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?
Here’s a list of the 10 things you should know before 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 home-buyer, 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 to buy your first home.
Buying a house is different from buying a new TV.
Since most home-buyers don’t have hundreds of thousands of dollars saved up to pay for the house in cash, you’ll need to secure a mortgage.
These are the general steps during the home buying process:
- Save up enough for a down payment, generally 20 percent of the home value.
- Apply for pre-approval for a mortgage to know where you should cap your budget.
- Once you find the perfect home, 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.
Make a list of what you want in a house.
Before contacting a real estate agent or browsing online listings, sit down to figure out exactly what you’re looking for in a house.
Location is a critical consideration. Do you want to live in the city, suburbs, out in the country or closer to work?
How many bedrooms and bathrooms will you need? Do you want extra space for a workshop or home office? Do you need a two-car garage?
There’s a good chance you may not find a house with absolutely everything on your wish list, but identifying your top priorities is a good place to start.
Consider 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.
Research the school districts and other kid-friendly locations.
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.
Decide if you can handle 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 then 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 may want to 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.
Determine what you can really afford.
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 will be a requirement from a lender.
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.
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 the 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 percent down payment. However, lower rates can be found through the Federal Housing Administration or the Veterans Administration.
Break down the loan amount.
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.
Ask your mortgage lender these questions during the loan process:
- Will your monthly mortgage payment includes property taxes and home insurance payments?
- Is the interest rate fixed, or will it adjust after a certain number of years?
- Are closing costs included?
Those questions 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!
Putting down roots.
The best time to buy a house is when you plan to live in the same area for at least the next five years.
If you’re dissatisfied with your job or are 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, there’s a chance you won’t 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.