Interest rates are starting to come down ever so slightly. With that, interest in the housing market is heating back up. If you’ve been waiting to buy a home until the housing market looks more favorable, you might be wondering whether you should dip your toe in. Deciding to become a home buyer is among the biggest financial and adulting decisions you’ll ever make. Plus, real estate transactions can feel devilishly complicated. How do you know whether buying a new house is right for you? And if you move forward, how do you navigate the home buying market, especially if you’re buying your first home?
In this post, I’ll go over helpful steps to take as you’re considering your first home purchase. I’ll also discuss tips to make the home buying process easier. I even provide a free home buying checklist at the end of this post. I hope by the end you feel more confident about your next steps.
Develop a Vision for Your Perfect Home
Your first step when considering a first time home purchase is to create a vision of your ideal home. It’s unlikely you’ll be able to buy your dream home with your first home purchase. However, envisioning your dream house can provide insights into the home features that are important to you. Plus, it can highlight whether you have any dealbreaker features.
Consider things like how many bedrooms and bathrooms you want, whether you want an open floor plan, preferred square footage, and other interior features that are important to you. Likewise, what exterior features do you want? Do you want a front yard? Or a fenced yard? What about a garage or extra storage space?
And where is the home located? Is it in a bustling area or on a quiet street? Are there plentiful sidewalks or a bus line nearby? In other words, develop a wish list for your home and flag the most important things on that list. This will provide insights into what you should look for in the right home, as well as dealbreakers to watch out for.
Run Your Home Buyer Numbers
Before looking for a home or even contacting a realtor, it’s a good idea to run your numbers. Specifically, find an online mortgage calculator that gives you a basic idea of how much home you can afford. While these calculators are somewhat overly simplistic, they provide an easy way to understand whether you’re financially on the right track for the home you want.
My favorite version is Nerdwallet’s how much house can you afford calculator. You simply fill in important details like the down payment you have saved (or plan to have saved), your household income, and any debt you have. It then provides an estimate of the monthly mortgage payment you can afford as well as the estimated price range of the home you can comfortably afford or stretch to afford.
It’s important to be aware of the potential problems with these calculators. Specifically, they provide a starting point for understanding financial affordability. However, they don’t account for all of the important factors that influence one of the biggest financial decisions of your life. For example, they don’t account for your monthly expenses, how much money you feel comfortable saving per month, what interest rate you’d qualify for, and more.
Nevertheless, they provide a useful and important starting point. Start with these estimates and then consider how your personal numbers might change once you account for some of that additional information mentioned above.
Research Homes for Sale in Your Price Range
Once you have a general sense of your numbers, do some online research. What kind of homes are available for your price point? Can you afford a home that hits the most important qualities you were interested in? Or do you have to save more for a down payment or lobby for a higher income to get the kind of home you want?
If the latter is the case, don’t despair! You have a goal now. You can use my guide to asking for a promotion and saving for any goal to help you get where you want to go.
Check Your Credit Score
As you are assessing home affordability, you may notice that the interest rate makes a huge difference for your monthly payment. A slightly higher interest rate can mean paying hundreds of dollars more per month. Mortgage interest rates are influenced by many things that are outside of our control. However, they are also influenced by our credit score, which is in our control. The higher your credit score, the lower your interest rate is likely to be.
Consequently, to get an accurate sense of the interest rate you might be offered, consider checking your credit report on one of the credit report services that offer free yearly credit reports. Equifax, Experian, and TransUnion all let you check your credit score for free annually and with no penalty to your score.
If you score is on the low side, consider taking the steps I outline in another post to boost your credit score.
Understand the Phantom Costs of Being a Home Buyer
I believe it’s important that potential home buyers go into the process with their eyes open. Consequently, before starting your home buying journey, I also recommend that you spend a little time understanding the phantom costs behind owning a home. By doing so, you can decide whether buying is actually a good decision for you. Specifically, owning a home comes with a lot of costs that are underappreciated by first-time homebuyers.
