In preparation for buying our first home, we read books, listened to podcasts, and researched extensively online. Yet, there were many surprises along the road. Here’s what they don’t tell you on HGTV, and what we wished we would have known.
1. Start Saving for Your Next Down Payment Years in Advance
Even if buying your first (or next) home isn’t on your radar, that doesn’t mean it shouldn’t be in your bank account. Life has a way of bringing the unexpected, and the unexpected can often be expensive. Medical issues, car repairs, etc. seem to happen at the worst time and always at the expense of whatever you were trying to save up for. It’s important to start saving early to combat these setbacks. If you’re struggling to save money, check out the posts in “Financial Freedom” for ideas of how to get started.
2. Don’t Forget the Closing Costs
This one was a scary reality check for us, especially because our goal was to save up the money we needed for ourdown payment in less than 6 months (hence why we should have started saving earlier…I don’t recommend our expedited approach). Closing costs are several additional expenses and fees that come with the purchasing process, and they vary depending on several factors. When calculating how much money you will need in your account to purchase your first home, reach out to your loan officer or real estate agent for an estimate of what these costs will be. Add this to the number you’ll be putting down, and viola! You have your goal for what to save.
In some cases, your real estate agent will be able to negotiate what’s called a “seller’s credit” to help cover closing costs. This is an agreement that the sellers of the home you purchase will pick up the tab (or part of it) for closing costs. However, not all sellers are willing to do this, so it’s best to prepare for the worst.
3. Your Realtor Matters
Do your homework when picking your realtor, because they truly are not all the same. Do they have high reviews online? Are they prompt in responding to emails and phone calls? Are they thorough in the information they bring to you? Do they seem to have your best interest (rather than the biggest and quickest sale) at heart? When you go through houses together, do they point out both positive and concerning qualities of the house (e.g., the fact there appears to be a moisture issue in the basement, that the electrical may need updating, that the windows do not seem energy efficient, etc.)? These are all important characteristics of a good realtor.
4. The Purchase Season Matters
In many real estate markets, the spring and early summer season is the busy season, and it can be BUSY. This can be both a positive and a negative, depending on the situation. On one hand, this is the season when the most homes will be coming on the market, so you will have many options to choose from. On the other, it is also the season in which you will likely have the most fierce competition in terms of other buyers putting offers in on the home you want to purchase. Consider the timing of when you would like to buy, and if it is in the spring or summer, be ready to move quickly when you find a place you like.
5. The Problem of Your Lease
Being stuck with a 12 month lease doesn’t seem like that big of a deal; that is, until you decide to move. Especially because the home buying process can be unexpected in terms of the timeline, it can be inconvenient to try to time your home purchase so that you are not left either homeless for a few weeks or with crippling double housing payments. In general, do not expect to be let out of your lease early. Landlords have legal authority to make you pay, and it’s extremely rare for them not to use that authority. Instead, think of creative options, such as asking sellers for a later closing (which means you have committed to purchasing the home, but have not yet actually done so, thus delaying the time when you start having to make payments). You might also consider moving in with family for a month or two to ease the pressure of your home-buying timeline.
6. 20% Down is Not Required
The idea that you absolutely should not purchase a home without a 20% down payment is a myth that many older generations cling to, but it is not always accurate. Although you should be aware of the ramifications of purchasing a home with less than 20% down, in many cases, it can be an excellent financial move.
Here’s an example: my husband and I had minimal savings, and knew we wouldn’t be able to afford even 10% down on a $160,000 home. However, we wanted to start building equity and stop throwing our money away with expensive monthly rent. After doing research and speaking to trusted real estate experts, we came to understand that the main “con” of not having 20% down is the higher interest rate you pay and what’s called “PMI” (which is essentially an extra monthly payment to the bank as an “insurance” on their investment in your mortgage). On a positive note, this extra payment disappears after you have paid the bank back 20%.
The way we saw it, this PMI was going to be less than $100 a month. While this is $100 a month we would be able to save if we had an extra $20,0000 in our bank account, this wasted money pales in comparison to the $1,000 a month we were wasting on rent. Moving forward even with a small down payment allowed us to purchase a duplex, in which we would live in one of the units and rent the other. When taking into account the renter’s check we would receive, our monthly mortgage payment would be about $450 (less than HALF of what we were paying in rent). Although our situation was unique, you can see why the small down payment is not an issue.
7. Set Realistic Expectations
House hunting can be an emotional rollercoaster, and especially when you’re just starting out, it’s important to set realistic expectations. Your first home is likely not going to be your dream home. Say it with me. Your first home is likely not going to be your dream home. But, that doesn’t mean it won’t be a great place to live, a great starting point, and a great investment. Consider what you’re looking for in a house, and then separate those into wants vs. needs. Do you NEED a beautiful white kitchen, or do you think you could settle for 2005 oak cabinetry in exchange for a fenced in back yard? You likely can’t get it all, but you do get to decide what’s most important.
8. You May Not Get the First Home You Love, and That’s Okay
The first home we (well, I suppose I should say I) really loved was a quaint little home on a the most beautiful little street. It was the kind of street that looked like a quaint village in London, with charm, classy old houses, mature trees, and well-maintained yards. The house itself wasn’t anything that special, but it had original hardwood floors and the “feel” of a place we could call home. The night we decided to put in an offer, someone else beat us to it, and we couldn’t compete. I was only a little heart broken, and it was a few days later that our realtor took us to a home I was determined to dislike. It couldn’t have been more different from the first home. It wasn’t the 1930’s charming type of old; it was the 1960’s hideous type. It wasn’t in the Londonesque neighborhood, and I didn’t see any hardwood floors. But the thing is, the potential was there (as were the hardwood floors, just hidden under ugly carpet). This was the home we ended up going with, not because it gave me that fluffy feeling, but because it offered us what no other home on the market could: an extra income, as it was a duplex. We made a decision to go with a home with good bones and hideous carpet, because it was what was best for our financial future. I wasn’t thrilled about the home until we crunched the numbers and realized we would be saving about $700 a month. That was when we I saw the vision of this home as a stepping stone to our next. This isn’t the dream home. It IS the house that will allow us to get there. I hope you find your stepping stone house, too.