Buying your first home is usually the biggest purchase of your life! Read these tips to help your first property be a successful one.
1. Plan Your Budget
We all want to own a home. But before you turn your dreams into reality, you must take a careful, objective look at your finances. Ask yourself: Can I really afford a home?
Here is the reality. Very few first-time home buyers have the cash reserves to purchase a home outright. You will have to take on a long-term mortgage. This means that you are accepting debt that in most cases exceeds $100,000. Are you ready to take on that commitment?
Most experts agree that your mortgage payment should be no larger than one-third of your income. This will change depending on your existing debt (student loans, credit cards, car loans). Take the time to examine your expenses. How much can you realistically afford to pay each month? Can you make cuts to your current expenses?
2. Save For A Downpayment
A standard down payment is typically 20%, but this amount can vary. By investing this much upfront, you can avoid mortgage insurance and will lower your monthly payments. You can be approved for a home loan without a large down payment, but you should get into the habit of saving your money to put toward your first home.
3. Added Expenses
When you invest in your first home, you are not paying just for the mortgage. There are many added expenses that need to be factored into your new budget. This will include the following:
- Property Taxes
- Homeowners insurance
- Repairs and maintenance
This last one is hard to plan for; we never know when an emergency will arise. In general, you should have three months of income saved in an emergency fund for any unforeseen disasters.
One of the most attractive aspects of home ownership is overseeing your own home: You get to decide how to design the home, when and where to paint, whether you want to tear out the carpets or add a new roof. You no longer need to seek approval from a landlord or property manager.
This is also one of the hardest transitions to make. When the kitchen sink pipes burst, or the roof leaks, or you suddenly need to replace old fixtures, you are now responsible. You will need to hire your own plumber or roofer (or do the work yourself).
These unknowns must be included in your emergency fund before you purchase your first home. It is not the most exciting thing to save for, but it will keep you out of financial trouble down the road.
4. Get Pre-Approved
Let’s say you have completed all the previous steps. You have the down payment saved. You created a working budget that includes your anticipated mortgage along with taxes, insurance, and an emergency fund. Time to go buy a home, right? Not yet.
Most sellers will not entertain an offer until you have been pre-approved by a lender. Before you make any offers – and really before you start a serious home search – you need to know how much the bank is willing to give you. Loan officers will review your financial record – W-2s, credit history, student loans – to determine what you can afford. They most often offer 15-year and 30-year mortgages. These come with either fixed or adjustable interest rates.
The safest route is a 30-year, fixed rate mortgage. You will make steady monthly payments and if your credit score is excellent, you will have a lower interest rate. An adjustable rate can be tricky only because it can fluctuate over time.
If you are prepared to pay a certain monthly amount but the rates change, you may find yourself over budget. It is worth noting that many banks will offer a loan amount that exceeds your set budget. You might plan to pay $200,000 for a home, but receive a loan offer of $300,000. Do not take on a loan that exceeds your budget. Just because you are eligible for a large loan does not mean you should take it. If you do this, you risk becoming house poor – spending your income on monthly mortgage payments and not building your savings or using money toward repairs, maintenance, and other necessities.
5. Common Mistakes
Buying a home is one of the biggest purchases you will make. It can be an emotional process but that doesn't mean you should make an emotional purchases. Here are a few common mistakes you should be aware of:
1. Waiting for the Perfect Deal
The market always goes up and down so it's easy to believe you will find a better deal. Yes, the market could drop but you're still never certain if it will. The best thing you can do is research and not get hung up on finding better deals forever.
2. Love at First Sight
In real estate you should never believe in love at first sight. Even if you do love the first home you see, look at 5 more homes just to make sure it's true love.
3. Looking for Perfection
This is similar to waiting for perfect deal because you might never find it. Have an open mind because it is unlikely you will find a home that crosses everything off your list. Make sure you don't overpay for perfection as well!
4. Not Thinking About the Future
People are investing to live in a neighbourhood but don't often think about the future of that area. Will there be construction there in 5 years? A highway behind your house? Are house prices declining in the area? You have to think about these things so you eliminate unpleasant surprises in the future
6. Money Sense
A house is a big purchase so don't let small mistakes cost you lots of money. Here are some tips and principals you can apply to the purchase of your home:
- Budget for added expenses
- Get a guarantor if you're struggling to find a mortgage
- Don't take the biggest loan the bank offers. Stay within your budget.
