First-Time Homebuyers’ Guide
For many, owning a home is one of life’s ultimate goals, bringing satisfaction, security and status to a new homebuyer. However, it is also a big commitment — one you must be fully ready for before jumping in. Shopping for a new home, especially as a first-time buyer, can be scary and exciting all at the same time. There are so many factors to consider and prepare for. We’ve waded through all the information out there to provide you with this first-time homebuying guide for 2019. Dig in, then go find that perfect home for you!
When to Buy a House
The homebuying process is an exciting time, but many people rush into it before they’re ready for that level of financial commitment. For many homeowners, buying a home is a smart investment, but you’ll need to get ready for this decision.
Add the following criteria to your homebuyers guide checklist to gauge your readiness for this life-changing commitment.
- Your finances are in order: Some debt is OK if you manage it well. You should have a healthy credit score and a budget that works for you.
- You’re ready to settle down: Your job and family life are stable, and you can picture yourself staying in your home for five years or more.
- You can afford a house payment: Even if the mortgage payment is similar to your rent payment, don’t forget to factor in other costs like extra utilities, taxes, HOA fees and repair costs — all things you’re likely not paying as a renter.
- You’ve saved for a down payment: Depending on the type of mortgage, a down payment can vary, but be prepared to have several thousand in savings at the ready. You should have enough to cover closing costs and other unforeseen expenses as well.
- You don’t mind doing repairs or can afford to have them fixed: Owning a home is different from renting in that you are now responsible for all repairs. If you are handy with tools and essential home repairs, great! Otherwise, be prepared to pay someone every time something needs fixing.
If all of these factors are true for you, you are ready to buy a home!
Benefits of Buying a Home
Buying a home comes with a lot of responsibility, but also many significant advantages. Perhaps the best is that buying a home is usually a sound investment. While there are benefits to renting as well, in a rental, you are not building any investment equity when you make your rent payment. Most homes increase in value, even during tougher economic times, so your debt goes down and your equity goes up with each mortgage payment. And the more mortgage payments you make, the more equity you build that you can re-invest back into the home later. You can also invest home equity into a new house or to give you better financial security for retirement.
When you own your home, you are in control of all the decision-making. From the paint colors on the walls to the appliances you choose, you call all the shots. In a rental, you’re stuck with the choices and rules your landlord imposes. When you own a home, you won’t need to ask permission or beg the landlord for improvements. Any upgrades you do make represent an investment in your property that you’ll likely see a return on when it comes time to sell the house.
Owning a home generally means more stability all around, too. Locking in your mortgage rate and staying in your home means your monthly costs will be relatively stable for years to come. So, you won’t need to worry about raising rent prices or moving often, and if you get a raise or other windfall, you can invest it elsewhere. Homeownership also gives a sense of emotional and social stability. Most homeowners take pride in their investment, get involved in their communities and build long-term relationships with neighbors.
What Can You Afford?
A home is likely the most significant purchase you’ll make in your lifetime, and before you’re ready to buy, you’ll need to know how much house you can afford. It’s a good idea to start by making a budget with your income and all your monthly expenses. Include your partner if you are buying a house together. You can even use an online mortgage calculator to get a more accurate estimate of the monthly payments and total mortgage you can afford.
A straightforward way to calculate an affordable house payment is to multiply your gross monthly income by 28%. Many financial experts agree this number is the maximum you should be spending on housing to maintain a healthy budget. Furthermore, the experts advise devoting no more than 36% of your income on total debts — including mortgages, credit cards, student loans and any other debts. Sticking by these rules will ensure you have enough room in your budget for other necessary expenses and can afford your housing costs.
Your monthly house payment will depend on a few factors, including your credit score and the amount of your down payment. Before you are ready to buy your home, work on improving your credit score as much as possible, so you get the best interest rate. You will also need to save as much as you can for a down payment. A better interest rate and a larger down payment will save you more money in the long run, and keep your monthly payment lower.
Another essential consideration for your homebuying budget is remodeling costs. It’s becoming more popular than ever to buy a “fixer-upper” home, or one with bare-bones amenities you can customize to your liking. If you’ve maxed out your budget on the cost of the home, you may be stuck with awkward layouts or outdated appliances and features for much longer than you’d like.
When you’re shopping around for houses, consider what remodeling projects you’d like to tackle right away, and build the costs into the total mortgage from the beginning. Maybe you found a home with a good structure in the perfect location, but the layout and design are all wrong for you. A total home renovation is the answer in this situation, and ensures you get exactly the home you want. Or maybe you only want a kitchen or bathroom remodel or another smaller project. Whatever you desire, be sure to factor these remodeling costs into your mortgage planning. Doing so will make things easier and make sure you get the home you want — and can afford.
Finding Your First Home
You’ve determined you’re ready for homebuying, and have started saving up for the down payment and other costs. But what are the next steps you should take in finding the right home?
- Research your mortgage options: Conventional mortgages, FHA loans and VA loans all have different terms and requirements, so do your research to find out which one is best for you. Look into federal and local assistance programs for first-time buyers, too. You may be able to find additional help with interest rates or down payments.
