Owning a home is a major milestone many Americans expect to achieve in their lifetime. It’s not simply about having the ability to stay in one place for years — it’s also about taking advantage of the incentives to homeownership, including the financial security to make a major investment and see it grow over time.
Even for the millennial generation, which has been slower to become a major part of the homeowner pool than previous generations, buying a house remains a key goal in life. In a study released earlier this year on expectations for aging, skilled nursing and assisted living company Aperion Care surveyed 2,000 millennials, of which 85 percent say they expect to own a home in their lifetime.
Following a decline in homeownership after the Great Recession, homeownership rates nationwide are above 64 percent as of the first quarter of 2018, according to the U.S. Census Bureau. While homeownership has not returned to its historical peak of 69.2 percent in 2004, it is edging upward again after hitting a 50-year low in mid-2016 at 62.9 percent.
While buying a house for the first time may be intimidating, no homeowner started the process feeling confident every step of the way. Here’s what first-time homebuyers need to know.
Are You Ready to Become a Homeowner?
Long before you start looking at houses, you have to be sure your finances are in order. The process of saving and making strategic financial decisions to ensure your credit history is more appealing to a lender can take more than a couple months if you haven’t already been working toward buying a house.
“I would say a year plus — and make sure you’re saving toward that goal over a period of time,” says Amin Dabit, director of advisory service for Personal Capital, an online financial advisory and wealth management company.
[Read: Why You Need an Extra $2,500 on Hand Once You’ve Bought a House.]
1. Credit history. Run a credit report on yourself — which is free to do once a year and doesn’t affect your credit by going to annualcreditreport.com and receiving a report from each the three major credit-reporting agencies — and focus on the areas you can improve. You may have credit card balances to pay off, or a few missed student loan payments from a couple years ago. You may also simply need more time to pass from a recent borrowing mistake. The more time that passes from the last blemish on your credit report, the less likely a lender is to consider it a red flag to give you a loan.
2. How much house can you afford? How good your finances look from a mortgage lender’s perspective isn’t the only thing to examine. You should also look at savings that can be used toward a down payment and determine how much you’d be able to afford on a monthly basis for your principal mortgage payment, interest, taxes and insurance, which Dabit recommends calculating as 28 percent of your gross income. “That’ll help you figure out how much you can borrow and sustain long-term,” he says.
3. Savings for down-the-road expenses. Of course, you also have to take into account maintenance and other potential costs that may come up as a homeowner. If you live in a particularly competitive or pricey market, such as San Francisco or the District of Columbia, it’s reasonable to expect your monthly costs to be higher than 28 percent at the start.
4. Who to consult. Once you’ve examined your financial history and expected future cash flow, it’s time to start talking to the professionals who will be able to help you throughout the process of buying a house.
A natural start is with a real estate agent. Once you’ve found an agent you can trust, he or she can help you find a financial advisor if needed, a loan officer connected with a lender, real estate attorney, title insurance representative, home inspector and many more faces that will be part of your transaction.
“The agent’s really the core source of all those, or at least can be,” says Josh Heyer, a licensed real estate salesperson with Triplemint, a full-service brokerage in New York City.
Approach the process as assembling a team of people who will help you achieve homeownership. With each person, you want to feel confident that the professional will work in your best interests. Heyer recommends not just speaking with multiple professionals regarding your mortgage and home inspection, but also interviewing several agents at the start.
“I want you to be comfortable with me throughout this entire transaction, and I would rather you meet with a variety of agents first to make sure that I am the one you want to work with going forward,” Heyer says.
What Mortgage Options Are Best for You?
When it comes to finding a mortgage, explore options with different lenders and the various products offered. Major banks, credit unions and nonbank lenders offer a variety of options to better fit your specific needs as a homeowner.
“There is a right, best product fit for each individual based on their circumstances and what they’re trying to accomplish,” says Joe Zeibert, senior director of products, pricing and credit for Ally Financial Inc.
Key to figuring out which program is best for you is how much cash you have for a down payment. By putting 20 percent of the home price down or paying for private mortgage insurance for a smaller down payment, you can qualify for a conventional mortgage.
Alternatively, you can put less money down with other options, like an FHA loan through the Federal Housing Administration, which requires less money down and a less impressive credit history but typically comes with a higher interest rate. Veterans are able to take advantage of VA loans, backed by the U.S. Department of Veterans Affairs, which require no money down but have additional fees.
[Find Out How to Shop Mortgages.]
There are many loan product varieties, and your interest rate can be fixed, most commonly in the form of a 30-year, fixed-rate mortgage, or adjustable, known as an adjustable-rate mortgage, which remains fixed for a specified number of years before changing gradually toward the industry rate.
In finding the mortgage product that works best for your financial situation, it’s essential to prequalify or get preapproved for a mortgage amount. This will let you know how much your lender is willing to loan you to buy a house.
But don’t take that maximum approved number as the price you should pay for a house. “In most cases, you shouldn’t borrow the maximum amount that a mortgage lender tells you [that] you can borrow,” Dabit says — otherwise you may find yourself having to skimp on other typical expenses, like food, for a few years or more.
How Can You Prepare to Look at Houses?
At last, with a real estate agent hired and an understanding of your home purchase budget, it’s time to start looking at houses, condos, townhouses — whatever your homeownership preference may be.
Further prepare by taking advantage of a first-time homebuyer education course, often offered by local Realtors’ offices, banks or even your county at a community center. Many courses stress the importance of financial preparedness and getting ready to go through the rest of the home purchase process, and a class will help you get ready for what’s ahead.
