You've landed your dream job and dreamier spouse/partner/whatever. Suddenly, you find yourself thinking about putting down roots, moving out of your noisy apartment and buying a house. Slow down just a bit. It's a huge step. Taking on a house usually means an increase in your monthly outlay for mortgage, utilities and maintenance, plus a time commitment for keeping the yard in shape.
Still, it's the American dream -- to go along with the job and spouse. Before you find yourself mired in a nightmare, read through our list of things to keep in mind to help make the dream that much sweeter.
Since the advent of the Great Recession in 2008, the real estate market has bounced back and forth between a buyer's and a seller's market in many areas. Have you ever wondered what those terms really mean?
A buyer's market is when there are more houses for sale than there are buyers for them. That happened early in the recession when, after the boom in new home sales, suddenly there were more new homes than builders could sell. The buyer's market continued as the recession lingered, people lost their jobs, foreclosures peaked and housing prices tanked.
The opposite, a seller's market, occurs when fewer houses are on the market than there are buyers. The run up to the recession was a booming seller's market in most areas of the U.S. With several buyers often bidding for the same house, home prices kept reaching new heights.
Talk to a real estate agent in your area who can help you understand the market and how it's currently impacting buyers.
Buying a house is not like buying groceries -- or even a car. It can be a complicated process involving a lot of paperwork that often makes little sense. Here are some of the general steps (specifics vary by state) that you will need to take as you prepare to sign on the dotted line.
Before you look:
- Save your money. You'll need it for a down payment, a home inspection, closing costs, some repairs or upgrades to your new home and monthly mortgage payments.
- Get prequalified for a loan to learn how much house you can afford. This keeps you from looking at houses that are out of your price range and also lets sellers know you're serious and can afford their home.
Once you're under contract:
- Apply for a loan. Just because you're preapproved for a specific amount doesn't mean you're approved for a loan. Your lender can help you understand the loan process, including the documents you'll have to provide and the loan costs involved.
- Have the house inspected. A professional inspector can uncover problems that you may not find otherwise.
- Gather your funds for closing. You may have to have certified funds (a bank check -- not a personal one) for the down payment and closing costs.
Buying a home can be a stressful undertaking. The best plan is to work with a real estate agent who understands the market in your area and will help you find the affordable home of your dreams.
Type of House
Do you have visions of living in a traditional home in the suburbs, one with a big yard and a houseful of kids and pets? Maybe your spouse likes the idea of in-town living, a condo within walking distance of shops and restaurants. What about two or more stories vs. a single-level home? Do you envision a basement or garage where you could have a workshop or space for a home office?
You may not be able to afford everything on your wish list, but it's important to talk with both your partner and your real estate agent about the things that might be deal breakers for you.
Just because you've been preapproved for a certain amount doesn't mean you have to max out that loan with your first home. In fact, you may not want to spend every penny on your home loan every month. When considering how much house you can afford, here are some other costs to be aware of:
- Mortgage payments are the monthly payments you make to the bank to pay back your loan. Often these payments include not just the principal and interest on the loan, but also property taxes and homeowners insurance. If your lender does not collect and pay out your taxes and insurance, you'll be responsible for them yourself.
- Closing costs, which are paid at the loan closing, might include lender and attorney fees, flood or title insurance, and any up-front interest on your loan -- called points.
- Your new neighborhood may have a homeowners association with required monthly or annual dues.
Keep all of these expenses in mind as you're shopping for a new home, and talk to your real estate agent and lender about any other unexpected expenses to expect.
Before you begin shopping for a house, get a copy of your credit report. Your credit score will play a large part in determining the interest rate you are able to get on your loan. The FICO credit score is the most widely used and ranges from 300 to 850 [source: Bankrate Credit].
Credit scores are affected by such things as the number of credit cards you have, outstanding balances, student and car loans and whether you pay your bills on time. The higher your credit score, the more likely you'll be able to get a loan to buy a house at a lower interest rate.
It is not unusual for there to be mistakes on a credit report -- often mistakes that bring your credit score down. Review it carefully and correct any mistakes you find before you apply for a home loan.
The down payment, which is the money you pay up front for your home, can vary from 0 to 20 percent or more depending on the loan type and your credit rating. Do your research and talk to lenders in your area about how much you will have to put down.
Credit unions and several government-backed programs -- including the Veterans Administration (VA) and the Federal Housing Administration (FAH) -- offer low-down-payment loans. Most conventional loans -- not government sponsored -- require more down.
Many first-time homebuyers have trouble saving enough for the down payment. The lucky ones have family who will give them money to help with it. Before you get too excited, talk the gift over with your lender, who will want to be sure the money is in fact an outright gift and not a loan dressed up like a gift.
Lenders check your bank statements, credit history, pay stubs and income tax returns before they decide to loan you money. If you have a large sum suddenly appear in an account, they are going to want to know where you got it. If it is a gift with no strings attached, you may be asked to provide a gift letter from the giver, with the name, date of gift and statement that it is a gift with no repayment expected [source: Brackel].
There are a couple of things related to your job that are important when you're thinking of buying a house. First, how stable is it? Have you had your job for at least a year? Do you see yourself staying with the job for the next few years? These are things a lender will look at and talk to you about before making a loan.
