Owning your first home is a big investment of your time and money so I’ve created this comprehensive home buying 101 guide.
I was able to buy my first house at 27-years-old in 2015 and have enjoyed the nearly three years into the journey of homeowning.
Similiar to when you start investing the home buying process can be difficult to understand with new terms being used frequently.
In this home buying 101 guide, I’ll show you if you are ready to buy your home and my top homeowner tips.
6 Steps First Time Homebuyer Checklist
Think you’re ready to buy your first home? Make sure you are 100% certain by following this easy six-step first-time homeowner step checklist:
Evaluate and Increase Your Credit Score
I recommend getting pre-qualified before you start house shopping. This will ensure that you don’t look for prices you can’t afford and be let down when you have to find different houses. Don’t trust the Zillow listings and estimates either. Work with a realtor to submit some basic paperwork and get pre-qualified.
*Disclaimer: Pre-qualified is very different than pre-approved. Pre-qualified is a simple process that can be submitted online. Pre-approval will require you to submit all financial documents, W-2’s, and tons of other paperwork.
Estimate Your Down Payment
Once pre-qualified play around with some mortgage calculators to figure out what your payments might be based on different down payments.
Depending on where you live and your financial situation everyone will have a different amount for their down payment. I recommend starting with at least 10% down but I personally did 20% as my home was under $200,000.
Once you estimate your down payment you can understand what your mortgage payment will be each month. Don’t spend more than 30% of your TAKE HOME (after-tax) pay on your housing. If something happens to the house you’ll be vulnerable if you have a change in your salary or additional upkeep costs.
Be Prepared for Closing Costs
Closing costs can be a real surprise during the home buying process. I was focused solely on the down payment and had no clue what closing costs were.
Closing costs are separate than your down payment and used for all transactional costs. According to Zillow “Typically, home buyers will pay between about 2 to 5 percent of the purchase price of their home in closing fees. So, if your home cost $150,000, you might pay between $3,000 and $7,500 in closing costs. On average, buyers pay roughly $3,700 in closing fees, according to a recent survey.”
Use a closing cost estimate tool and talk with your loan representative to learn more about closing costs. Sometimes sellers are willing to negotiate paying for part or all of the closing costs.
Look Into The Future
Think of buying a home as a long-term deal, similar to investing stocks (you’re in it for the long game, no the quick profit).
Ask yourself these type of questions:
- Will this be your forever home?
- Do you plan on moving in the next five years?
- Will this house be the right size if your family grows?
- Will your job potentially make relocate in the future?
- Could you afford this home with only one income?
- Do you have enough saved in case of home repairs?
Be very honest with yourself in answering these questions. Buying a home is a big investment and not one you can get out of easily. If you plan on moving within the next five years think twice before buying.
Understand The Process of Homebuying
The last step of the homeowner checklist is to understand the process of buying your first home.
Here’s a very brief overview of the timeline of the home buying process:
- Get pre-qualified
- Find a house you love
- Put an offer on your potential future house
- Offer accepted
- Submit endless paperwork to be pre-approved
- Establish escrow period (think of this as the time until you move in, typically 30-60 days)
- Sign a ton of paperwork, cut the check for your down payment and closing costs
- Get the keys, pop a bottle of champagne & celebrate
If you have passed this first-time homeowner checklist you can start looking for your first home.
Before you make a deal be sure to check out my top first-time homeowner tips:
Home Buying 101 – Top First Time Homeowner Tips
Love Your House & Location
When I began house shopping in 2015 with my friend (who had owned three houses) told me that when you walk in you will know it’s the house you want. I thought it was total BS but once I walked into my future house I loved it. I loved the size, location, price, and feeling I got when I walked around.
When you are house hunting visualize yourself, significant other and family living there. You want to love your first home as it will without a doubt be the biggest purchase of your life.
Love the Location
Don’t just like where your house is located, LOVE it! Make sure your house is convenient and in an area with restaurants, freeway access, and in a safe neighborhood. What’s the point of having a great house if it’s super inconvenient from work or not in a good area of town?
Location is one of the main factors for resale value in the future. Choose a home that makes it convenient for you and has good potential for the future.
Go With a 20% Down Payment (If Possible)
If possible, try to put down 20% for your down payment. This won’t be possible for everyone, especially if you live in higher cost places like SF, NY, or LA.
But the reasons I put down 20% is because it kept the monthly payment low AND avoided property mortgage insurance.
Property mortgage insurance (PMI) is an additional amount to your mortgage that guarantees the lender is covered if you stop making payments. Once you have paid 20% of your house you can work with your lender to remove the PMI to lower your payment.Property mortgage insurance will usually cost between .5% – 1% of the entire loan amount on an annual basis. On a $200,000 loan, you would be paying as much as $2,000 per year or $166 per month.
