First Time Homebuyer's Guide
Homeownership is part of the "American Dream" for many people. At the very core, a home is a building that provides you with shelter. It also symbolizes an environment that offers security and affection. It's a place where many families begin, and memories are created. A home is also a labor of love, and you should buy it for the right reasons. Don't buy your first home thinking you can flip it, and make tens of thousands of dollars like they do on TV shows like "Flip this House," and don't expect your home's value to appreciate by thousands of dollars each year. Make sure your largest motivation for purchasing a home isn't about money. Buy it for the right reasons.
If you're considering purchasing a home you should know the home buying process. The good news is it doesn't have to be complicated as long as you are willing to dedicate enough time to thoroughly do your research, and you have a good Realtor® working with you. Let's get started!
The first thing to consider is your budget. I recommend you download a budget spreadsheet. You can Google it, or follow this link to Microsoft's free Excel templates: http://office.microsoft.com/en-us/templates/CT101172321033.aspx
Make Two Budgets
The first budget should include current income and expenses. Don't fudge the numbers! Dig up those credit card statements, bank statements, and check book if you have to. Remember, this is your current budget so don't start budgeting for next month. Itemize each expense, because you may need to go back later and figure out how you can save more money towards a down payment or mortgage. Include every little expense. Keep a log of how much cash you spend each month, because otherwise it will go unaccounted for.
The second budget requires more research. You're going to want to add all your new expenses associated with having a home. This is where most first time homebuyer's get into trouble! How do you know what kind of expenses are associated with having a house if you've never owned one?
This is where a Realtor® who works with first time homebuyers can come in handy. They can help you with your research! We can't do it for you, but if you're working with a good agent they will be able to point you in the right direction. There is no such thing as a stupid question. We share the same excitement you do about your first home, and we don't want to put you in a home that isn't right for your budget! Your happiness and well-being are important to us, because we want you to be a loyal customer who refers friends and family back to us.
Things to consider when creating your second budget:
• Closing Costs and Mortgage Payments- Get a Good Faith Estimate (GFE) from your lender and a Truth in Lending Statement. It will give you a fairly accurate number that you will most likely pay each month towards your home. Don't rely on a simple mortgage calculator to estimate your monthly payments! They don't calculate in things like closing costs, insurance, or property taxes. If your lender is hesitant, pushy, or doesn't answer your questions clearly or explain things to you then find somebody else!
• Down Payment- How much are you going to put down? Did you know if you don't put down at least 20% on a conventional loan you will have to pay Private Mortgage Insurance (PMI.) This can add anywhere from $40-$100 on top of your monthly payments!
• Property Taxes- Figure out what the last owners paid in property taxes. This is free public information, and your Realtor® or lender should be able to help you if needed.
• Furnishing your Home- You should have enough money in savings to buy some basic furniture. Your home won't feel like home if it's empty, and you're kitchen table consists of boxes you haven't unpacked yet.
• Repairs- Even homes in good condition need routine maintenance. You should have some cash in reserve for repairs you want or need to do. You should also be able to save enough to perform emergency repairs such as a leaky roof, furnace failure, or broken faucet!
• Utilities- Ask friends, family, and neighbors what they pay each month towards gas, electric, water, cable, heat, etc.
• Homeowners Association Dues- If your property is in a planned development or condominium site chances are you may have to pay HOA dues. This can range anywhere from a few dollars each month to hundreds!
• Cushioning- Make a separate "cushion expense" to allow for things like the rising cost of fuel, food, or insurance. Did you know in cold winter weather your car probably gets worse gas mileage? Letting your car warm up, blasting the heat, or driving when the engine is cold can all contribute to worse fuel economy. The cushion expense allows for things like this. At the very least take 10% of your total expenses, and add it in your cushion. This should be in addition to having money in reserves for unexpected repairs.
Saving Money for your Home
So what if you aren't comfortable with the numbers on your budget, and don't feel you have enough in savings? If you are ready to be a homeowner you will be willing to make certain sacrifices. Look back at your very first budget, and find expenses that you might be able to reduce or cancel out. Going a year without expanded cable, the most expensive internet connection, buying less snacks, smoking less, combining trips to town, spending less on entertainment, and so on are all good ways to save a lot of money. I know it sounds boring, but after a while you may find you actually enjoy doing activities that cost less such as reading or hiking.
If you have credit card debt or other loans that eat a significant amount of your budget try paying them off first before committing to a mortgage payment. The best practice is to pay off the loans that cost you the most first. Just think how much more money you would have each month if you didn't have to continue making that car payment, credit card payment, or maybe even a high interest student loan.
You may also find that there are things you purchased in the past that simply won't work with your new budget. It's time to downsize. Maybe during your old budget you could easily afford an SUV along with the higher gas bill each month. If you don't need it, you may be able to save money by selling it and replacing it with a more economical vehicle. Did you buy a cell phone with all the bells and whistles? Do you need to use all the minutes, features, and options or could you downsize your plan? If you aren't using it or don't need it then sell it!
You might already be working several jobs, but if you're not try to take on a part time job. You could potentially double your income, and many people do it.
Considering other Options
Many first time homebuyers have very high expectations for a first home. They know exactly what they want, and can picture what the house will look like. The truth is most homeowners have to reduce some of their expectations and work their way up to that dream home.
Buying a fixer-upper is a great way to save money. Envision the possibilities of what the home could be. If you have trouble doing this, get friends and family involved or ask your Realtor®. We've see enough homes to know what's desirable and chances are we've seen what past clients have done to fix up their own properties. Don't be discouraged; sometimes a fresh coat of paint can be all a home needs to spruce it up! Buying a home that needs a little TLC is also a great way to learn new skills. You'll find if you do some of the work yourself you'll appreciate the home even more.
Foreclosed properties and short sales are hot right now. Great properties are selling every day for much less than you could build them. It can be like shopping a "going out of business sale" where everything is deeply discounted. Many properties are in great condition, too. If you want to learn more about short sales visit my intro to short sales blog post: http://www.cbgreatlakes.com/jared.hammond/Blog/Short_Sales
Choosing a Real Estate Agent
When you're ready to start looking at a home a real estate agent or Realtor® can be invaluable. It's our business to know what's on the market, and our job to be able to guide you through the process. As agents, we should be able to locate a property that fits your needs and budget if such a property exists on the market. Agents should be able to provide you with information about the properties they show, the community, tax information, and evaluate comparable homes using a Comparative Market Analysis (CMA.) We also serve as a negotiator or intermediary representing you as a buyer with your best interest in mind. We have a fiduciary duty to you. To learn more about getting the most out of your Realtor® please see my blog post: http://www.cbgreatlakes.com/jared.hammond/Blog/Getting_the_most_out_of_your_Realtor
The term real estate agent and Realtor® is often confused. A real estate agent is only a Realtor® if he or she is a member of the National Association of Realtors® (NAR.) As members of the NAR we pledge to abide by a strict Code of Ethics and Standards of Practice. The NAR provides continuing education, research, market information, and professional development to its members.
There are many resources available not mentioned in this introductory guide. For more information please contact me. If you're looking to buy a home, or know somebody who is I'd be glad to help.