Sound Advice for First Time Home Buyers
If you’re like most people, buying your first home is the largest investing decision you will make. Because of this it is important that you get your purchase right, and not overlook some of the key mistakes that first time home buyers often make.
Here are 4 tips to keep in mind when making this big purchase:
Evaluate your circumstances
Evaluating your circumstances means more than just looking at where you are now, it also involves considering where you may go in the future, and the likelihood of different life events occurring.
Questions such as ‘Do you plan on having a child?’, ‘Are you considering relocating jobs or moving?’, and ‘How long do you plan on living in that home?’ all become relevant.
Additionally, you need to factor in the stability of your job, how easy it would be to find a new job if you lost your current one, and how easy it would be to sell your house in case the need arises.
Assess your finances
While life circumstances play a huge role in where you will purchase your first home, and whether or not to buy one in the first place, looking at your current financial situation should also play a role in making the decision of how much you will spend on a home, what your down payment will be and the terms of your loan.
While there are no strict rules about homeownership, general guidelines can be a good place to start when choosing how much to spend on a home.
Time Money recommends that you not spend more than 2.5 times your gross annual salary on the home, and that your mortgage plus any other debt payments that you have should not account for more than 36% of your income.
In a low interest rate environment such as the one we are currently in, purchasing a home that is only 2.5 times your annual income may not only be unrealistic, it may also be unnecessary. You should access your specific needs and measure the amount you can afford based on your current spending and income patterns.
First time home buyers should get pre-approval
Once you have an idea of your financial situation as well as your life circumstances, you can now begin the process of making the purchase.
The first step is to get your financing plan in place.
Contact your local bank or other financial institution and get pre-approval for a mortgage. The loan officer will assess how expensive a home you can purchase, what down payment you need, and the particular terms of the loan. He will then provide you with a pre-approval letter.
While this letter does not guarantee that you will actually receive the loan, it does help streamline the process.
Alternatively you can request an underwriting review of your completed file be done, where the loan officer will go much more in depth. Your income, credit and financial history will all be considered before you are given the letter.
Ultimately this type of letter carries more weight than a standard pre-approval letter, however you may have to pay some money up front in order to go through the process.
Find an agent
Once you have determined the type of house you will buy, how much you are willing to spend, and have received pre-approval for the loan, your next step is to find a real estate agent.
Contact various agents in your community, look for references, then select the one you trust most.
Once you have an agent you can begin the process of looking for your dream home.
Here are a few things for first time home buyers to remember during the home buying process:
- Don’t fall in love with any home – There are always more homes to consider.
- Keep your eyes on the price – Your agent may try to get you to purchase a higher priced home than you feel comfortable with.
- Location, location, property – Location is extremely important, but so is the home itself. It’s fine to buy a fixer-upper, but make sure you are aware of the renovation costs beforehand.
If you adhere to the outlined recommendations, you’ll be well on your way to making a smart decision that is quite possibly the most important investment you’ll make in your lifetime.
Brad Sherman is an independent financial planner and investment advisor, specializing in guiding Millennials on the path to financial independence and achieving their financial goals. Co-host of the Launch Financial podcast, Brad is a frequent speaker and has been featured in The Wall Street Journal, Business Insider, Bankrate, and GoBankingRates, Brad graduated with a degree in International Economics from the University of Wisconsin-Madison (go Badgers!) and has a Masters in Finance from American University’s Kogod School of Business. He enjoys playing football - both fantasy and real - and baseball, but his real talent is playing Whiffle Ball with his young son.