If you’re debating on putting 20% down or being low on cash don’t put the full 20% down. When you first move into a house there are a lot of upfront costs such as moving, home decor, and minor repairs. You don’t want to put down 20% if you are going to be “cash poor.”
Be Prepared For Homeowner Repairs
It is inevitable that things will break when you become a first-time homeowner. Make sure you have money saved up for these repairs or emergencies. After two years I’ve had to replace the air conditioner, garage door, and some minor repairs.
Some home repairs are cheap while others are extremely expensive. Don’t spend all your cash on the down payment so you can have extra saved for your house!
Talk With Your Significant Other
Buying a home is a ton of responsibility. Make sure you and your partner discuss the down payment, closing costs, and the ongoing costs once you move in.
Choose a 30 Year Mortgage Fixed Rate Loan
There are two general types of mortgage loans — fixed rate and adjustable rate mortgage loans.
Fixed Rate Loan (Conventional Loan)
Fixed rate loans are offered by lenders in 10, 15, 20 or 30-year term lengths. When you choose a fixed rate loan you lock in a monthly payment and interest rate for a set term. Fixed rate loans ensure you know what your payment will be for the next 10, 15, 20 or 30 years. The only part that will adjust in the future is your homeowner’s insurance and property taxes.
Variable Rate Loan (Adjustable Rate) (ARM)
A variable rate mortgage is more commonly known as an adjustable rate mortgage (ARM). Your interest rate will change over the life of the loan. With a fixed rate loan you will always know what your payment will be, ARM loans are the exact opposite! This is terrifying to me. Even if interest rates don’t go up (or even decrease) your payments could increase drastically.
Prior to the 2008-2009 housing crisis people were using adjustable rate mortgages more so than today. People overextended themselves and didn’t fully understand the terms of their mortgage. It was easy to be lured into an adjustable rate mortgage as the payments were lower at the beginning.
As time went on rates increased so much that people weren’t able to afford their payment. This led to foreclosures and the housing crisis. A 30 year, fixed rate loan will ensure you know your payment now, in five years, or 20 years. You’re always able to refinance in the future if interest rates drastically decrease. Fixed rate loans will allow you budget around your never changing mortgage payment.
Save Money With a Refinance In The Future
Stay in touch with your lender to see if refinancing your house is a good idea depending on the market rates in the future.
When I refinanced I was able to drop 1.25% and remove 10 years off my loan. I went from a 30 year, 4.625% to a 20 year 3.5%.
The best part? The monthly payment went up $100 dollars and didn’t spend any money out of pocket.
Buy Small Your 1st Time
Do you really need 3,000 square feet or four beds/four baths? I opted to buy a townhome that was 2bed/2bath. Even though I was approved for a $300,000 house I chose to go significantly under my approval limit.
This ended up being one of the greatest choices when I became a first-time homeowner. If you don’t plan on this being your “forever home”, plan on moving in the future, or aren’t having kids don’t buy a big house. Look at other options like townhouses or condos, just make sure the Homeowners Association Fees aren’t too high.
By purchasing a smaller house I was able to keep the mortgage low, not have to furnish tons of new rooms and save a ton of money.
Here’s why I always recommend buying small on your first home:
Home Values Can Decline
A big house equals a big mortgage. Use the 2008 housing crisis as a brutal reminder that real estate prices can go down, sometimes overnight.
There is always the possibility your home will decrease. Historically home rates have increased 3 to 5% per year but there is still is a chance of your home declining in value. If you bought in 2008 you probably overpaid and nearly ten years later it might be back to the original amount you bought the house.
You Don’t Want to Be Cash Poor
If you overspend on the house you will have a large mortgage payment. By overextending yourself you might be cash poor and potentially not be saving enough elsewhere. A high mortgage can lead to not saving enough for your future retirement or not saving towards other goals.
More Space to Fill
Consider the costs when buying a house that is bigger and requires you to buy more stuff. When I moved into my townhouse it was from a 1 bedroom/1 bath to a 2 bedroom/2 bath, roughly 400 square feet more. Even going up one bed and one bath I spent over $1,000 on the one room:
- Futon ($300)
- Desk ($200)
- Bookcase ($100)
- Home decor ($500)
- Total: $1,100
If you are increasing the size of your house be prepared for the extra costs of furnishing bedrooms and bathrooms.
A bigger house will mean more potential for homeowner repairs.
Enjoy Your First Home
Thank you for reading the home buying 101 guide!
My last piece of advice is one that I had to include. While the process of buying a home is expensive and can be overwhelming don’t forget to enjoy your first huge purchase.
Would you add anything to the home buying 101 guide? Do you have any unique experiences that can help first-time home buyers?
Let me know in the comments!
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