What You Should Know Before You Buy Your First Home

November 14, 2018

With interest rates on the rise, many first time home-buyers are looking to purchase a home before mortgage rates go any higher. If you’ve never purchased a home before, the process can be confusing and even a bit scary. When a family member recently asked me for some tips, here’s what I told him:

1) Make sure you’re ready to buy. Your credit should be in as good of shape as you can get it (740 or above will generally get you the best rates), you should have no high-interest debt like credit card debt, and you should have enough savings for a down payment (ideally 20% of the home value to avoid paying mortgage insurance), closing costs (typically 1-3% of the home value), and furnishings and moving expenses you plan to pay, and an emergency fund (at least enough to cover 3-6 months’ of necessary expenses) now that you’ll be responsible for a mortgage and maintenance costs. You should also plan to keep the home at least 3-5 years to make it worth the transaction costs and the risk of selling in a down market.

2) Get pre-approved for a mortgage. This will give you an idea of what you can qualify for and how much home you can afford (which are not the same thing). Being pre-approved gives you an advantage over other buyers if you get into a competitive bidding situation and some real estate agents won’t even show you homes until you’re pre-approved. To find the best deal, shop around online comparison sites like Bankrate.com, mortgage brokers or loan officers referred to you by your real estate agent and people you know, and any credit unions you may belong to. To avoid hurting your credit score, try to do any rate shopping within a two week time period.

3) Pick the best mortgage for the time period you intend to keep the home. If you can use the savings to invest (especially in tax-advantaged accounts) or pay down high-interest debt, a 30 year mortgage can be better than a 15 year mortgage, even when you factor in the ability to ramp up your savings once the mortgage is paid off. In any case, be sure to have the rate fixed for as long as you might keep the home. Otherwise, you may find your mortgage payments skyrocketing if interest rates are higher when the fixed period ends.

4) Use an independent home inspector. The home inspector is one of the most important and underrated members of your team. People often let their real estate agent recommend someone, but they may refer someone more prone to overlook problems in order to get the deal done. That’s why an independent inspector is more likely to be on your side. You can search for one here.

5) Look for ways to earn income from your new home. Being able to rent out one or more extra bedrooms or a “granny flat” for either short-term stays on sites like AirBnB or HomeAway or to more long term tenants can be a great way to reduce the cost of the home. Just be sure renting is allowed by your building (if it’s a condo or co-op) and city and that you’re prepared to be a host/landlord.

Buying your first home can be both exciting and stressful. Following these tips should help make it more of the former and less of the latter. Happy house hunting!