- You never know where the market will be tomorrow
- Get info from the sellers. How long has it been on the market? How are the neighbours? What renovations have been done?
- Talk to the neighbours yourself. Ask about the area and you could get to see what they are like
- Consider resale potential in the future
The more you factor in these variables the more knowledgable you will be with your decision.
7. Needs vs. Wants
After you determine what you can afford, it’s time to start searching for your dream first home. Keep in mind that you may not find everything you want within your given budget. You will need to make some sacrifices.
This is why it is helpful to keep of list of Needs and Wants. Your needs represent everything you must have in your home. You might include the following:
- House size
- Number of bedrooms and bathrooms
- House, townhouse or condo
- Lot size - do you need a large yard?
- Location: Neighbourhood, school district, distance to work
Wants are unnecessary things that would be good to have if possible. This list might include:
- A swimming pool
- A large pouch
- Extra closet/storage space
- Certain architectural style of home
- Multi-car garage
Although it would be nice to include these additions, they should be the first to go when you are searching for that first home. Do not talk yourself into buying a house that is more than you can afford, just so that you can hit every item on your list.
8. Online Resources
For your initial search, the best online resources are Zillow and Trulia. They have the largest collection of homes available in your area, and you can search according to specific parameters. Most listed homes come with professional photographs (15-20 is standard) as well as information about previous owners, property taxes, and your estimated mortgage payment.
You can also research school districts, nearby homes for sale, and compare prices in adjacent neighborhoods. For the first-time homebuyer, these two sites are the best place to go first.
You can also find homes listed on specific real estate company websites. These can be helpful if you drive through your city and see homes for sale. By taking note of the real estate company handling the sale, you can easily access their website for more information.
Property management companies are a third option, although these companies typically have a limited selection – primarily townhomes and condominiums.
9. Using A Real Estate Agent
When buying your first home, it is often a good idea to use the services of an experienced buyer’s agent. These professionals are highly skilled and can help you navigate the process – which is especially helpful if you lack experience. Buyer’s agents:
- Help locate homes within your budget and search parameters
- Negotiate deals with the sellers
- Can help you file all the necessary paperwork
- Will let you know if you are getting a good deal
Their commission generally comes out of the final sale price, so you will not need to pay anything for their services. Not outright, at least. Sellers who know they are working with a buyer’s agent may raise the listing price to compensate for the amount they will lose to the agent’s commission. In general, it is still a wise decision to work with an agent if you can afford one.
10. Open Houses
By this point, you have put together a short list of potential homes. It’s time to see them up close. Although the open house can be the most exciting part of the process (besides signing the closing documents), this is also a time when you must be well-prepared.
A mistake that most homebuyers make is looking only at the rooms that are of the most interest. They will look at the kitchen layout, move quickly through the common rooms, and end up in the master bedroom. All this time, they are imagining life within the house. What are they missing? The trouble signs. Avoid this scenario by remembering to look at the following:
- Neighboring houses: Do the neighbours keep good care of their homes? Is this a place where you will feel safe? If you have children, are you living near a dangerous road?
- The house exterior: Check the exterior paint for signs of chips or cracks. You probably won’t be allowed on the roof, but you can tell from the ground if the shingles will need updates soon. If you can’t tell, ask.
- Layout of the house: Is it easy to move around? Are the bedrooms secure and private, or is it easy to see into your windows from the neighbor’s house or the sidewalk?
- Where will you spend most of your time? Studies have shown that most families congregate in the kitchen and the living room. Are these two spaces inviting? Is there space enough for your family and friends?
- Think like an inspector: Check for cracks, signs of repairs, or any unusual smells. If you notice anything that worries you, ask the owner or realtor for an explanation.
Overall, you should be as careful as possible to give the home a thorough visit. We are trained to be polite when we enter other people's homes, so this might feel unnatural to you.
Fight that feeling. You are about to invest hundreds of thousands of dollars (or more) into this property. It needs to meet your standards. If it does not, keep looking.
11. Proper Research
You should carefully research the neighbourhood for safety and comfort, but you should also research recent home sale prices. This will help you better determine your initial offer for the home that you want.