Work with your agent to determine your list of must-haves in a home, whether it’s based on the number of bedrooms for kids and guests, the neighborhood that’s near your favorite restaurants and bars or a yard for your pets.
Take care to also get a realistic understanding of what your budget allows in your market. For example, if your heart is set on buying in downtown Denver but you have a budget of $250,000, you’ll want to consider other neighborhoods or suburbs that offer easy access to downtown if you need more space than a one-bedroom condo.
Gannon Forrester, an associate broker with Warburg Realty in New York City, says adjusting to the price of properties is the biggest challenge for first-time homebuyers in a pricey market like Manhattan — especially for those who haven’t lived in the area for long: “For someone [coming in] from outside New York, it’s a big culture shock of what the sticker price is.”
How Should You Begin Your Search?
Begin by house hunting online, whether your agent is sending you homes listed on the market through the local multiple listing service, or you’re checking out consumer-facing marketing sites like Zillow, Trulia, realtor.com or Redfin. It’s easy to narrow your online searches by setting boundaries around the neighborhood or general part of the city you hope to buy in.
Desirable neighborhoods are often based on proximity to the area’s best schools, walkability to shops and restaurants or easy access to reliable public transportation. “Most people have at least a cursory knowledge of what they can afford, and where what they can afford is available,” Heyer says.
Of course, trying to buy in the hottest neighborhood may mean you’re out of your price range. As Forrester notes, “No matter where you are, it’s location, location, location — anywhere in the world.”
Expand your neighborhood search and determine which area could be a better fit for you by attending open houses for properties on the market during the weekend. You can check out the condition of homes listed at different prices, and you can also take time to walk around the block to get to know the neighborhood.
Once you’ve gotten a feel for the areas you’ll most likely find your future home in, tour houses with your real estate agent. Take notes on what each place has to offer and what’s missing from your must-have and want-to-have lists.
What Should You Include in the Offer?
It may be the first house you tour with your agent — or it may be the 30th — but when you’re ready to make an offer on a house, it’s time to determine how much you’d like to offer, your needs and the seller’s as well. The latter might include a quick closing date, necessary repairs or covering closing costs.
At this point in the process, Forrester says he sits down with his clients to go over recent sales of similar properties nearby. “That way we can see, ‘Is this fairly priced, is it overpriced, is it underpriced?’ And we want to jump on it really quick and put in a full-price offer before someone else steals it,” he says.
Your preapproval for a mortgage will be an important part of formulating an enticing offer, so be ready with the preapproval letter from your lender when it comes time to determine your bid price and overall offer with your agent.
If you’re house hunting in a popular neighborhood, you’ll need to move quickly in making a decision and formulating an offer. If your agent expects there to be multiple offers on the property, be ready to put your best and final price on the table from the get-go.
“You see people paying up a little for the neighborhood they want, for the vibe they want,” Zeibert says. “It’s the land and the neighborhood and everything that creates the value of the house.”
Especially when you’re in a seller’s market, where there are more buyers than houses for sale, don’t be discouraged if the first house you bid on goes to another buyer. Heyer says a multiple-offer situation tends to be a double-edged sword: “If they don’t get the apartment they’re going to be bummed, at least in a bidding war, and if they do get it, they’re going to instantly feel like they overpaid, which is also a bummer.”
The winning bid isn’t always about price — the seller wants to feel confident about the entire transaction at the end of the day. If your bid includes your preapproval letter as opposed to a competing buyer’s prequalification, or you’re willing to let the seller take a little more time to move out, your offer might be the package the seller chooses.
Next Steps Toward Owning a Home
Whether your first offer was a success, you negotiated on terms a bit or you had to keep looking for a home, eventually you’ll reach the point of going under contract. At this point, you’re just a few weeks — and a good deal of paperwork — away from becoming a homeowner for the first time.
Once negotiations have finalized, the contract has been signed and you’ve provided a small amount of cash as a deposit or earnest money, you’ll have a few days to conduct your due diligence on the property. That includes the home inspection, which will tell you if there are any issues with the property that could affect the amount you’re willing to pay or if there’s anything that should be repaired before you move in.
[Read: How to Tactfully Back Out of a Real Estate Deal.]
While an inspection provides you with a snapshot of the house’s structure and condition of systems, expect to make repairs or replace an appliance or two before too much time has passed. For that reason, you want to be sure you still have some money saved up after the down payment.
“If you’re buying a home that’s over 10 years old, you’re likely going to have to fix something in the first year that you’re in there,” Dabit says.
You should also have funds ready for the closing costs, which typically account for between 2 percent to 5 percent of the sale price.
Your mortgage lender will also be working on the underwriting for the loan, including an appraisal of the property to ensure the purchase price matches its value, based on other sales of similar properties in the area. If the appraiser determines the house isn’t valued at the agreed-upon sale price, you may have to come up with cash to make up the difference, or try to negotiate the price down with the seller. You’ll likely have to provide updated proof of income, details on your existing debts and assets, information about your tax return and, of course, the address of the property you’re buying along with the price of the house and amount you’d like to borrow.
Just before closing, you’ll visit the home one more time, “usually the day before or the day of the closing,” Forrester says. The walk-through helps ensure there hasn’t been any additional damage to the house, and anything you expect to be gone has been removed before you get the keys.
The last step is the closing itself, which transfers the down payment to the seller, finalizes the mortgage and, with a few signatures including title clearance, transfers the deed into your name. You have the keys, and you’re officially a homeowner.
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The Guide for First-Time Homebuyers originally appeared on usnews.com
