First, let me apologize for a bit longer post today, but I think you will agree, the information eaxplained is helpful.
Are you gearing up to buy your first place? A first home can seem stressful and overwhelming, and it isn't without its share of potential pitfalls. If you're aware of those issues ahead of time, you can protect yourself from costly mistakes and shop with confidence. For many people, a home is the most significant purchase they will ever make, but it need not be the most difficult.
You Must Know What You Can Afford
As we've all learned from the subprime mortgage mess, what the bank says you can afford and what you know you can afford (or are comfortable with paying) are not necessarily the same. If you don't already have a budget, make a list of all your monthly expenses (excluding rent), including vehicle costs, student loan payments, credit card payments, groceries, health insurance, retirement savings and so on.
Don't forget significant expenses that only occur once a year, like any insurance premiums you pay annually or annual vacations. Subtract this total from your take-home pay, and you'll know how much you can spend on your new home each month. When calculating this figure, use a mortgage calculator to research current interest rates. This will give you an estimate of what your total mortgage payments will be.
Next, tailor your house-hunting to properties in your financial neighborhood. If you end up looking at homes that are outside your price range, you'll end up lusting after something you can't afford, which can put you in the dangerous position of trying to stretch beyond your means financially or cause you to feel unsatisfied with what you actually can afford. You may even learn that you can't afford the type or size of home that you desire and that you need to work on reducing your monthly expenses or increasing your income before you even start looking. (Read "Six Months to a Better Budget" and "Get Your Budget in Fighting Shape" to learn more.)
Complete Mortgage Qualification
What you think you can afford and what the bank is willing to lend you may not match up, especially if you have poor credit or unstable income, so make sure to get pre-approved for a loan before placing an offer on a home. (Get the details in "Pre-Qualified Versus Pre-Approved – What's the Difference?") If you don't, you'll be wasting the seller's time, the seller's agent's time, and your agent's time if you sign a contract and then discover later that the bank won't lend you what you need, or that it's only willing to give you terms that you find unacceptable.
Be aware that even if you have been pre-approved for a mortgage, your loan can fall through at the last minute if you do something to alter your credit score, like finance a car purchase. If you cause the deal to die, you may have to forfeit any deposit or earnest money you put up when you entered into the contract. (To learn more about your options, see "Financing for First-Time Homebuyers.")
Estimated Additional Expenses
Once you're a homeowner, you'll have additional expenses on top of your monthly payment. Unlike your renter days, you'll be responsible for paying property taxes, ensuring your home against disasters and making any repairs the house needs (which will occasionally include expensive items like a new roof or a new furnace).
If you're interested in purchasing a condo, you'll have to pay maintenance costs monthly regardless of whether anything needs fixing, because you'll be part of a homeowner's association, which collects a couple of hundred dollars a month from the owners of each unit in the building in the form of condominium fees. (For more information, see "Does Condo Life Suit You?")
Not To Be Too Picky
Go ahead and put everything you can think of on your new home wish list, but don't be so inflexible that you end up continuing to rent for significantly longer than you want to. First-time homebuyers often have to compromise on something because their funds are limited. You may have to live on a busy street, accept outdated décor, make some repairs to the home, or forgo that extra bedroom.
Of course, you can always choose to continue renting until you can afford everything on your list – you'll have to decide how important it is for you to become a homeowner now rather than in a couple of years. (For related reading, read "To Rent or Buy? The Financial Issues - Part 1" and "To Rent or Buy? There's More to It Than Money - Part 2.")
Expand Your Vision
Even if you can't afford to replace the hideous wallpaper in the bathroom now, it might be worth it to live with the ugliness for a while in exchange for getting into a house you can afford. If the home otherwise meets your needs concerning the big things that are difficult to change, such as location and size, don't let physical imperfections turn you away.
Besides, doing home upgrades yourself, even when you have to hire a contractor, is often cheaper than paying the increased home value to a seller who has already done the work for you. (For more information on renovating, read our related article "Fix It and Flip It: The Value of Remodeling.")
Being Swept Away
Minor upgrades and cosmetic fixes are inexpensive tricks a seller's dream for playing on your emotions and eliciting a much higher price tag. Sellers may pay $2,000 for minimal upgrades or spend several thousand dollars on staging. If you're on a budget, look for homes whose full potential has yet to be realized. Also, first-time homebuyers should always seek a house they can add value to, as this ensures a bump in equity to help you up the property ladder.
The Important Things
Don't get a two-bedroom home when you know you're planning to have kids and will want three bedrooms. Don't buy a condo just because it's cheaper than a house – if one of the main reasons you're over apartment life is because you hate sharing walls with neighbors. It's true that you'll probably have to make some compromises to be able to afford your first home, but don't create an understanding that will be a significant strain.
Do the Inspection
It's tempting to think that you're a homeowner the moment you go into escrow, but not so fast – before you close on the sale, you need to know what kind of shape the house is in. You don't want to get stuck with a money pit or with the headache of performing a lot of unexpected repairs. Keeping your feelings in check until you have a full picture of the house's physical condition and the soundness of your potential investment will help you avoid making a grave financial mistake.
Choose your Agent
Once you're seriously shopping for a home, don't walk into an open house without having a real estate agent or broker (or at least being prepared to throw out a name of someone you're supposedly working with). Agents are held to the ethical rule that they must act in both the seller and the buyer parties' best interests, but you can see how that might not work in your best interest if you start dealing with a seller's agent before contacting one of your own.
Consider the Future
It's impossible to predict the future of your chosen neighborhood correctly, but paying attention to the information that is available to you now can help you avoid unpleasant surprises down the road.
Ask Questions:
What kind of development plans are in the works for your neighborhood in the future?