12. Making An Offer
1. Be Tactful and Polite
Although this is a business transaction, you must remember that you are buying a piece of someone’s history. You are potentially buying a home that held a family, all its memories, its hopes and dreams. Do not discount this when making your offer. If you are overtly negative about the house, or focus entirely on the flaws, you will make the seller much less willing to negotiate. Remember that you are buying a house, but that you are interacting with another person. If you are likable, it will be easier to make a deal that benefits both of you
2. Make A Reasonable Offer
An incredibly low offer is insulting. Although a high offer will most likely secure the deal, it may cause you to pay more than you originally intended. How do you strike the right balance? Research the neighborhood. Look for comparable home sales. If the initial listing price is something you are comfortable with, make your offer. If you want to come in slightly under the listed amount, try to think like the seller. Ask yourself how much you would be willing to negotiate.
3. Do Not Overreach
You don’t want to come in with a low offer, but you also don’t want to overreach in your excitement to close the deal. Take your time to negotiate. A motivated seller will often come down from the initial list price. Just as you wouldn’t accept a home loan that is more than you can afford, you also shouldn’t accept a price that is outside of your budget – no matter how much you love the house.
4. Do Not Agree to Unfavorable Terms
Unfortunately, we have seen first-time homebuyers make critical errors in their eagerness to “win the deal.” One common but disastrous mistake is foregoing the home inspection. Some homebuyers will defer or completely dismiss the inspection. This is a terrible idea. If you don’t have the home inspected by a professional, you will be responsible for any damages once you move in. You can’t claim a leaking roof after the deal has closed – this must be done before your move-in date. Again, the key here is patience. Although buying your first home is a thrilling experience, you can’t let that cloud your vision
13. Review The Contract
You have discussed the terms of the contract, so be sure to read through this carefully. If anything needs to be amended or added, this is the time to do it. Here are some contingencies that should be included in the contract:
- Home Inspection
- Termite Inspection
- Seller Assist: Will they agree to help paying the costs
- Fixtures and Furniture: Is any existing furniture remaining with the house after sale?
- Financing Terms
- Closing Date
- House Condition at Final Walkthrough
14. Home Inspection
This is an absolute must. Hire a home inspector to thoroughly search the home for defects, old repairs, potential problems, and really anything that can bring down the value of the home.
As part of your contract, the seller may be responsible for making certain repairs to the house. If they do not, you can negotiate a lower total selling price if you are willing to make the repairs yourself.
15. Final Walkthrough
Everything is almost complete, so be sure to make a final inspection to confirm that all repairs were done according to the terms of the contract. During the walkthrough, you should check the following:
- All repairs are complete
- House is in the condition listed in the contract
- All the previous owners' belongings are gone (unless they are part of the sale)
- Hot and cold water
- Any appliances
- Test the outlets
- House should be cleaned, carpets shampooed and vacuumed and read for move-in
If you are working with a conscientious seller, this walkthrough should be fast and painless. However, if you find anything out of place, or something that makes you uneasy about the sale, address it immediately. We can’t stress this enough – you are investing in a major, life-changing purchase. Make sure you are comfortable with the home and the contract terms before you sign.
16. Signing The Paperwork
The day has finally arrived. It’s time to close the deal. On closing day, the buyers and sellers will usually meet at a predetermined location – most often the closing or title company. Here are some things you must bring to the table:
- Government ID for all buyers (e.g. driver's license)
- Cashier's check for the closing costs (made out to the title company
Not every signing day is the same, so you may need to bring additional documents as necessary. The closing agent will give you more information before you arrive.
At closing, you are essentially completing the transfer of ownership. There are many legal documents to sign, including mortgage documents and promissory notes.
Once you fill out the paperwork, submit the required payments, and have it notarized, the seller will give you the house keys and garage door openers.
That’s it. Congratulations, you are now a home owner!
17. Moving Day
It has been a long process: You planned your budget, found the home of your dreams, had your offer accepted, and signed the closing documents. There is only one final step – the move.
- If it fits in your budget, hire a professional mover. This will save you time and energy. At the very least, rent a moving van or truck to transport your furniture. Don't damage or destroy your belongings by trying to fit them into a mid-sized car.
- Contact the Post Office: Fill out a change of address notice
- Contact all vendors, credit cards and your place of employment - give them your new address
- Transfer utilities
- Set up your new phone lines and internet connection in the new house