Buying a First Home

Buying a home is no simple task, particularly for first timers who tend to let emotions get in the way and who are simply uninformed about the many nuances of the real estate market. The following information will help both new and experienced homebuyers to be better-informed purchasers:

How much house can you afford? Before getting tied up in the theatrics of finding a home, take a dispassionate look at how much you can afford to pay. Figure out how much more it will cost you to buy a home compared with renting. After you factor in the tax savings from mortgage interest and property tax deductions, you may be pleasantly surprised to find that the cost of owning won't be much more than what you are paying in rent.

Keep in mind that when you start looking for houses, you'll always find "better" houses that are beyond your price range. That's understandable, and it happens to all homebuyers, even rich folk. Someone who is looking at $2 million homes would dearly love to buy a $3 million home, because it's a "better" home. Set a reasonable target price (although you'll probably end up spending more than your target).

You should also find out if you qualify for assistance for lower-income homebuyers. Check with state and federal housing agencies because they may have a program for you even though your income isn't all that low. 

There's nothing wrong with buying as much home as you can afford, so long as you're willing to deprive yourself of some of the luxuries you may have enjoyed prior to buying the home. But don't get in over your head, as so many people did during the days of easy credit at the beginning of the decade.

If you eventually want to trade up to a more expensive home, that's fine as well, so long as you don't extend the maturity of your mortgage. For example, if you originally took out a 30 year mortgage, lived in the house for a decade and want to trade up, take out a 20 year mortgage on the new home. If, instead, every time you move you finance with a longer mortgage, you'll never make any headway at paying off the mortgage. The goal is not to have an enormous home with a huge mortgage when you retire; instead, at retirement you should have a house you can afford with a small mortgage or, better yet, no mortgage at all.

Are you financially prepared to look for a house?
Is your credit rating okay?
Have you cleaned up your debts?
Do you have enough money for the down payment?

Rather than addressing these issues after you begin your house search, why not go to a lender and get a pre-approved loan? This will also put you in a much better negotiating position.

The amount a lender may lend you is not necessarily the amount you can comfortably borrow. Ask yourself if buying a house that costs the maximum you can afford will leave you so short that you won't be able to furnish it, much less take a vacation for the next decade.
Begin your search. Almost 80% of all home searches begin on the Internet. You can search through literally hundreds of online listings, take virtual tours, and view photographs of neighborhoods and homes. The Internet can be a valuable resource to help you narrow your search. Be realistic in your search. While location is important, so is affordability. First-time homebuyers often have to settle on housing that isn't quite as nice as the home they grew up in. But that's okay. The goal is getting into a home. You can always trade up later on if you must.

Negotiation. Negotiations are the time to hold your emotions in check. You obviously want the home, but until you have purchased it, it's just a house. If this is the first time you've purchased the home, be sure to enlist the assistance of family members or friends who have purchased houses in the past. Otherwise, you can rest assured that you'll pay too much.Negotiation need not be an unpleasant experience. Stressful, yes; unpleasant, not necessarily. Understanding the reason the seller is selling can be helpful. If the seller is particularly anxious to sell, that puts you in a better negotiating position. 

Purchase and sale agreement. A purchase and sale agreement (P&S) is a contract between a buyer and a seller that specifies the terms and price of the sale. Prior to signing the P&S and forking over the deposit, you should ask an attorney to review it. You will want to include some contingencies in the agreement, typically including obtaining the financing (which will require the lender to appraise the property), a satisfactory home inspection, and a clear title.

Inspection. The real estate agent may – or may not - have a conflict of interest in recommending an inspector, so you may want to retain one on your own. You should receive a written report from whomever you use. It also is very helpful to accompany the inspector during the inspection to discuss any problems the inspector may uncover. It's actually kind of fun, and a good inspector can be very helpful in advising you about making repairs and minor improvements later on.

Mortgages. Stick with garden-variety mortgages. Your parents probably survived quite nicely on an old-fashioned fixed-rate mortgage, and they're still the best mortgages for many first-time homebuyers if interest rates are relatively low at the time the mortgage is taken out and you expect to stay in the house indefinitely. Adjustable rate mortgages with reasonable caps on future rate increases are also fine. Avoid unusual financing arrangements, notably interest-only mortgages where you never pay down principal and adjustable rate mortgages (ARMs) with substantial future hikes in the interest rate. These latter mortgages were the cause of the subprime lending debacle. Homeowners were induced into taking low interest ARMs whose interest rates rose dramatically in future years.