Guide for the First Time Homebuyer

Recently, I have seen a lot more people purchasing their first home.  After buying my condo a year and a half ago, I thought I could lend some advice to those who are about to do the same.  Purchasing your first home can be very overwhelming.  I am so thankful that I had my parents to help me through this sometimes frustrating and overwhelming experience and for their advice and guidance along the way.  In no particular order, here are my tips for the first time homebuyer.

1. Are you actually ready?

photo courtesy of http://engine2diet.com/wp/wp-content/uploads/overwhelmed.jpg

Buying a house is really wonderful, but make sure that you are actually ready to do so.  If you have any doubts, you probably should wait.  Upkeep on a house/condo/townhome is not cheap and it truly is one of the biggest responsibilities you can take on (except obviously a child/maybe even dog).  Do not underestimate the amount of things that can and will go wrong or break.  Some experts estimate that yearly maintenance accounts for around 1% of the purchase price of the home.  Learn more about how you can estimate yours here.

2. Find a good Realtor

keep_calm_and_call_a_realtor_premium_keepsake_box-r13e7801632604218bac385d084474536_ag9ey_8byvr_512Having a good Realtor throughout this process is extremely important.  Thankfully, the first Realtor I picked was incredible!  You want to make sure that whoever you choose is looking out for you and is not just trying to “make the sale.”  If you want to see a house, make sure that they are showing it to you quickly.  Most of the time when I wanted to see something my Realtor got me to see it the same day.  Another key part is to make sure they understand what you want.  If they are suggesting houses that are completely opposite of what you’ve said you wanted or are out of your price range, it’s probably time to find a new one.

3. Expect the unexpected

unexpected-road1

Seriously.  This is probably the biggest tip I can give.  People will lie to you or make things sound better than they are so that later when you find out the truth you are so far into the sale you won’t want to back out.  Let me explain.  When I got my original financing from the lender I was told that I only had to put 5% down based on my credit.  This was awesome, right?  Well kind of.  TWO DAYS before my closing, the lender called and said that I had to put down 10% in order to get the PMI (Private Mortgage Insurance – it’s something required by the lender if you put down less than 20%).  This was literally thousands of dollars that I hadn’t expected to spend.  It ended up being OK because I had saved enough to do the 10% but it could be a huge hit to someone who can only put down 5%.  My advice would be to not put down less than 10% to begin with.  It looks as though most lenders won’t insure you for the PMI with less than that.

4. The “Paper Trail”

paper

When you are bringing (well wiring) your money to closing, you have to have a “paper trail” of how you got every single penny of that money.  If you are making money in a shady way or not paying taxes, do not expect to get past this step.  You literally have to show where every single penny came from.  In my case I had a savings account that I would transfer money to each month.  I had to show them how I got that money in my checking (from my paycheck) and then in my savings.  EACH TRANSACTION had to have a trail.  If you have family members giving you money, this also has to be traced and there is a limit as to how much they can contribute.  Make it easier on yourself for the future and just know you will have to do this.  Set aside an auto-transfer or something so that proving where the money came from is easier on you when it comes time to buy.

5. Find a trusted Home Inspector

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The best way to find a Home Inspector (and Realtor) in my opinion, is word of mouth.  I think this is actually more important with the Home Inspector.  The man that did mine was incredibly meticulous.  That is what you want.  You should not let the small things get to you, but it is always good to have them pointed out.  Getting a “good deal” on a Home Inspector will end up costing you more in the long run.  There is definitely a reason they are cheaper.  Getting and checking their credentials and references are essential.  Just to give you an idea on price & time (this is for Atlanta) my condo is about 1,300 square feet and he spent about 2-3 hours on the inspection.  If they are running through faster than that they are not doing a thorough job.  It cost somewhere in the range of $350-400.  Those are obviously just my costs but I think it’s a good ballpark for those to estimate the time and cost based on their home.

 6. Make sure you have enough money saved

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Buying a house has so many unexpected costs as you will soon find.  Here are some costs to consider in the process.  For simplicity’s sake I will pretend you are purchasing a $100,000 house.

