Home ownership is still a core part of the American Dream. In many ways, home ownership provides a degree of financial security. A home is an asset that tends to increase in value, which means that if you buy today, your property could be worth substantially more tomorrow. However, actually buying a home can be frightening, especially for first-time home buyers.
When you start thinking about buying a home, there are many considerations:
- How big a home do you need? How many bedrooms? Do you need a garage? How many bathrooms?
- What is the best neighborhood for you? Is it within easy commuting distance? Are the public schools right for your children?
- What kind of property do you want? Do you want a modern home that is move-in ready, or do you want to save a little on a fixer-upper?
- What type of home loan do you need? Do you have enough for a down payment? How will mortgage payments affect your household budget?
Buying a home is a big decision, so the best way to begin is by assessing what you need and what you can afford.
Home Needs vs. Wants
Before you start looking at properties, you have to know what you are looking for. Make a list of everything you want in a home—bedrooms, bathrooms, yard, appliances, kitchen size, fireplace, whatever you can think of. As you create your list, don’t just consider your immediate needs; think of your future needs, as well. For example, are there enough bedrooms for children?
Once you have an idea of what you want in a home, prioritize your criteria. Some criteria, such as the number of bedrooms and bathrooms, are probably essential, whereas other features, such as a fireplace, are “nice to have.”
Your budget may dictate how large a home you can afford. Once you identify the region where you want to live, get an average cost of homes that match your criteria to determine how much home you can afford.
Prequalify for a Mortgage
Before you start house hunting, you should be prequalified for a mortgage. Prequalification doesn’t mean you are committing to a mortgage, but it does mean you have spoken with a mortgage broker or lender and they are willing to lend you a specific amount for a home purchase based on your credit.
There are different types of mortgages, each with its own pros and cons. The most common mortgages are 30-year loans with a fixed interest rate, although fixed-rate loans also are available in 5-, 10-, and 20-year terms. An adjustable-rate mortgage (ARM) adjusts the interest rate of the loan based on the prime rate, so your mortgage payments may change up or down with the market. An interest-only mortgage allows you to pay the interest on a loan at the beginning for 5-10 years, then pay the principal on the loan. The advantage of interest-only loans is that your mortgage payments tend to be lower at the beginning and increase later on, when you may be earning more money or considering selling or refinancing your home.
Most home buyers want to have 20 percent of the purchase price of the home as a down payment. First-time home buyers have a distinct advantage: They only need a down payment of 3 percent, or sometimes less.
To determine whether you prequalify for a mortgage, the lender will consider a number of factors, such as your income, length of employment, credit score, the amount of outstanding debt you are carrying, and so on. Once you prequalify, however, you will know exactly how much you can afford for a home.
Your Property Checklist
When you do start looking at potential homes, you want to be sure to look for telltales that indicate problems you may not want to take on as a homeowner. Here are just some of the warning signs to watch for:
- Deferred maintenance – If the home is untidy or is clearly in need of repair, consider carefully before you buy.
- Roof condition – Replacing a roof can be an extremely expensive repair. Ask when the roof was built and make sure there are no leaks.
- Floor condition – A worn or warped floor could indicate water damage or a settling foundation. In addition to visual inspection, you can always use the marble test—place a marble on the floor and see if it rolls to determine if the floor is level.
- Windows – Single-pane glass and cracked window molding will let heat out and will probably need to be replaced.
- Water and mold – Water damage or mold in the kitchen, bathroom, or basement could indicate a leak or persistent moisture that may be impossible to fix.
- Water heater, furnace, and appliances – The age and condition of the water heater, furnace, and other appliances should be considered because they would be expensive to repair or replace.
- Foundation – Look for crumbling or cracks in the foundation.
- Follow your nose – Unidentified smells can tell you a lot. If there is a persistent aroma of pet urine or mold, then there is likely a problem, even if you can’t see it.
As you inspect potential homes, consider if the property has everything on your “must have” list. Also, see how many items on your “would be nice” list you can check off. Don’t be frightened away from a property if the amount of work required is nominal. If you are handy, you might be able to make some of the home repairs yourself, and at the very least you can use deferred maintenance issues to help lower the price.
You will need a home inspection to qualify for a mortgage. A good home inspector will find everything that is potentially wrong with a property, so don’t let that scare you. When you read a home inspection report, you will find that many of the items are minor and easily addressed. If, however, the inspector finds bigger issues, such as dry rot, mold, or a roof leak, think hard before you proceed. You also should use the inspection report to determine if repairs need to be made before you close on the home, or if you can use needed repairs to renegotiate the price.
Your mortgage professional will be an important resource for you as you navigate the home buying process, especially if they are at a local bank. Not only can they assist you with finding the right home loan, but they can also provide information about the local real estate market to help guide your decision.