Buying a Home for the First Time
Buying a home can be a daunting task for first time home buyers.
However, as a Realtor, I understand.
Below I have eleven tips for first-time home buyers.
Featured: 10 Major Advantages of Owning a Home
But first, what exactly is a first-time homebuyer?
First Time Home Buyer Definition
The U.S. Department of Housing and Urban Development defines a first-time home buyer as the following:
- You haven’t owned a primary residence for three years. However, if you’ve owned a home but your spouse hasn’t, both of you can still buy as first-time home buyers.
- You’re a single parent who has owned a home with a former spouse while married.
- You’re a displaced homemaker who has only owned with a spouse.
- You have only owned a primary residence that wasn’t attached to a fixed foundation.
- You’ve owned a home that wasn’t up to code. Or if it wasn’t possible to bring the property up to code for less than the cost to rebuild.
- Learn the Home Buying Process
- Save Your Money Before Buying a Home
- Calculate How Much House You Can Afford
- List Your Needs and Wants of a Home
- Hire a Good Real Estate Agent
- Shop Around for a Lender
- Compare Mortgages
- Apply for Down Payment Grants
- Look for Homeowners Insurance Providers
- Know Your Contingencies
- Don’t Be a Lagger
Learn the Home Buying Process
Here’s my first of many tips for first-time home buyers.
Learn the ten steps of the home buying process.
- Begin early by looking for homes in the area
- Figure out how much house you can afford
- Get pre-qualified and pre-approved for a mortgage
- Find the right real estate agent
- Shop for a home and make an offer
- Order a home inspection
- Work with your lender to select your loan
- Get the home appraised
- Complete the paperwork
- Close the sale
As you can see, there’s a lot to juggle during the home buying process.
Buying a home isn’t something that can get done overnight.
You must do your part as a first-time homebuyer.
The infographic below has some of the steps swapped around, but it can be done in either order.
Save Your Money Before Buying a Home
The second tip for first-time homebuyers is to save your money.
- Down Payment and Closing Cost
- Things to Avoid Before Buying a Home
- Save Money for Home Repairs
- Consider Buying a Fixer-Upper
Your debt-to-income ratio will affect how good of an interest rate you’ll get.
Paying bills on time will increase the health of your credit score.
In addition to that, you should also keep your balances low.
Finance experts suggest you use no more than 30% of your credit card limit.
The weaker your credit score, the higher your interest rate and down payment will be.
Overall, the credit score needed to buy a house will vary per lender.
- 300 to 499: Very few loan options.
- 500 to 579: Poor credit score mortgage programs are available.
- 580 to 699: Eligible for government-backed and conventional loans.
- 700 to 739: Good credit mortgage options.
- 740 and above: Best interest rates available.
It also wouldn’t hurt to get a free annual credit report.
Another tip is to keep your current credit cards open.
Closing a credit card will decrease the amount of credit available.
As a result, your credit use increases while your credit score decreases.
However, it is wise to get rid of store cards with insanely high-interest rates.
For instance, credit cards for Best Buy and Amazon aren’t needed.
Down Payment Money and Closing Cost
When you’re buying a home, lenders want to see some skin in the game.
There’s an exception if you’re getting a VA or USDA loan.
Then again, you may not be eligible for those kinds of loans.
Knowing How Much to Save for a Down Payment
So, let’s use an FHA loan as an example.
An FHA lender may require at least a 3.5% down payment.
You’ve also set your budget at $200,000.
$200,000 x 0.035 = $7,000
Now you’re liable for saving at least $7,000 for a down payment.
The good news is, there are many down payment grants available for first-time home buyers.
I will talk more about that later.
Don’t Forget About Closing Costs
Then there’s closing cost.
Closing costs are usually 2% to 5% of the total loan amount.
For our example, let’s say the lender requires 5%.
Since you’re putting $7,000 down, the loan amount will be $193,000.
$193,000 x 0.05 = $9,650.
Keep in mind closing costs can be negotiated with the seller.
For instance, the seller may agree to only pay 2% out of 5% of closing cost.
In summary, you’ll need to save at least $16,650.
Things to Avoid Before Buying a Home
Below are 14 things to avoid before buying a home.
- Missing loan payments
- Combining debt with hidden fees
- Changing jobs
- Switching banks
- Shifting finances around to different accounts
- Buying a car
- Purchasing household goods on credit
- Making large cash deposits: the lender may scrutinize the loan and back out due to unusual and unexpected deposits.
- Stretching the truth on your loan inquiry
- Don’t let anyone make inquires on your credit
- Spending money needed to cover closing costs
- Maxing yourself out financially
- Co-signing for someone
- Buying a home for more than it’s worth
The above is one of the most essential tips for first-time home buyers.
Your dream of buying a home can vanish in a heartbeat if you’re not careful.
Save Money for Home Repairs
One thing is for sure, home repairs will be needed.
That goes for both new and existing homes.
Knowing how much you should budget for home repairs is very simple.
Use the tried and true 1% rule.
By doing this, you should set aside at least 1% of your home’s value each year.
If your home is worth $200,000, your annual savings for home repairs will be at least $2,000.
