Shopping for your first home signals the first step towards a great achievement, and usually represents the largest investment an individual will make in their lifetime. However, with all the excitement of selecting that place you will call “home”, objectivity can sometimes fall by the wayside when you lock eyes on that “perfect” property. In order to help keep emotions from detrimentally influencing your purchase, we’ve compiled a list of the top ten things a first-time home buyer often misses, which any buyer should review and answer BEFORE they start looking at potential homes:
- Thinking About Long-Term Goals & Resale – Forcing yourself to think long-term helps to keep you honest with yourself and to prevent you from falling in love with homes that don’t align with what you have planned for your future. Some questions to ask yourself: Are you planning to have kids, start a family? Will you be taking care of elderly relatives? Do you see this home as a possible rental property? Investment? If your planning to live in your first home for only a few years, who is your target audience when you want to sell?
- Knowing ALL The Expenses Before You Purchase – Asking yourself these questions when you think you’ve found a potential home can cut down on “buyer’s remorse” later when your budget starts to burst at the seams from unrealized expenses. Think about changes in your utilities (increases in monthly cost, inefficiencies in the home, new utilities like natural gas, etc…), any changes to your commute (extra gas/train/subway expenses), and those upgrades/repairs that need attention post-move-in – like finding out the chimney needs cleaning. Sort out these costs to see if you can afford to own the house after you’ve purchased it.
- Knowing Your Down Payment Options – Historically, 20% of the asking price is expected when making a down payment on a home. Loans and subsequent monthly payments are calculated off of this percentage as well. Lucky for you, first-time home buyer programs are everywhere, including federal loan products from Fannie Mae and Freddie Mac that offer loans with down payments as low as 3% of the purchase price. Doing a little homework could mean that, on a $200k home, you could spend as little as $6k down versus $40k. Not exactly chump change!
- Comparing Multiple Loan Offers – It’s your first time buying a house, and probably your first time trying to secure a loan for such a large sum of money. You got qualified from one lender, but don’t let that excitement go to your head. Many first-time homebuyers stop at that first rate quote, but this shortsightedness could cost you. A lot. According to the Consumer Financial Protection Bureau, comparing mortgage rates from at least three lenders can save you – on average – more than $3,500 over the first five years of your mortgage. There are websites that allow you to simultaneously compare rates from multiple lenders – often without any dings to your credit – so you can see which loan is right for you.
- Getting Your Loan Before You Shop – Think about it. How often do you go shopping without a budget, or at least an idea of how much you can spend? While this step isn’t necessary, it’s smarter to get loan pre-approval in advance. Instead of locking eyes on that perfect house (that you cannot afford), you will know beforehand what you can and cannot afford – side-stepping a lot of heartaches, embarrassment, and wasted time.
- Asking For Any HOA Contracts Before You Buy – Before you read any contracts pertaining to the sale of a home you like, make sure there isn’t an HOA contract out there you aren’t aware of. Want to turn your home into a rental property in the future? Too bad, HOA may forbid it. Not a fan of red clay tile roofing? Want to cut down that tree? You may own the house and the property beneath it, but an HOA contract can remove your right to do whatever you want with your home and property. Get a copy of the HOA contract and have it thoroughly vetted before you buy – you’d be surprised at some of the riders and stipulations that are out there, up to and including clauses that could result in the loss of your home altogether.
- Getting A Contingency Clause – A what? A contingency clause is just that, a specific clause of legal language that protects you if, say, you lose your job and the loan falls through, or the appraisal price comes in over the agreed upon purchase price. Should one of these events occur, a contingency clause ensures that the buyer gets back the money he or she used to secure the property. Without the clause, you could lose that money and still be legally obligated to purchase the house.
- Getting a Home Inspection – Some states require a home inspection before a buyer can make an offer on a home. In other states, a home inspection is a part of a contract contingency. A contract contingency (see #7 above) affords a buyer the right to cancel the contract based on the outcome of a home inspection. Regardless, a home inspection is a great idea. Knowing the state of a home’s HVAC system, chimney(s), plumbing, roofing, and foundation can save you thousands. We cannot stress the importance of an inspection enough. You might, for example, not know what to look for when inspecting a foundation. Having it inspected professionally is not only smart, but in most cases, free.
- Pausing Your Credit Activity – People often overlook this one. Any time you open a new credit account, whether to take out an auto loan or get a new credit card, the lender runs a hard inquiry – which can temporarily ding your credit score whether you get the credit card/loan or not. If you know you’re going to apply for a mortgage soon, avoid opening new credit accounts to keep your score from taking a hit – it could cost you in interest fees for years to come.
- Budgeting Money For After Move-In – This is part of #2, but less about identifying specific things and more about setting up a “contingency fund.” Essentially, this is a short-term budget you’ll want in place for the first six months of home ownership. One study, conducted by Zillow and Thumbtack, put the estimate for overlooked costs at move-in close to $10,000. Some things to keep in mind:
- New Furnishings – It happens. You think you have a respectable collection of furniture, and yet, in your new digs, nothing seems to fit.
- Appliances – A new refrigerator can set you back anywhere from $800 to $8000.
- Paint, Trim, Flooring, etc – much like point a) above, some things don’t manifest themselves until you populate your new space with your old belongings. Maybe that trim doesn’t go with all your framed art, or since you are NOT giving up those amazing club chairs, the paint has to go.
- The Unexpected – that squirrel-sized hole in the overhang you missed in the initial walkaround reveals its purpose in the ceiling above your bed at 3 am. There’s no postponing a squirrel eviction.
If you’ve budgeted for these inevitabilities, they’ll be a lot less painful.
We’re confident you’ll find this list useful as a first-time homebuyer. Spending time to focus on things like HOA contracts and asking tough questions like “where will I be in ten years?” will mitigate future costs and headaches. Focusing on all that money you’ll save will more than make up for the time you spend informing yourself about these ten areas that most first-time home buyers miss.