The Maintenance Costs of Being a Home Buyer
For example, financial advisors recommend that you budget 1-2% of the home’s value each year for home repairs. It might be a water heater that breaks, a crawl space that becomes infested, or a dishwasher that needs replacing. A home inspector can help you identify major issues to budget for. However, unexpected problems inevitably crop up with homes as well.
Monthly Fees and Interest
Moreover, for those who put 20% down on their home, about 80% of their monthly payments for the first 10 years will go towards interest payments. That’s on top of taxes, homeowner’s insurance, and, potentially HOA fees. The reality is that you won’t start building substantial equity until you’ve own a home for quite awhile, unless you’re able to make additional payments to a home or pay it off in full.
Those who put down less than 20% on their home will take even longer to build equity.
Closing Costs
Finally, remember that if you’re purchasing a starter home, you’ll likely have to pay closing costs when you purchase your next home (unless you maintain it as a rental). Closing costs add up to about 10% of your home’s value. As a result, those costs will eat up a good chunk of appreciation that home sellers experience. That is, assuming your home appreciates in the first place.
Most people who refinance also have to pay closing costs as well. This is rarely discussed when people advocate that you buy a home at a high interest rate and just wait to refinance.
Consequently, if you’re considering a home from an investment perspective or if you are viewing it as a cheaper option than renting, it’s important to remember that maintenance costs, interest, taxes, insurance, and closing costs can quickly exceed your monthly rent payment. Don’t get me wrong, I know all this and I still dream of owning a home. However, it’s important to remember that, at the end of the day, most financial advisors describe a primary home as a consumer purchase. Even real estate investor Paula Pant notes that your primary home is a consumer purchase, not an investment. So you should make sure you’re ready for that level of purchase.
Find a Great Realtor and Home Buyer Lender
At this point, you’ve gotten a sense of your dream or goal home, along with important features and dealbreakers. You’ve also run your numbers, including your credit report, understood phantom costs, and decided that you are financially in the right place to purchase the kind of home you want. Your next step is to find real estate professionals to support you.
When searching for a new home, it’s super important that first-time home buyers find a great team. That includes finding a good real estate agent and mortgage lenders you trust. I have a detailed post about the qualities of a good realtor. I highly recommend reviewing that.
However, to provide a couple of key details, it’s important to find someone certified by the National Association of Realtors who has your best interest at heart and who has a lot of good experience. Someone with experience can help you understand whether a property is a good value or in good condition. They’ll know the structural elements to look for, safety features to be aware of, and the promises and pitfalls of a particular neighborhood.
Comparing Mortgage Lenders
Likewise, a good loan officer can help you with your mortgage pre-approval. They can help you clarify the monthly payment and home value you can afford. Plus, a good mortgage lender can get you the best deal on interest rates for your situation. The degree to which they are fast and responsive can mean the difference between getting a house you want and not qualifying in time.
I recommend comparing the interest rates offered by a few mortgage lenders. Sometimes mortgage lenders are even willing to match the rates of their competitors or offer incentives like defrayed fees. Getting a pre-approval requires a hard credit check, which can ding your credit score. However, multiple pre-approvals within 45 days will be bundled together in your credit report and not ding your score any more than one would.
It’s important to keep in mind though, that just because you qualify for a certain amount, doesn’t mean it’s right for you. It may be higher than you are comfortable paying, for example. You should decide that on your own or with a partner if relevant.
Boost Your Chances at Being a Successful Home Buyer
The best way of boosting your chances of getting the home you want is finding a good realtor and mortgage lender. It is also important to find a good realtor before you go to open houses, especially for new builds. Realtors at open houses may try to take advantage of you if you do not have representation. Aside from that, there are a few other steps you can take to increase your chances of winning a bid when you find a home you love.