The second method to follow is the 10% rule.
Instead, your savings for home repairs will be measured monthly.
First, you’re going to add up the total monthly costs of owning a home.
This will be property taxes, mortgage payment, and insurance.
Using the same home value above, that’s $200 per month.
Consider Buying a Fixer-Upper
This tip for first-time home buyers goes by a simple principle.
Start small at first and benefit later.
Making home improvements can increase the value of your home.
Indeed, most first-time homebuyers may be opposed to such.
But it could be a financially rewarding choice in the future.
Especially if you’re buying a starter home and plan to upgrade later.
Thankfully, it’s possible to get financial assistance for home repairs.
As an example, USDA’s Rural Development has low-interest loans and grants available for such.
The FHA also has low-interest home repair loans.
There are also four home repair grants for disabled veterans.
However, it should be noted the maximum grant amounts change every year.
Specially Adapted Housing Grant
SAH grants allow disabled veterans to enjoy barrier-free living.
Therefore, veterans will have independent living that otherwise wouldn’t be possible.
Special Adaptation Housing Grant
A SAH grant can be used to allow veterans to gain more mobility throughout their home.
Temporary Residence Assistance Grant
TRA grants are for disabled veterans temporarily living with family.
This allows a family member to alter their home to accommodate the needs of a disabled veteran.
Thus, enhancing mobility throughout the home.
Home Improvement and Structural Alterations Grant
HISA grants allow veterans to make the changes necessary for treatment and disability access.
Other Expenses to Account for
Buying a home has hidden costs, such as:
- Earnest money deposit (1% to 3% of the sale price)
- Property taxes
- Homeowners insurance
- Funding the escrow account
- School taxes
- Premium mortgage insurance
- Moving costs
- HOA fees (if applicable)
- Interest rate(s)
When buying a home, you may encounter prorated debt.
Proration is when both parties divide the costs associated with the sale of real estate.
Items such as excess propane in the tank can be prorated.
Calculating HOA Dues Example
You’re buying John’s house in a neighborhood with an HOA.
Monthly HOA dues are usually paid on the first of the month.
With that being said, John just paid his monthly HOA dues of $50 for June.
The closing date is set for June 10.
This means there will be 20 days left in June.
Your first task is to find the daily HOA rate.
This can be done by dividing the total monthly HOA dues’ total cost by June’s full days.
50 ÷ 30 = 1.66666667
Now you know the daily HOA rate is $1.66.
Next, multiply the daily HOA rate by 20.
1.66666667 x 20 = 33.3333333
Now you finally know how much it costs to live in John’s neighborhood for 20 days.
As a result, you’ll owe John $33.33.
In short, John is no longer a resident after June 10.
Instead, you’ve now become a resident of the neighborhood.
Therefore, John only got his money’s worth out of 10 days.
From a seller’s standpoint, it’s only fair for the buyer to pay their remaining share.
In other words, you, as the buyer, are picking up where the seller left off.
Calculate How Much House You Can Afford
As a first-time homebuyer, you shouldn’t take a wild guess.
Finding out how much house you can afford can also be made simple.
According to most financial advisors, you should follow the 28/36 rule.
You shouldn’t spend more than 28% of your gross monthly income on housing expenses.
Likewise, you shouldn’t spend more than 36% of your gross monthly income on total debt.
Total debt is things such as your car note and credit card payments.
Doing the Math
For example, let’s say your gross monthly income is $4,000.
Multiply your gross monthly income by 28%.
4,000 x 0.28 = 112,000
Next, divide the sum of the equation by 100.
112,000 ÷ 100 = 1,120
In this example, you shouldn’t spend more than $1,120 on housing per month.
Apply the same method to see how much you should spend on total debt each month.
The next thing to figure out is your debt-to-income ratio.
First, add up your monthly expenses.
- Rent: $1,500
- Car payment: $300
- Student loan: $180
- Credit card: $100
1,500 + 300 + 180 + 100 = 2,080
In this example, your total monthly expenses are $2,080.
Next, divide the sum of your total monthly expenses by your monthly income.
We’re using $6,000 in this example.
2,080 ÷ 6,000 = 0.34666667
Third, multiply the decimal by 100 to get the percentage.
0.34666667 x 100 = 34.6666667
Remember to round to the nearest hundredth if possible.
Your DTI is 34.7%.
List the Needs and Wants of a Home
This is the fourth of ten tips for first time home buyers.
Here’s an important question to ask yourself, “do I plan to have kids in the future?”
If so, you need to know what to consider when buying a home with kids.
For instance, you might prefer a home with a playroom.
Or maybe you have dogs that love to run and play.
Therefore, a large backyard could also be a need.
Having a general idea of what makes a house a home is essential.
Location, location, location is the number one thing to think about.
Here are a few questions to ask as a first-time homebuyer.
- How’s the walkability?
- How far are you willing to commute to work?
- Are there any good schools in the area, and how far?
- What about shopping and restaurants?
- Where’s the nearest gym, doctor, and dentist?
- Any leisure and entertainment nearby?
The list above can go on and on forever.
Find a Good Realtor
If you’re a first-time homebuyer in Williamsburg, Virginia, contact me!