Is your street likely to become a major street or a favorite rush-hour shortcut?
Is there talk of a bridge or a highway to be built in your backyard in five years?
What are the zoning laws in your area?
You Must Know What You Can Afford
As we've all learned from the subprime mortgage mess, what the bank says you can afford and what you know you can afford (or are comfortable with paying) are not necessarily the same. If you don't already have a budget, make a list of all your monthly expenses (excluding rent), including vehicle costs, student loan payments, credit card payments, groceries, health insurance, retirement savings and so on.
Don't forget significant expenses that only occur once a year, like any insurance premiums you pay annually or annual vacations. Subtract this total from your take-home pay, and you'll know how much you can spend on your new home each month. When calculating this figure, use a mortgage calculator to research current interest rates. This will give you an estimate of what your total mortgage payments will be.
Next, tailor your house-hunting to properties in your financial neighborhood. If you end up looking at homes that are outside your price range, you'll end up lusting after something you can't afford, which can put you in the dangerous position of trying to stretch beyond your means financially or cause you to feel unsatisfied with what you actually can afford. You may even learn that you can't afford the type or size of home that you desire and that you need to work on reducing your monthly expenses or increasing your income before you even start looking. (Read "Six Months to a Better Budget" and "Get Your Budget in Fighting Shape" to learn more.)
Complete Mortgage Qualification
What you think you can afford and what the bank is willing to lend you may not match up, especially if you have poor credit or unstable income, so make sure to get pre-approved for a loan before placing an offer on a home. (Get the details in "Pre-Qualified Versus Pre-Approved – What's the Difference?") If you don't, you'll be wasting the seller's time, the seller's agent's time, and your agent's time if you sign a contract and then discover later that the bank won't lend you what you need, or that it's only willing to give you terms that you find unacceptable.
Be aware that even if you have been pre-approved for a mortgage, your loan can fall through at the last minute if you do something to alter your credit score, like finance a car purchase. If you cause the deal to die, you may have to forfeit any deposit or earnest money you put up when you entered into the contract. (To learn more about your options, see "Financing for First-Time Homebuyers.")
Estimated Additional Expenses
Once you're a homeowner, you'll have additional expenses on top of your monthly payment. Unlike your renter days, you'll be responsible for paying property taxes, ensuring your home against disasters and making any repairs the house needs (which will occasionally include expensive items like a new roof or a new furnace).
If you're interested in purchasing a condo, you'll have to pay maintenance costs monthly regardless of whether anything needs fixing, because you'll be part of a homeowner's association, which collects a couple of hundred dollars a month from the owners of each unit in the building in the form of condominium fees. (For more information, see "Does Condo Life Suit You?")
Not To Be Too Picky
Go ahead and put everything you can think of on your new home wish list, but don't be so inflexible that you end up continuing to rent for significantly longer than you want to. First-time homebuyers often have to compromise on something because their funds are limited. You may have to live on a busy street, accept outdated décor, make some repairs to the home, or forgo that extra bedroom.
Of course, you can always choose to continue renting until you can afford everything on your list – you'll have to decide how important it is for you to become a homeowner now rather than in a couple of years. (For related reading, read "To Rent or Buy? The Financial Issues - Part 1" and "To Rent or Buy? There's More to It Than Money - Part 2.")
Expand Your Vision
Even if you can't afford to replace the hideous wallpaper in the bathroom now, it might be worth it to live with the ugliness for a while in exchange for getting into a house you can afford. If the home otherwise meets your needs concerning the big things that are difficult to change, such as location and size, don't let physical imperfections turn you away.
Besides, doing home upgrades yourself, even when you have to hire a contractor, is often cheaper than paying the increased home value to a seller who has already done the work for you. (For more information on renovating, read our related article "Fix It and Flip It: The Value of Remodeling.")
Being Swept Away
Minor upgrades and cosmetic fixes are inexpensive tricks a seller's dream for playing on your emotions and eliciting a much higher price tag. Sellers may pay $2,000 for minimal upgrades or spend several thousand dollars on staging. If you're on a budget, look for homes whose full potential has yet to be realized. Also, first-time homebuyers should always seek a house they can add value to, as this ensures a bump in equity to help you up the property ladder.
The Important Things
Don't get a two-bedroom home when you know you're planning to have kids and will want three bedrooms. Don't buy a condo just because it's cheaper than a house – if one of the main reasons you're over apartment life is because you hate sharing walls with neighbors. It's true that you'll probably have to make some compromises to be able to afford your first home, but don't create an understanding that will be a significant strain.
Do the Inspection
It's tempting to think that you're a homeowner the moment you go into escrow, but not so fast – before you close on the sale, you need to know what kind of shape the house is in. You don't want to get stuck with a money pit or with the headache of performing a lot of unexpected repairs. Keeping your feelings in check until you have a full picture of the house's physical condition and the soundness of your potential investment will help you avoid making a grave financial mistake.
Choose your Agent
Once you're seriously shopping for a home, don't walk into an open house without having a real estate agent or broker (or at least being prepared to throw out a name of someone you're supposedly working with). Agents are held to the ethical rule that they must act in both the seller and the buyer parties' best interests, but you can see how that might not work in your best interest if you start dealing with a seller's agent before contacting one of your own.
Consider the Future
It's impossible to predict the future of your chosen neighborhood correctly, but paying attention to the information that is available to you now can help you avoid unpleasant surprises down the road.
Ask Questions:
What kind of development plans are in the works for your neighborhood in the future?
Is your street likely to become a major street or a favorite rush-hour shortcut?
Is there talk of a bridge or a highway to be built in your backyard in five years?
What are the zoning laws in your area?
I offer an hour free consultation in Long Beach for the first-time buyer, Please request your free and no obligation consultation meeting now.
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