Buying Your First Home (Part 1)

So you think it’s time to buy your first home. Then you’re likely already dealing with questions and doubts like these: How can you be certain it’s the right thing to do? How do you know if you’re ready? What kind of mortgage should you look for? How do you pick the right home? What if you end up with horrible neighbors? How exactly do you maintain a home? How much does it really cost to buy a home, and can I afford that?

These and so many more questions are probably filling your mind as you consider buying a home. Here are 5 steps to take before you start looking at houses, some of these will start to help you answer the above questions, others will help you make sure you're asking the right questions.

  1. Your first step is to STOP WATCHING HGTV!!! House Hunters is a wonderful TV program and a great way to live vicariously, but it’s also staged. Often the home-buyer already has a contract on a house they want to buy and they go through friends’ homes as their other two “options”. Anyone who has watched the show also knows they will almost always pick the most expensive house that’s above what they decided was their price range, but the “closets are just the best” or the “kitchen is more inviting”. Watching this and other shows about home buying will give you an over-inflated expectation of what you should expect in buying your first home. Turn off the TV and start talking to professionals in your area to learn as much as you can about your local market.
  2. Do your homework FIRST. It’s easy to go out looking at open houses, pull up Zillow, or schedule a day with a realtor to walk through houses, but don’t do it yet. When you start picturing yourself in a home it can be hard to not get caught up in home-buying fever and make an offer before you’re ready.
  3. Get your finances in order
    1. Look at your finances to see how much you can afford. Start by looking at your savings and deciding how much you are willing to spend on purchasing the home (notice I didn’t say down payment because there are other costs that you pay when buying a house that you’ll need to cover with this money as well). Then look at your monthly spending and think about how much you could afford to pay toward your house each month. Remember to leave wiggle room for both of these. You’ll want some of your savings to do small projects on the house, buy furniture, move, etc. You also don’t want to be house rich and cash poor, spending so much on your home each month that you can’t enjoy your new neighborhood.
    2. Take your monthly payment for a test drive and boost your home savings at the same time. Whatever you’re paying for rent, take the extra that you want to spend on a home and put it into a savings account set aside for your home purchase each month. So if you spend $1,000 on rent and want to spend $1,200 on your monthly payments you should put $200 aside each month into savings to see if you can adjust to the new budget. Remember that with your monthly payment you aren’t just paying for the principal and interest of the loan, you will also be putting some money aside into an “escrow” account for taxes and insurance. Plus if you don’t put at least 20% down on the loan you’ll also owe Primary Mortgage Insurance (PMI) to protect your lender in case you default on the loan. And in addition to these, you should be putting at least a little something aside for home maintenance.
    3. Pull your credit reports and pay to see your credit scores for all three major credit agencies. The report will let you know if you have any incorrect information on your report while your score will help you use online calculators to understand what to expect for your interest rates. You won’t need this for a little while, but doing it this early in the process will let you know if you need to work to improve your scores before going to the bank to talk about pre-approval on the loan.
  4. While you have this little experiment running LEARN EVERYTHING YOU CAN about home-buying and home-ownership. Before buying my first home my wife and I attended a First Time Homebuyer workshop hosted through the Willamette Neighborhood Housing Services. This was both overwhelming and phenomenal at the same time. You can find similar courses in most areas, usually hosted by real estate professionals, but remember to think about who is providing the information. Realtors are paid for buying and selling houses, mortgage lenders are paid for originating loans, so weigh their advice in their areas of expertise with the opinions of financial professionals not paid to encourage you to buy a home. Hopefully, after a course like this, you’ll know the difference between a 30 year fixed and a 5/1 ARM and which is right for you; and if you should shop for FHA, USDA, or a Conventional loan. If you find a course like this locally you may even find a few professionals you like that you could work with (realtors, mortgage lenders, and home inspectors all worked together to teach the course we attended).
  5. Start the process
    1. Talk to multiple potential lenders and ask for a Loan Estimate (which replaced the previous Truth-in-Lending Disclosure). These are slightly different from lender to lender, but all of the same information will be there. To make it easier to compare use a worksheet like the FTC’s Mortgage Comparison Sheet. During this step talk to at least three different lenders, and make sure at least one of them is a “Mortgage Broker” who has access to multiple lenders. This will help you get the best rate at the lowest cost.
    2. After finding a lender you like get pre-approval for your loan. The lender will approve you “up to” a certain amount. DO NOT USE THIS AS A GUIDELINE OF WHAT YOU CAN SPEND! This is the absolute max that they will loan you, not necessarily what you can afford. Having a pre-approval in hand makes you a much stronger buyer, especially in a competitive market.
    3. While you wait on your pre-approval, or even while you are mortgage shopping, start talking to realtors. Don’t rush to go see lots of houses with them until you know you like working with the person. Some buyers’ agents will have you sign a contract to work with them exclusively, but don’t sign unless you’re certain this is the right agent for you. AFTER THIS POINT DON’T TAKE OUT NEW LOANS or apply for new credit! Your credit will be checked again later to make sure nothing has changed.

Don't rush through these steps, buying your first home is an overwhelming process and if you try to rush yourself you may make a mistake that costs you thousands of dollars and years of your life to correct. It's better to "waste" a few months in extra preparation. Next time we'll talk about the steps to take when you're ready to start looking at homes. In the meantime you can also find good tips for first time home buyers over on Redfin.