I’m a Realtor!
Otherwise, if you’re not in my area, ask friends and family for referrals.
What if you’re new to the area and don’t know anyone yet?
Thankfully, technology has made finding products and services a breeze.
Just run a quick Google search by typing “real estate agents near me.”
Or replace “near me” with the name of your town or city.
Our job as Realtors is to act as your personal consultant.
Oh, and as your personal therapist!
You’ll need one because the home buying process can be stressful.
Hence the reason why 89% of home buyers bought their homes through a real estate agent.
But what are some benefits of using a Realtor?
A real estate agent brings negotiating power.
For example, the home inspector has found faulty wiring.
After getting examined by an electrician, the cost to correct the issues is $1,000.
What if the seller doesn’t want to pay for the total cost of repairs?
Fortunately, negotiations aren’t over just yet.
You could request the seller to pay 70% of the cost for electrical repairs.
As the buyer, you would contribute the remaining 30%.
Like I mentioned in Other Expenses to Account For, proration of expenses may also occur.
What if you’re buying a home with older appliances and systems?
In that case, you might want to request a home warranty from the seller.
Especially if the systems and appliances have periodic issues due to their old age.
Just about anything within reason is negotiable.
The second benefit of working with a Realtor is our network.
We have connections with various service providers in the real estate industry.
This includes closing attorneys, contractors, lenders, insurance providers, etc.
We, as Realtors, have many tools to assist home buyers and sellers.
Those tools can help us determine if a house is overpriced or not.
That will be done with a Comparative Market Analysis.
Also, a Realtor may know someone who’s thinking about selling their home.
The home of that particular someone may have some of your needs and wants.
In conclusion, hiring a Realtor is indeed a great tip for first-time home buyers.
Shop Around for a Lender
One of the biggest mistakes first-time homebuyers make is settling for one lender.
Be mindful of the fact that eligibility requirements will vary per lender.
Some will have lower credit score requirements and vice versa.
As a first-time homebuyer, you’ll also need good customer service.
If you can, try using a local lender instead of a large one.
You may find it easier to keep in contact with a smaller lender.
Compare Mortgage Options
Choosing the right mortgage is a vital tip for first time home buyers.
Below are the four main loan types.
- FHA loans are home loans insured by the Federal Housing Administration. A down payment of at least 3% is usually required.
- Best FHA Lenders
- USDA loans are government-backed guaranteed home loans. This loan type is only available to those buying a home in eligible rural areas. 100% financing is also available.
- Best USDA Lenders
- VA loans are also government-backed home loans and are guaranteed by the VA. They’re only available to active and retired service members. A down payment is usually not required. The surviving spouse of a veteran could be eligible to apply for a VA home loan as well.
- Best VA Lenders
- Conventional loans are non-guaranteed home loans. Likewise, they aren’t backed by the government, nor are they insured by the lender. Instead, loans are funded by private lenders, and the purchaser is responsible for obtaining insurance. Premium mortgage insurance (PMI) is not needed if you put down at least 20% of the homes purchase price.
- Best Conventional Lenders
Apply for Down Payment Grants
It’s shocking to see how many first-time homebuyers are unaware of down payment grants.
Across the nation, there are over 2,000 programs available!
There’s also the possibility that your county of residence offers down payment grants.
In my state, the VHDA offers down payment grants to first time home buyers.
- Virginia Housing Development Authority
Down payment grants help to make buying a home possible for those that otherwise wouldn’t be able to.
Compare Homeowners Insurance Providers
One of the single most important tips for first time home buyers is to protect your investment.
Homeowners insurance covers damage caused by natural disasters and vandalism.
For example, if a tree limb falls on your roof, the homeowner’s insurance will cover it.
Anything considered as a preventative maintenance will not be covered.
Damage caused by termites is an example of preventative maintenance.
However, if you’re seeking additional coverage, you’ll need a rider.
A rider is an insurance policy provision that’ll add more coverage to your primary policy.
Similar to the previous topic, it’s also vital to compare homeowners insurance providers.
Know Your Contingencies
Contingencies define certain conditions or actions that must be met before closing the sale.
Therefore, if certain conditions or actions in the contingency aren’t met, either party can walk away.
- Appraisal Contingency
The buyer isn’t obligated to buy a home for more than it’s worth.
- Financing Contingency
A buyer must obtain financing before continuing with the purchase of a home.
- Home Sale Contingency
The buyer’s current home must sell to move forward with the purchase of another house.
- Title Contingency
This contingency explains that the home’s sale isn’t valid unless the title is clear of all defects.
- Home Inspection Contingency
Your accepted offer will become valid after having a home inspection.
Don’t Become a Lagger
My last tip for first-time homebuyers’ is don’t lag around.
Doing so in a competitive market is a big mistake.
Especially if cash buyers seem to be everywhere.
Although this may dishearten you, it really shouldn’t.
Luckily, there are proven ways to compete with cash buyers.
Such a challenge is also a reason to consult with an excellent real estate agent.
Moving without a sense of urgency is common.
But in return, the home of your dreams could go out of stock.
After all, following these tips for first-time homebuyers can void you of many headaches.