Buying a house is an exciting time! I recently learned that over 50% of buyers report that buying is a stressful process, and another survey found it to be more stressful than divorce, bankruptcy and even the loss of a loved one. After buying my little fixer-upper, I realized that there were many things I hadn’t thought to consider, which probably would have helped me to plan ahead, feel more confident and less stressed throughout the process.
Buying a home can be more stressful than divorce, bankruptcy and even the loss of a loved one.
Whether you are looking for yourself, a partner, your family – my goal below is to share 7 key things to consider as you start the home buying process and BEFORE you make an offer on a house.
- Neighborhood you want to live in: As you are looking at houses in different neighborhoods in your target city, be sure to look at the history of property taxes. While the county will have a set property tax, local bonds will influence it (i.e., percent paid to school districts). Also look at the quality of the school district, as this could matter for children if you have them or plan to have them, but also for resale. Finally, ask if houses are part of a home owner’s association (HOA). An HOA will result in more maintained neighborhoods (pro), but will usually have a monthly fee (con).
- Decide on your down payment (3-20% of home price): There are first-time homeowner programs that allow you to put down as low as 3% for your down payment and some help with closing costs (I think these are more common in rural areas). Private banks will sometimes take a lower down payment (such as 10% down). This can be a huge asset for first-time home buyers but remember you will have to finance more than 20% which can result in high monthly insurance premiums (PMI) on top of your home owner’s insurance. Also consider that you will need to pay for closing costs (more on that in a future post!)
- Interest rate: Shop around on interest rates. Sometimes credit unions will be lower than other banks. Obviously a 15 year fixed will be paid off sooner & with less interest than a 30 year. If that does not work for your income, you may consider a 30 year fixed, then pay a little more each time (& designate that you want it to go towards “principal.” There are also ARM (adjustable rate mortgages), which means you are locked in the lowest interest rate for 5 years, then at the end of the 5 years, it can go up to a certain amount. Statistically, prices have never gone up to the maximum they say it can, but they also rarely, if ever, go down. I’ve heard this option can be good for people who are likely to move in the first 5 years after home purchase. If this is you, beware of making a down payment of less than 20% of the home price (due to PMI; see bullet above).
- Get preapproved for a loan: Getting preapproved for a loan is the first major step you make. This looks at your credit, income and down payment and comes up with a number that the bank is willing to cover you for. You will work with a lender at the bank, please choose someone who you can ask questions and is sensitive to your unique situation and preferences. It is a good idea to shoot for a home that’s under your maximum, it gives you flexibility if you need to counter offer but also will protect your credit. A key part to know, you will usually need the preapproval letter for putting in an offer, but it does not guarantee that you will get that amount. It does give the seller some peace of mind that you’ve done your homework and can financially support the offer you’ve made. Sometimes home offers fall through because the loan underwriters come up with an issue. This happened to me because I am in a term position, so my offer letter for work had an end date. This also happens when people make huge impulse purchases after getting their preapproval letter and experience a dip in their credit score. Not a good idea.
- Decide on your price range: This is a largely personal decision, though limited by what you get preapproved for and the size of your downpayment. There are online calculators that you can calculate how much you’ll pay, plus insurance, mortgage insurance, utilities, etc. Things will break in a house, so it’s probably better to have a little wiggle room.
- Factor in whether you will have mortgage insurance: If you put down less than 20%, you will have to pay mortgage insurance (also called loan insurance or mortgage guarantee). This is basically an insurance policy that would compensate the lender if you defaulted. You can ask this to be removed when you have 20% equity / you have paid for 20% of the value of the house. Some private banks do not require this, if you go that route. If you do, know that the total cost can be quite high. You can find this out from your bank’s mortgage officer. If you’re in this boat, may be better off waiting until you can make the 20% down payment.
- Work with individuals who are looking out for you: I’ll end with, get a good realtor. A good realtor always has your best interest (and not the sale) at heart. They will stay in your price range and point out strengths and weaknesses of the houses, within reason. It’s becoming common practice for a realtor to ask you to sign a contract. Essentially it says if you buy any home in a designated period, usually 12, they will get a commission from it. This was alarming for me because I worried my realtor wouldn’t be good but she was amazing (so check reviews!). It’s meant to discourage people from using multiple realtors. They could look at 100 houses with you, then you buy a house with someone else – it sucks. You will want to find a realtor after the preapproval. So, lender first, then realtor.
This is an exciting process and our goal is that we can help equip you with some information, and our personally tried approaches so you make the decision that is absolutely right for your home buying process.
We have presented information here that compiles tidbits from several different sites and from our own experience. Our hope is that our work will save others countless hours of searching to find the answers they need. Please remember that we cannot make any guarantees or promises regarding the accuracy, reliability or completeness of the information. This website is for informational purposes only, and not a substitute for professional advice. Purchase safely!