  • Down Payment – Save the percentage (10-20%) of the house that you want to put as a down payment.  For a home that is $100,000, you would want to have between $10,000 – $20,000.
  • Home inspection – A home at this price is probably not going to be huge, so I’d say to have about $500 put aside for this.  This money is due when you inspect the home.  Also remember that you may end up inspecting more than one house (I got out of my first contract after the home inspection didn’t go well, so I ended up paying this amount twice).  I would say to even have about $1000 just incase you ended up having the same problem.
  • Closing costs – These will vary greatly based on the type of loan, term, and amount you put down.  A good tool can be found here and will help estimate your closing costs.  For our example, on a $100,000 house with 10% down on a 30 year fixed mortgage, you can estimate about $4,200 in closing costs (my advice is to negotiate this in your contract and have the seller pay this).  Also, closing at the end of the month is cheaper than closing at the beginning of the month.
  • Appraisal – Most lenders will require this.  Plan on dishing out another $250-350 for this.  They will generally choose the appraiser but you will foot the bill. This will be paid for in full when it is done and it will be completed prior to closing.
  • Maintenance – Yearly maintenance costs should account for about 1% of the purchase price.  In this case, that would be another $1,000.
  • Upgrades – The sky is the limit.  This is the amount that you want to use to upgrade things prior to moving in (paint, appliances, floors, etc).

***So for this $100,000 example home you would want to have between $15,050 and $25,550 saved before signing a contract.

7. Do not overspend

shopping 

Do not spend the maximum amount that you were pre-approved for!  Chances are that the bank is going to offer to lend you a whole lot more money than you actually should be spending on your mortgage.  Keep the amount you spend at a reasonable amount (I’d say do not go higher than 70% of what you are approved for).  The last thing you want is to be house poor after moving in your home or living beyond your means.  You will be paying for this for years to come, just remember that!  I think I spent about 2/3 of the amount I was pre approved for and am SO GLAD that I did not purchase something more expensive.  The debt-to-income ratio should be between 28% & 36% of your salary, according to most experts.  A good tool to find your balance can be found here.

8. Negotiating

Business handshake

When you make your offer, be fair.  Obviously you do not want to pay full price, but be reasonable.  A good way to get a better deal is to negotiate in the closing costs.  This alone will save you a few thousand dollars.  Even if you get this and get the seller down another couple of thousand you are getting a pretty good deal.  You’ll have to get your house appraised before you close so you should not be in the situation ever that you are paying more than your home is worth.  At the beginning, set yourself a maximum price you are willing to pay for the property and stick to it!

9. Get a Home Warranty

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This is a must – at least for your first year or two.  My Realtor actually got this negotiated in the price I paid for the first year.  Thank God for it because I had my air conditioning break twice as well as an issue with my dishwasher.  You pay about $60 for them to come out and will fix or replace whatever is covered under your warranty.  This is a LOT cheaper than paying the whole price for repairs.  After my warranty expired, I renewed it but did not look at the fine print.  My dryer recently broke and I found out it was not covered.  I ended up shelling out almost $200 to get it fixed.  Make sure you look closely at what appliances are covered and what is not.

10. Taxes/HOA Increases

uncle-sam-pay-your-taxes1

Taxes are something I completely underestimated.  Although you should have this money estimated into your monthly payment (based on what the seller paid in the past), there really is no telling if it is estimated correctly until it comes tax time.  Last year I got my first tax bill to the amount of almost $2,000.  I’m sure that my face was priceless when I saw this number.  Thankfully I had quite a bit in my escrow but I did end up paying some out of pocket.  The first of this year, they re-estimated my escrow amount and my mortgage has sense gone up to cover the additional amount of taxes.  Be ready for unexpected increases!  Another increase you may want to be aware of is HOA fees if you purchase a townhouse or condo.  This also went up for me this year.  These are some of the reasons that I say not to spend the maximum that you were approved for!

I hope that you have found this helpful if you are planning on taking the plunge and purchasing your first home.  Make sure to be reasonable with your expectations based on your budget.  The chances of you getting everything on your “must-have” list for your first home is slim to none.  You will definitely have to prioritize features (location, bedrooms/bathrooms, yard, etc.) and be able to sacrifice some things.  

Taking this step is both really exciting and really stressful!  Please feel free to ask me any additional questions in the comments or email me at notfornothingyall@gmail.com and I will answer them to the best of my ability!

All photos in this article do not belong to me and are linked to their source.

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One thought on “Guide for the First Time Homebuyer

  1. Pingback: A full year of blogging is complete! | not for nothing y'all

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