Buying your first home could be a dream come true. Not just for the pride and security of having your own home, but because home ownership can offer you:
- Mortgage interest deductions
- Property tax deductions
- Solid credit rating
- Home equity loan options
- Home appreciation
However, as a first-time homebuyer, you probably have a number of questions about how the process works. Here are five factors you should consider when you’re ready to invest in a home.
Figure Out What You Can Afford
Regardless of the type and size of home you want, you first need to determine how much money you have and want to spend. That means, even though you may be eligible for a $300,000 loan, you must decide if you want to spend that much. You don’t want to be house poor.
Though lenders may vary, the typical guideline for what is considered an “affordable” home price is generally 28% debt-to-income ratio. Keep in mind that in addition to your home loan, you will also need to pay for home insurance and property taxes. Moreover, if your down payment is less than 20%, you may need to have mortgage insurance.
Therefore, for a quick calculation of how much you can afford for a monthly payment, take your annual income and multiply it by .28 then divide by 12. However, keep in mind that most lenders limit your TOTAL debt-to-income ratio (home loan + all other current outstanding debts, such as car, education, and credit cards) to 36%.
Shop Around for the Best Loan for You
Some people may ask, “Which comes first, the loan or the house hunting?” We think one of the smartest moves you can make is to investigate home loans first. By being preapproved you:
- Establish in advance how much house you can buy, so you’ll stay within budget
- Demonstrate to the seller that you are a serious homebuyer
- Avoid the possible future fallout (and embarrassment) of not being able to secure a loan
Before you select a lender, be sure to shop around. A variety of institutions offer home mortgage loans, including savings and loan associations, banks, credit unions, and mortgage companies.
Shop Around for the Right Home
Now that you know how much you can spend and you’ve found the right lender for you, you need to decide what you want in a home. Consider features and amenities that you must have (such as two bathrooms) versus those that would be nice to have (such as a pool).
Additionally, talk to any real estate agent and they will tell you that one of the most important aspects of choosing the right home is location, location, location. While families might want to find a home close to schools, older buyers may want to be closer to shopping.
Don’t forget, as you are making your lists of must-have and nice-to-have, some things such as paint color and carpeting can easily be changed with a little elbow grease.
Make an Offer on a Home
Before you make an offer on a home, you’ll want to consider these six factors:
- Current home-selling market
- Length of time house has been for sale
- Physical condition of the home
- Comps (sale price of “comparable” homes in the area)
- Seller motivation
One more thing before you can then determine what a reasonable offer for the home might be, have the property appraised to help determine the value.
Your real estate agent should be familiar with the area, the current real estate market, and how to structure an offer. Don’t be afraid to ask for their input.
Wrap Up all the Loose Ends
Once your offer is accepted, it’s time to wrap up all the loose ends. You will need to:
- Submit a non-refundable deposit (called “earnest money”)
- Have the home inspected by a professional home inspector (if there are any repairs required, you can renegotiate your offer)
- Get homeowner’s insurance
- Arrange for the utilities
- Have a final walk through to ensure the condition of the property
- Obtain a cashier’s check for the down payment and closing costs
On closing day, you’ll sign all the papers (be sure to read them carefully) and turn over the cashier’s check to officially transfer the home to you.
Now all you need to do is pack up and move in!