Equifax®.

Save up for your down payment.

The more you can offer as a down payment on a house, the less you have to borrow from a bank.

By lowering the principal of your loan, you can also greatly reduce the amount you ultimately pay in interest.

Traditional mortgage lenders like commercial banks generally require a 20% down payment, but lower rates can be found through the Federal Housing Administration or the Veterans Administration.

If a family member wants to help with your down payment, make sure to get a signed gift letter to confirm it’s not a secondary loan.

Does your house fit your job?

Where you work and how much you earn are hugely important factors when shopping for a home

Lenders will not only want to know your monthly income, but also how long you’ve been working at your current job

Stable income is critical to paying back a mortgage loan.

And what about your commute?

Think twice before buying a house that’s an hour or more from your workplace.

Long commutes can try your sanity and cost a fortune in gas. If you work from home, you’ll need space for a dedicated home office.

Are you up for a fixer-upper?

When home prices are on the rise, you might be tempted to invest in a fixer-upper.

If you’re handy, you can pay less up front, make necessary repairs and upgrades yourself, and sell for a handsome profit.

But fixing up a home takes serious time, skill and dedication. Even if you buy a newer home, set aside room in your budget for unexpected maintenance and repair costs.

If you’re not confident in your fix-it abilities, you might ask your real estate agent to negotiate a home warranty with the seller.

Under a warranty, any repairs to existing equipment like pipes, appliances and roofs are covered for at least a year.

Beyond that first year, you can pay a flat annual rate to extend the warranty.

Schools and other kid-friendly considerations.

Since public schools are largely funded by local property taxes, the quality of schools can vary significantly from one district to the next.

Since better school districts generally have higher property taxes (and higher home prices), this is something parents will have to consider when shopping around.

Are you willing to trade a smaller house for a better school district?

Other considerations for families include nearby parks, playground and pools, traffic and sidewalks, and the general safety of the neighborhood.

Putting down roots.

The best time to buy a house is when you know that you will be living in the same area for at least the next five years.

You have a stable job with the potential for promotion. You have kids or are planning on starting a family. You have family or good friends in the area which supply a strong sense of community.

If you’re dissatisfied with your job or itching to move to a different part of the country (or the world), it’s probably not the right time to buy.

If you decide to move, you might not be able to sell the house quickly, and if you sell within two years of buying, you will owe taxes on any profit you make from the sale.

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