- Start shopping for a loan: While it’s probably more fun to look at houses instead of loan terms, the process will go more smoothly if you take care of the financial side first. Take a look at several different mortgage lenders to find the best terms that suit your situation. Request a pre-approval letter from your lender — this shows the seller in writing you are serious about buying and have the financing available.
- Find a reputable real estate agent: Ask friends and family for recommendations for real estate agents they have worked with and trust. A qualified agent will be knowledgable about the area you’re interested in, and will listen to your wants and needs. Your real estate agent should be able to make suggestions for homes that fit your wants and budget. Later, when you find the house you want, your agent will help you negotiate the best terms with the seller.
- Choose the right type of home and neighborhood: Think about your ideal living situation — whether it’s urban life or suburbs, single-family home or condo, etc. Do you want certain schools or amenities nearby? Your real estate agent can help you narrow this down and start looking for homes that fit your specifications.
- Visit open houses: Take advantage of open houses in your area as a chance to see a wide variety of homes available. Take note of all the homes’ details as you visit and ask lots of questions. If there are lots of other buyers visiting, schedule another time to visit the property and ask questions more privately.
- Request a home inspection: A home inspector will tour the home, looking for any potential issues like mold or termites. They will also check for structural problems, like those with the roof or foundation. With a quality inspection, you’ll know just what you’re getting into in terms of repairs the house may need right away.
- Negotiate: If the inspector discovered any issues with the home, you can use this information to negotiate with the seller. The seller may also be willing to bargain on other aspects like closing costs. Your agent can help you with this, too.
- Close on your house: Once you make a formal bid on the house, it goes into escrow — a process that protects the buyer and seller and makes sure all the necessary paperwork and finances are in order. Having completed escrow, you can sign the closing papers and take ownership of your new home. It’s time to move in and enjoy!
Mortgages and Monthly Payments
A mortgage is a loan typically used for buying a home, in which the real estate serves as collateral. While there are many types of mortgages available, they generally fall into categories based on the length of repayment terms and whether the interest rate is adjustable or fixed. You’ll make payments once a month for the duration of the loan to pay for your home.
A mortgage repayment length is typically either 15 or 30 years. If you choose a 15-year mortgage, you’ll likely get a slightly lower interest rate, and end up paying less interest overall, since you will pay off the loan much faster. With a 30-year mortgage, the interest may be higher and you’ll pay more overall, but the monthly payments will be significantly lower.
You’ll also choose between fixed-rate and adjustable-rate mortgages (ARMs). In a fixed-rate mortgage, your interest rate is locked in for the life of the loan, and your monthly payment will remain the same throughout the loan. The tradeoff for this is a slightly higher interest rate overall. In an ARM, the initial interest rate will be somewhat lower than in a fixed-rate mortgage, but it can adjust, depending on market conditions. That means your monthly payment can also change to reflect the changing interest rates. A mortgage banker can give you an estimate of what your payments would be with interest rate changes, to help you decide which option is best for you.
Another option is to negotiate discount points on your mortgage to save money in the long run. You can “buy” discount points by paying an upfront fee, which is generally 1% of the total loan for each point. Each point you purchase will lower your interest rate by about .25%, although this can vary depending on your lender and loan terms. If you have some extra cash available upfront, using discount points can be a good idea to save you money later.
While you are searching for your perfect home, and planning your mortgage budget, remember to factor in possible home remodeling projects and costs. Check with your mortgage lender, as not all loans can accommodate extra borrowing for renovations, but some types of loans are specifically designed for this, like a Fannie Mae HomeStyle loan or FHA (203)K. Your lender can guide you to the right choices.
If the home needs major repair work, you may be able to negotiate with the seller to get a lower price. However, if it is merely personal preferences, luxury upgrades or cosmetic changes, it’s not likely the seller will budge on the price. To negotiate the price, get an estimate of the renovations needed, subtract this from the total selling price and offer this as a bid. The seller doesn’t necessarily have to agree to this offer, but it’s a good starting point. With some smart negotiating, you can likely lower the price a bit.
With the option for remodeling a home in mind, it becomes easier to find what’s truly your dream home. It’s challenging to find as-is homes that are perfect and move-in ready. You may have ideas about the perfect kitchen, specific bathroom fixtures or your ideal layout, but just can’t seem to find homes you love in your area. If you find a home in the perfect location with a few things you want to fix up, home improvement remodeling can create your custom ideal dream home exactly the way you’ve always envisioned. Or maybe the home you found is a total fixer-upper, in need of a complete home renovation. Renovating a home in your desired neighborhood can create your dream home wherever you want it.
Choose Ideal Construction & Remodeling for Your Home Project
Local, family-owned Ideal Construction & Remodeling has served the D.C. metro area for two generations, making dream homes reality for clients in Northern Virginia, Washington, D.C. and the Maryland suburbs. Every member of our team is qualified, trained, certified and experienced. By providing quality, luxurious home renovations, we can handle any renovation project you have in mind, and we make your satisfaction our priority. When you’ve found the right home and have some renovations in mind, contact us to set up a complimentary site visit. With our design and construction help, your first home can be the home of your dreams!