The second thing to consider is your commute. Does it matter to you how long it is? Does it matter to your partner? If you choose a house close to work and then either lose your job or take a job in a different area, is that still a place you'd be happy to live? Maybe you work from home. If so, do you need dedicated space for equipment, computers or a phone? There are no right or wrong answers to these kinds of questions. Just think seriously about them, and talk to your housemate about them as well, to find the right answers for your situation.
Home Repairs and Maintenance
Some of the hidden costs of home ownership are in repairs and maintenance. When thinking about how much house you can afford, consider these costs before you commit to a monthly payment that will take your entire budget. What happens if the air conditioning needs to be replaced, the roof leaks or the refrigerator dies? Consider putting money aside every month to cover those home emergencies, which will crop up more often than you think.
If you're handy, you might consider buying a house that needs some work. You can probably get it for much less than a perfect home, and then you can put in what's commonly called "sweat equity." Later, when you have the home of your dreams, it may be worth much more than you paid for it. Talk to your real estate agent about whether or not home values are rising in your area. You don't want to buy a fixer-upper that's in a neighborhood on the decline.
Do you have or are you planning to have children? If so, you'll want to consider the school district and neighborhood before buying. In fact, even if you don't have children, it's smart to consider the school district.
According to a survey, 20 percent of buyers said they would pay 6 to 10 percent over their budget for a home in the right school district [source: DeBord]. Of course, this means as a buyer that you may have to pay more for a home in a good school district. On the other hand, when you go to sell that home, you're likely to make more on the sale than if it were in a less desirable district.
Even if a school district is a major consideration when buying a home, don't forget about other factors that can be important if you have or plan to have children. Take a look at the neighborhood. Is it family friendly? Does the street have a lot of traffic? Is there a playground? A swimming pool? Are there sidewalks? What about other kids? Keep all of this in mind if you're planning to raise a family in your new home.
Are you up for a promotion that would send you halfway across the country? Have always wanted to live in a grass hut on the beach halfway around the world? If either of these is the case in your life, now may not be the time to buy.
You'll want to examine things like the market in your area. Are home values rising, and how quickly? You may pay closing costs when you buy the house, and perhaps be asked to pay them again when you sell it. And the thing about home mortgages: Most of your monthly payments for the first few years cover the interest. You don't make much headway on the principal for a while, which means you aren't building up equity.
The bottom line is this: Even if you live in a buyer's market now, you may not be able to make much money if you try to sell your house within the first few years. On the other hand, if everyone from your great-grandparents on down has lived in the same neighborhood and you aren't about to break with tradition, now may be a great time to buy a house. Look for a home that can grow with your family – or at least accommodate all the family members in the neighborhood who will be dropping by.
In 2008, the U.S. government introduced a new program for first-time homebuyers and sellers. Learn just how helpful it was at HowStuffWorks.
Lots More Information
Author's Note: 10 Things to Consider Before Buying Your First Home
As a former real-estate agent, I've seen lots of first-time home buyers make plenty of mistakes, from buying more house than they could afford to taking on a more decrepit house than they could realistically make habitable. Despite their best intentions, agents can only do so much with their advice. The first-time buyers I saw who stayed happiest in their homes were the ones who had done their research, planned their purchases, communicated with their partners and agents and did not step too far outside of their comfort zones. I'm all about taking risks in life -- I went from selling real estate to writing about it, after all. But, a home is often the biggest purchase you make in life, and it's a purchase that follows you around for years. Do your homework before you buy. And happy house hunting!
- Bankrate. "What is a Credit Score?" April 22, 2010. (Oct. 19, 2014) http://www.bankrate.com/finance/credit-cards/what-is-a-credit-score.aspx
- Brackel, Christine. "Using Gift Money for Your Down Payment: What You Need to Know." Quicken. May 22, 2014. (Oct. 19, 2014) http://www.quickenloans.com/blog/gift-money-down-payment
- DeBord, Sam. "The Right School District: How Much Do Schools Affect Real Estate Prices?" Realtor.com. (Nov. 12, 2014) http://www.realtor.com/advice/the-right-school-district-how-much-do-schools-affect-real-estate-prices/
- Dratch, Dana. "6 Must-Do's Before Buying a New Home." Bankrate. (Oct. 19, 2014) http://www.bankrate.com/finance/mortgages/6-must-dos-before-buying-a-home-1.aspx
- HGTV Frontdoor. "10 Things Every New Homebuyer Needs to Know." (Oct. 19, 2014) http://www.frontdoor.com/real-estate/10-things-every-new-homebuyer-needs-to-know
- Holden, Lewis. "4 Mortgages That Require Little Money Down." Bankrate. (Oct. 19, 2014) http://www.bankrate.com/finance/mortgages/4-mortgages-that-require-little-money-down-1.aspx
- Williams, Geoff and Annalisa Burgos. "What to Know Before Buying Your First Home. HGTV FrontDoor. (Oct. 19, 2014) http://www.frontdoor.com/real-estate/what-to-know-before-buying-your-first-home
- Zykor Homes. "Difference Between Seller's Market and Buyer's Market." June 11, 2014. (Oct. 19, 2014) http://www.zykorhomes.com/difference-between-sellers-market-and-buyers-market/