Put Down at Least 1-3% in Earnest Money
First, put down a solid earnest money deposit. An earnest money deposit shows sellers that you are committed. With an earnest money deposit, you usually put down 1-3% of the home’s value. If you back out of the sale without cause, that earnest money goes to the seller. If the deal falls through because the home doesn’t pass inspection or because of another breach of contract, the money goes back to the buyer.
Basically it’s a way of ensuring that buyers aren’t putting down offers on multiple homes and backing out without cause. Plus, a hefty earnest deposit shows you’re likely to qualify for the home loan.
Show That You Can Financially Handle Being a Home Buyer
In addition to offering a decent earnest money deposit, you can pre-qualify for a loan and offer a more sizeable down payment to increase the chances that your offer is accepted. Both show that you have the financial resources to qualify for a home loan. As a result, your offer is less likely to fall through if they accept, which makes for less of a risk for the seller.
Forego Home Buyer Contingencies
In very competitive markets, you might have to make a lot of compromises in order to successfully buy a home. For example, when we were looking at condos, we had to waive the inspection in order to be taken seriously. This is definitely not something I recommend. However, it highlights that sometimes you need to compromise in a seller’s market.
Offer Above Asking
Another option is to offer above asking. One of the best ways of doing this is with an escalation clause. Instead of automatically offering, say, $20,000 above the asking price, you tell your realtor how high you’re willing to go and the increment you would like to make.
Let’s say you are putting down an offer on a $850,000 home (if that seems crazy, that’s pretty small potatoes in the Seattle area). You tell your realtor that you are willing to go up to $870,000 with a $5,000 increment. That means that if another buyer puts down an offer of, say, $860,000, you’ll automatically offer $865,000 ($5,000 more than they offered). If they offer $865,000, you’ll offer $870,000. And if they offer above $870,000, you’re out of the running. If you’ve ever bid on something on Ebay, it’s a similar process.
Make Things Easier on the Home Seller
One way you can do this is by limiting the things you ask for. In a seller’s market, you can rarely ask for them to cover closing costs, for example.
You can also offer sellers a rent back option. With a rent back option, they can rent the home they’re selling to you. Some people rent it for free or for the cost of the buyer’s rent while they wait to move into the home. You can let them rent the home from you for usually a month or two, which gives them time to find a home of their own with the equity they just earned from selling.
Related, you might choose a closing date that is convenient for them and gives them time to find a new home.
Write a Letter
This isn’t always a helpful or successful option for every home buyer. However, if there’s a home you really want, you may want to try writing the sellers a letter. Explain why you love their home and why it would mean so much to own it. Be careful not to mention any information (like race/ethnicity, sexuality, etc.) that might be construed as discriminatory when the seller makes a decision. Also ensure that you are polite and not overly pushy.
Printable Home Buyer Checklist Template
A qualified realtor can help you better understand the pros and cons of homes that you look at. However, it’s hard to keep track of everything when you’re looking at a lot of homes. I’ve provided this free home tour checklist you can use as you compare homes. This free checklist template is available as a digital file that you can instantly download. Simply download the PDF file and print at home or at your local library or print shop.
I recommend printing multiple copies so that you can bring them to each home you look at. Just make sure to write down the property address for each so you don’t mix up the homes you’re touring! I also give spaces to add additional details about the home to best fit with your personal use.
Final Thoughts on Being a Home Buyer
Becoming a home buyer is a huge financial and personal step. It’s also really stressful. The good news is that by taking a few basic steps, you can set yourself up well to purchase the right home for you. With interest rates expected to fall in 2024 and 2025, this is a good time to start considering whether you’re ready to start running your own numbers. I hope this guide and the house hunting checklist helps make this process as smooth as possible.
If you enjoyed this post, please consider liking, subscribing, or sharing with others. Interested in related content? Check out my posts on my home-buying lessons learned, the qualities of a good realtor, how to save for multiple goals, and my first-time home-buying guide plus free budget worksheet. If you want more home buyer resources, check out my home buying bundle on Etsy! It includes a home buyer checklist, budget worksheet, dream home planner, realtor interview, and more!