Thinking About Buying Your First Home? Here Is What You NEED To Know!
- Mr. Organic
- Jul 2, 2019
- 5 min read
Buying a home is no small task. Especially if it is your first time purchasing real estate! Buying a home is not good for everyone, and renting may be a better option. Utilize this quick over to be sure you fully understand what buying a home means, and if you're ready!
Keep It Simple
The process of buying a home is a complicated one. For the purposes of this article we are going to look at what everyone should know in general about the process of buying a home. Also, this is to help you understand the general nature of a real estate asset and what it may require compared to renting.
Before you even think about purchasing a home, I would strongly advise you already have your 3-6 month emergency fund built. Too often I hear someone wants to buy a hom because, "they're sick of wasting money renting."
Although when I ask them if they at least have money in the bank for an emergency fund, and they answer "no," then maybe renting is actually best for there situation.
If you don't have any savings started, see: How to Manage Your Money Like The Wealthy for Individuals and Households | Millionaire Mindset
The General Nature of Real Estate Assets
Anytime you purchase an asset, there is often a way to purchase it most efficiently and with the lowest costs/fees. With that in mind I have outlined the next steps to prepare you for purchasing your home in the most efficient manor and how to avoid unnecessary costs.
The Home Buying Process:
Determine Your Mortgage Paying Ability - What can you afford?
First, a good practice is to understand what your budget will allow for a mortgage payment before moving forward. Check out Nerd Wallet's Mortgage Calculator to help!
For example, when my wife and started looking for our home, we knew wanted a $1,000-$1,250 mortgage (Not bad for Indiana), and thus that provided us our range of affordable homes. The bank originally approved us for a mortgage that would allow almost a $2,500 mortgage! Do not buy more then you need even if tempted by the loan officer.
Here are some important concepts to be aware of, and how to handle them:
Save an emergency fund first of 3-6 months of living expenses (with new mortgage payment calculated in).
The house may call for more money. Real estate is a unique asset as it may call for additional capital at any point. For example, if it's the dead of winter, and your heating unit goes out, what are you gonna do? This is why it is important to have a liquid (non-retirement) 'house fund.' Typically 5%-10% of the home value is a good amount to have saved. Although, this will depend on the age of the home, type of units (Heating/AC) being used, cost of appliances (fridge, oven, etc) and the estimated costs to replace them.
Avoid primary mortgage insurance (PMI) by putting 20% down. PMI is insurance for the bank against you defaulting. In the banks mind, because you don't have much in the asset in regards to your own dollars you are at much higher risk of default. Typically PMI is 0.5%-1.0% of the loan value. For example a $200,000 home with PMI may cost an extra $166/month! This is added on top of the interest on the loan already. Do to increased costs and no benefit for you, bring down at least 20%. The other route would be to purchase a homeowners warranty to cover your units and appliances. Also, PMI is no longer deductible, hard to cancel, and goes on forever because less goes toward getting you to the 20% equity and more into the banks pocket!
Understand property taxes and homeowners insurance. Typically when I hear someone compare a quote for a mortgage to there current rent, they are blown away that it is comparable or even cheaper than their current rent! For example, I spoke with a young client of mine and she was so excited about how she could get a mortgage for $700/month while her rent was $1,000/month! The next question I asked was, "Does that include your property taxes and homeowners insurance?" Also, "Do you have 3-6 months of savings, and excess cash for repairs when needed?" After explaining to her that on top of the $700/monthly mortgage you will also need to pay property taxes which can heavily change depending on your geographical area, but in general are at least $200/month for the area she was looking. On top of that a typical homeowners policy with a low deductible could range from $100-$300/month. She also had no emergency funds saved, which would put her in an extreme pickle if something fails on the home. She has decided that she will continue to rent and save her emergency funds first, rather then open herself to huge risk without any planning.
Get pre-approved. After you have a complete understanding of the process, the nature of the asset, and have saved your e-funds/home fund/20% down, its time to get pre-approved! Be weary though, because lately the banks are becoming overzealous again, in regards to lending practices, do not go over your pre-planned mortgage payment that you can afford. The bank may tell you that you can afford the beach house mansion, but get real and stay awake!! Stick to what you organically decided you can afford and you'll be much happier that you can afford to furnish your home rather than end up house poor.
Find a Trusted Realtor & Plan To Stay. You have an understanding of the process, you have cash saved, you got a your pre-approval letter. Congrats! Now you've earned the ability to buy a home in the most efficient manor! Find a trusted realtor that knows the area well and start the home searching process. This is where the process really begins. There are millions of questions that your realtor can help you answer in order to find your perfect home. One last thing to keep in mind is that realtors do not work for free! Typically realtor fees (6%) are paid by the seller. Thus, you will want to be sure your time horizon for staying in the home is long enough to at least recoup the 6% you will pay to sell the home. The typical answer you'll find for how long to stay in your home is 5-7 years, but heavily depends on market conditions, and the specific home.
Take your time, and pay the extra for inspections! Don't skimp out on getting proper inspects completed. This goes back to having a well funded house fund to be able to pay for any inspects that come up. At times you may have to pay for a specialist to complete specific inspections on AC/heating units, wells, foundation issues, or other areas the general inspector does not feel competent providing an examination for. I promise you, that any inspection you get will not be a waste of money. They will tell you one of two things: Yes, this is an issue, and it must be resolved or you may be at risk. No, this is not an issue and you can live happily ever after! The worst place to be in is not knowing if you have a problem or if you could have a potential problem in the future.
There is a lot more that can be said about the home buying process. These are the initial concepts to be aware of before jumping into any major decisions. Too often I speak with individuals that made major life-altering mistakes simply because they were uneducated about the process. This is literally what got us into the "subprime mortgage crisis" of 2008.
The grass is not always greener on the other side, and sometimes it even has more dog shit in it and stinks worse!
Thanks for your time!
Also See: How To Pay 0% Taxes In Retirement
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