Buying Your First Home

Several clients have recently asked me how to prepare for buying their first home. Here’s a high-level overview of my recommended approach.

1. Save for your down payment

2. Get pre-approved for a mortgage (if you don’t go with the 100% down payment plan.)

3. Find a real estate agent

4. Go house hunting

5. Submit an offer

6. Get a home inspection

7. Close on your new home

I like to see my clients completely debt-free with a fully-funded emergency fund before buying their first home. Timing is also important. If you plan to move again in less than five years, you may want to pump the brakes and continue renting until you get to the new market you are considering as a home town. 

People often rush the home buying process - after all, it is the American dream! But buying too early can turn a dream into a nightmare. So be careful!

Save for Your Down Payment

Of course, my favorite down payment is 100%. If you can build the discipline to save enough money to pay cash for a new home, I can assure you that you will never forget that feeling! It’s so fun to watch people’s faces when you respond to their financing questions with, “I’ll be paying cash.” It will blow their minds!

Let’s assume you have consistent income, are debt-free and have 3-6 months’ worth of expenses set aside in your emergency fund. I really like to see clients put 20% down as a minimum. This takes the whole PMI calculation out of the equation. If you’re considering home ownership and haven’t learned about PMI yet, schedule a consultation with me and let me help you think through your options.

In addition to the down payment, you’ll also want to make sure you are prepared to pay closing costs and your moving expenses. 

Get Pre-Approved for a Mortgage

Here’s where you need to consider your budget. You’ll want to keep your mortgage payment to 25% (or less) of your takehome pay. This allows you flexibility in your budget to take care of all those unexpected expenses that come along with homeownership. When you are the owner, you no longer get to call the landlord to fix the leaky pipe or the broken A/C. That will now be your responsibility.

If you are married, it is super important that you are both on the same page with regard to your home buying budget. Once you agree on the budget, don’t allow the lender or anyone else to talk you into borrowing more than you’ve agreed to. Hold tight to that pre-determined budget!

Once you have all this information together, schedule a meeting with your lender, and make plans to get pre-approved for your mortgage. This gives you extra buying leverage when talking to sellers. If multiple people are making an offer on the same house, the one coming with a cash offer will typically get the home. If you don’t have all the cash, a pre-approved mortgage is the next best thing. Few sellers who have desirable real estate will be interested in selling to you contingent upon you securing financing.

When it comes to financing terms, I am a fan of the 15-year fixed-rate mortgage. I am so grateful to the president of our local bank when my wife and I were buying our first home. All of our friends were taking out 30-year loans, and Bill sat us down and told us that we didn’t need to do that. He convinced us that the 15-year loan was the way to go. It saved us tons of money in interest payments and helped us become completely debt-free so much sooner than we would have had we taken that 30-year loan.

I know I’ve tossed out a lot of numbers here. Here’s a link to my mortgage calculator to help you crunch your own numbers.

Find a Real Estate Agent

I am a fan of Zillow and other online real estate sites. My wife and I found our current home using a tool like this. However, I am convinced that having a real estate agent on your side as you purchase a home is essential. I can tell you for a fact that if not for our agent, we wouldn’t be in the home we’re in right now. Another buyer beat us to the first offer, but our agent fought for us and coached us to refine our offer to make it more attractive than the other offers that had been submitted.

People sometimes think they can’t afford a real estate agent, but the seller pays your real estate agent’s fees. Does this mean they’ve probably bundled that expense into their listing price? Yes. But it’s also helpful to know that you won’t see an additional line item at closing where you need to pay your real estate agent. They will be paid, but it will be the seller paying them.

Be sure and interview a few different agents, and don’t choose your spouse’s second cousin just because they are family. You want the best agent representing you. Here are a few points to consider when choosing a real estate agent. Be sure they have:

• Specific experience assisting home buyers like you

• Full-time real estate experience for at least two years

• Great communication skills

• A super-serving attitude that makes you feel like you’re their only client

• An impressively long list of sold homes every year

• Exceptional experience in your local market

Go House Hunting

This is the fun part! You’ve saved your money, set your budget, and gotten the pre-approval on your mortgage.

Take time to list your home requirements. For example, a 2-car garage was a deal-breaker for us when we were last looking. If there was no garage or space to build one, we could take that off the list. The number of bedrooms or bathrooms may be a big deal for you. If you’re married, I recommend both spouses start with their own list and then compare to make their joint list. This adds to the creative process and ensures that both spouses have a voice in the process.

Think of your home purchase as an investment, and do your best to purchase a home that will increase in value. One of the simplest ways of doing this is by purchasing a home in the lower end of the price range of your target neighborhood. For example, if you buy the most expensive house on the block, it will typically increase in value much slower than the least expensive house on the block.

Don’t let cosmetics scare you away from buying a diamond in the rough. Imagine what a fresh coat of paint and new light fixtures will do as you explore possibilities. 

Submit an Offer

Once you’ve found the perfect house, it’s time to work with your real estate agent to submit an offer. Allow them to guide you through the process - that’s how they earn their pay. 

Sometimes other buyers will put an offer on the same property. If so, negotiations will be coming. Don’t allow your emotions to overcome your good sense. Remember the budget that you set in the beginning and don’t stray from it. But think creatively about what you can offer that differentiates you from your competition. Can you move quicker? Do you have cash? Be sure and brainstorm with your agent to find a winning strategy.

Get a Home Inspection and Appraisal

Your new home is under contract? Congratulations! Now it’s time to have your home inspected for any sort of unexpected damages or needed repairs. This can save you tons of money. I’ve had clients discover tens of thousands of dollars in needed repairs at this stage of the purchase. Discovering something like this doesn’t mean you have to walk away, but it becomes a point of negotiation. Perhaps the seller was unaware of the issue (they should have been). If so, every other potential buyer would make the same discovery as you. Many times, they will reduce their price to allow for the necessary repairs.

If you are getting a mortgage, your lender will require an appraisal prior to closing on the loan. This step protects you from paying more than what a property is worth. The lender will also be finalizing all the paperwork for your closing at this point.

Close on Your House!

Wow! All your hard work is about to pay off. You’ve saved your money, gotten approved for your mortgage, found the perfect home, had your offer accepted, and now it’s time to exchange money for property! Your real estate agent will be there with you, and you should feel free to ask them any questions that you have about the process. Once all the paperwork is signed, you should leave with the keys to your new home! Congratulations!