If buying a home is one of your financial goals, you’ll need to start educating yourself about the home-buying process, the requirements (financial, credit and otherwise) to buying a home in the area you’d like to be in and how to avoid common first-time homebuyer pitfalls.
What to Know Before Buying a House
Understand the Process and Timeline
Buying a home isn’t like buying a loaf of bread—or even a car. You can walk into a car dealership this afternoon, write a check and walk out with a new vehicle an hour later… but even if you’re not getting a mortgage (and most do), buying a home takes much longer and requires a number of steps. Here’s a quick rundown of the process (but you’ll need a much more in-depth look at each step to be truly prepared):
- Loan pre-qualification
- Finding your dream home (yay!)
- Making an offer
- Getting an acceptance or counter-offer
- Property inspection
- Getting an appraisal
- Signing all documents and finalizing financing
- Closing (everything is official and you get the keys!)
Buy the Right-Sized Home
If you pick something too big, you’ll be paying extra in heating and cooling costs, property tax, and insurance. If you pick something too small, you risk running out of space and needing to sell your home, going through another round of closing costs.You’re going for the Goldilocks rule here - not too big, not too small. Here are some tips on how to find a home size that’s just right.
What’s Your Daily Use?
Think about your family’s day-to-day activities. What do you like to do together (or apart)?Consider how your home design can encourage a lifestyle that matches your family values. Here’s an example:My wife and I used to own a home that had both a living room and a great room. This gave us two living spaces with TVs, which meant our family was often in different areas during screen time. In order to encourage more family time together, we downsized to a single living room.The same goes for the other areas of your home. Do you need a dining room, a dinette, and an island? Or could just one or two of those suffice for your eating needs? What about bathrooms? How many bathrooms would your family reasonably need to use all at the same time?
What About Special Occasions?
It’s tempting to want a home with guest rooms, entertaining spaces, and other extra square footage to cover special occasions.That said, all of that square footage comes at a cost. Consider how often those special occasions really happen. A spare bedroom of 150 square feet and a cost of $150 per square foot totals up to $22,500. At that cost, it’s likely less expensive to put your guests up in hotel rooms than to build and maintain that extra room.
What Do You See In Your Future?
One other major consideration is what you see your future holding. Do you plan on having (more) kids? Maybe your children are entering high school and will be leaving the nest in a few short years. Do you have elderly parents that you might someday care for out of your home?It’s difficult to examine every “what if” situation, so consider the scenarios you are most sure of and go from there. Remember, if things change, you can always sell your home down the road (albeit at a 6% or more cost due to closing expenses.)
What About Resale?
It’s also a good idea to think about the resale potential of your house. While owning the biggest house on the block may seem appealing, you may want to think twice. Neighborhoods tend to have homes of similar sizes; being the outlier can mean a tougher sell down the road.So look for neighborhoods where the majority of homes are around your ideal size. If you need to sell down the road, you’ll likely have an easier time finding a suitable buyer.
Can You Buy With Expansion In Mind?
If you see your need for space increasing in the future, don’t feel the need to pay for all of that space right away. Consider buying a home that has expansion possibilities (an unfinished basement or attic or space to build over a garage). This way, you’ll always have the flexibility to expand later but at a lower cost today. And if your plans change and you don’t need the space, you won’t be paying anywhere near as much for those unfinished square feet!
It’s More Than the Purchase Price
Houses cost much more than their purchase price—and if you’re comparing your monthly mortgage payment to your monthly rent payment, you might be in for a surprise. Here are some costs homeowners have but renters don’t:
- Homeowners’ insurance (much more than renters’ insurance)
- HOA fees
- Property taxes
- Maintenance costs (especially if something goes wrong)
Avoid New Credit While Buying a New Home
One common tip about buying a home is how important it is to avoid making large purchases—especially on a credit card—before the closing. As you’re moving through the home-buying and mortgage process, your lender is scrutinizing your credit and anything that increases your debt to income ratio could lead to a denial. The best bet is to spend a couple months living frugally until your mortgage has gone through—and don’t buy the new furniture until after closing.
Don’t be Fooled by Cosmetics, including Staging Furniture
Sellers will try to make their house look as good as possible by sprucing up the paint and staging with fancy, spotless furniture. Make sure you look past this staging to see the things that really matter—how is the foundation, the roof, the electrical system? Is there water damage? It’s easy to paint a room but hard (and expensive) to replace the foundation.
Prepare for Closing Costs
Buying a home often comes with a surprising number of fees, some of which aren’t entirely clear at the beginning of the process. Some of these fees have to do with the mortgage process, others with the fees levied by real estate agents and still more with the escrow, inspections and title transfer.
According to Zillow, you can generally expect to pay between 2 and 5 percent of the total price of your home in closing costs. Savvy homebuyers should remember that many (though not all) closing costs are negotiable—and you can also see if the seller is willing to pay (or split) closing costs.
The bottom line is that buying a house is expensive, and some of the costs are hidden—especially from those who have never been homeowners. To avoid a financial crunch, educate yourself about the process and the costs of both buying the home and maintaining it.