Buying your first home is a magical moment. Along with nailing down a steady job and getting married, it’s one of those undeniable signs that you’re a full-fledged adult. It’s also a process with long-term financial and emotional consequences. The last thing you want to do is make rash decisions that you’ll end up dreading down the line. Here are some of the things you should know upfront to make sure you don’t suffer from a case of buyer’s remorse.
1. It’s okay to buy a starter home.
Some buyers sit on the sidelines while saving up for their dream home. But by continuing to pay rent, you’re giving up your ability to build equity over time.
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You may be better off buying a more modest place in the meantime, as long as you’ll be there long enough to justify the closing costs. “Down the road as you’re settled into a long-term situation, you can always embark on a journey to find your forever home,” says Greg Vladi, an agent with Triplemint Real Estate in New York City.
2. Online searching has its limitations.
The emergence of online real estate websites has certainly made home shopping easier for consumers. But in order to make the best decision for you and your family, you really have to get off your couch.
Looking at properties is free – and it’ll give you a much better sense of what each listing has to offer. “You need to get out and see as much as possible,” says Vladi . “Grab a coffee and go to some open houses with your agent.”
3. Going it alone can be costly.
If you like the idea of searching for a home by yourself, well, you’re not alone. It’s easy to be confident in your own abilities at the start of the journey. Once you get down to the nitty-gritty of contract negotiation, however, you may end up with a sudden dose of humility.
Working with a reputable buyer’s agent gives you access to their expertise, not to mention a network of bankers, attorneys and other professionals in their referral network. And because they’re, in effect, paid by the seller, there’s really no extra cost to use their services. “It’s truly a win-win,” says Vladi.
The first step of home-shopping is finding out how much you can actually afford.
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4. When selecting an agent, chemistry matters.
“You’ll be working closely with your real estate agent, so it’s essential that you find someone you get along with,” says Ivan Estrada, an agent with Douglas Elliman Real Estate in Los Angeles. The agent should be highly skilled, motivated and knowledgeable about the area you’re exploring.
Your first step should be soliciting referrals from friends and family members. If you find a local agent on your own, ask to talk with recent clients and see what they have to say.
5. It’s okay to be a list-maker.
With some decisions, going by gut instinct pays off. Not so with something as complex and important as a new home. Vladi recommends formulating your criteria ahead of time. “Write down a list of must-haves, nice-to-haves, not-neededs and complete deal-breakers,” he says.
The list may change after you start looking, but it’s still important to have at the outset. Consider, for example, what amenities matter most to you and your spouse. And think about whether you’re open to making renovations or would rather have a house that’s move-in ready.
6. Homebuyers tend to think short-term.
There’s a tendency for young people to go house- or condo-hunting with their current lifestyle in mind. But easy access to coffee shops and gastropubs will probably mean less to you than quality schools and access to parking once you start a family.
Vladi tells clients to think about the big picture when evaluating neighborhoods and properties. Consider what your lifestyle will be a few years down the line, not just today.
7. Pre-approvals help focus your search.
If you’ll be purchasing a home with a loan, getting pre-approved is a huge time-saver, says Estrada. Based on your income, employment history and debt, lenders are able to tell you ahead of time how much you can borrow. With the pre-approval in hand, you can focus your search on properties you know you can afford. Plus, your offer will be stronger, since the seller knows you can obtain the necessary financing.
8. Saving for a down payment isn’t enough.
It can take years to save enough money for a down payment and closing costs. But you really need to put away more than that. “ Have money for furnishings, appliances, rugs, updated fixtures, new paint and any other touches you’ll want to have when you move in,” Estrada says.
9. The mortgage is only one of your monthly payments.
Young homebuyers tend to gauge how much they can afford by looking at the monthly mortgage payment for a given loan amount. But that’s only one of the fees you’ll be paying on a regular basis.
You also have to account for property taxes, homeowner’s insurance, homeowners association fees and – if you’re putting down less than 20 percent – mortgage insurance. If you fail to consider those expenses, you could be in for a rude awakening.
10. Even nice homes may need work.
There are certain aspects of a home that you can’t change, like the neighborhood it’s in or the overall layout. But there’s a lot you can do to spruce up a home without breaking the bank. “Don’t get caught up on superficial details like paint color, fixtures and carpets,” Estrada says. “These features are easy to change once the home is yours.”
11. Home renovations boost resale value more than anything else.
Homeowners often like to put their own touches on a home, especially if it’s an older property. But if you see your house as just a starter home, you might want to consider how much your renovation project will help your home’s value.
A recent analysis by Remodeling magazine found that replacing a garage door actually offered the biggest return of any project (homeowners recouped 98 percent of their expenses, on average). Among the poorest investments was installing a backyard patio, which only nets a 48 percent return.
12. Credit scores take time to improve.
Lenders use your credit score to help determine your interest rate. Given the size of a typical home loan, even a small drop in your rate can save you big money.
Unfortunately, there’s virtually no way boost your score overnight. Your best bet is to pay down your revolving credit accounts over a matter of years and make sure you hit your due dates. Even fixing an error on your credit report is a process that can take a month or more. The sooner you start on these things, the better.
13. You don’t need a 20% down payment.
There was once a time when borrowers needed to put down 20 percent the purchase price in cash. But these days, there are a number of options to buy a home even if you have less than that.
FHA mortgages, for example, only require you to put down 3.5 percent, as long as you pay a mortgage insurance premium that safeguards the lender if you default on the loan. Another option: the Fannie Mae HomeReady program, which has a low 3 percent down payment requirement. Unlike FHA loans, HomeReady borrowers have the right to discontinue mortgage insurance payments when they build 20 percent equity in their home.
14. Comparing lenders can save big money.
Unless you evaluate terms from multiple lenders, you’ll never know if you’re getting the best deal out there. Shop multiple financing sources, including banks, credit unions and mortgage companies. But don’t just look at the interest rate – closing costs matter, too. Comb through the Loan Estimate, a document that lenders provide you after you submit your mortgage application, to see how much they’re charging you for various fees.
15. You can protect yourself with contingency clauses.
Even homes that look great at first glance can have hard-to-find problems, like mold inside of the walls or improper wiring. Including a home inspection contingency in the contract lets you back out of the deal or negotiate repairs if one of these issues comes to light.
You may also want to incorporate a home financing contingency, which protects the buyer if his or her loan falls through. Without a contingency in place, you may have to pay in cash or walk away and forfeit your earnest money.