10 Key Factors to Consider for First-Time Home Buyers
Buying a home is one of the most significant decisions of your life. For many, this can be a stressful and confusing process. This makes sense as you are investing considerable time, money, and future comfort in your decision with the home that you buy.
I went through this myself when I bought my first property. I was spending by far the most money I had ever spent. I was nervous and questioning whether or not it was the right fit for me, and I would have loved more guidance to avoid this stress.
I wrote this article to provide first-time home buyers with 10 tips to think about when buying a house:
1. Define Budget:
One of the most essential and first factors to consider is your budget. Considering your income, expenses, and debt. Make sure you have a clear idea of how much you can afford to spend on a home. You'll also want to factor in the ongoing costs of homeownership, such as property taxes, insurance, and maintenance.
You may have trouble figuring out precisely what you can afford. An easy way to do this is to follow the 28/36 rule. The 28/36 rule says you shouldn't pay more than 28% of your monthly gross income on mortgage payments—including taxes and homeowner's insurance. Gross income is what you make before taxes are taken out. In addition, you should spend no more than 36% of your gross income on total debt service, including student loans, car loans, and credit cards.
Example: Let's say you earn $5,000 monthly in gross household income. Multiply $5,000 by 28%, and that's about what you can expect to spend on your monthly mortgage payment. With a $5,000 gross income, your monthly payment should be about $1,400 using the 28% model. However, if that were the case, then according to the 36% rule, you would only have $400 left over to spend on other debts as $5,000*.36 = $1,800 and $1,800 - $1,400 = $400.
The location of the home is also essential. Do you want to live in an urban area, a suburban area, or a rural area? Do you need to be close to work, school, or family? What about access to public transportation, shopping, and entertainment? Consider the location carefully and ensure it aligns with your lifestyle and needs. The location also determines which school district you are in, as well as your taxes.
Make sure you take the time to drive around where you are considering buying to get a scope of what's in the area. Before I bought my first property, I drove around, stopped and walked through the park nearby, and even went to grab lunch in the local area to get a feel for the location. Look into the crime rate in the area as well. Find a great tool for that here.
Location is also a significant factor in resale value. Depending on your goals and how long you expect to live in the property, this could impact you.
3. The Type of Mortgage:
If you're a first-time homebuyer, the process of securing a mortgage can be overwhelming. There are many different types of mortgages to choose from, each with its own pros and cons.
The first recommendation is to get a 30-year fixed-rate mortgage. The 30-year fixed mortgage is one of the most popular types of home loans. This type of mortgage offers a fixed interest rate for the life of the loan, which means your monthly payment will remain the same throughout the loan. Additionally, because the loan is fixed, you don't have to worry about interest rate fluctuations affecting your monthly payment. You may be thinking, "why don't I get a 15-year mortgage?" the answer is Flexibility. A 30-year mortgage will lower your monthly payment. You can also always pay off the mortgage in less than 30 years. This results in giving you more flexibility in case your financial situation changes.
Look at a conventional loans vs. FHA loans:
FHA (Federal Housing Administration) loans are designed to help low- and moderate-income households buy homes. They are backed by the federal government, which makes them more accessible to first-time homebuyers who might not have a large down payment or a high credit score.
FHA loans typically require a lower down payment (as low as 3.5%) and have more flexible credit requirements than conventional loans. However, they also require mortgage insurance. For an FHA loan, this mortgage insurance is locked in for the loan's lifetime unless you refinance at 20%+ equity into a conventional loan which is recommended assuming interest rates are favorable.
Conventional loans are not backed by the government and are offered by private lenders, such as banks and mortgage companies. They are often more flexible than FHA loans and don't require mortgage insurance if you make a down payment of 20% or more.
Conventional loans are a good option for homebuyers with a high credit score and a large down payment. They typically offer lower interest rates than FHA loans and can be a good choice for those who want to avoid mortgage insurance.
Private Mortgage Insurance (PMI)
Private mortgage insurance, or PMI, is a type of insurance that protects the lender in case you default on your mortgage. It's required if you make a down payment of less than 20% on a conventional loan. PMI can be expensive, so it's important to consider this cost when deciding on a mortgage.
4. Size and Layout:
Consider the home's size and the rooms' layout. Are you looking for a single-family home, a townhouse, or a condo? How many bedrooms and bathrooms do you need? Are you looking for an open floor plan or separate living and dining areas? Make sure the size and layout of the home meet your needs and fit your lifestyle.
Keep in mind that bigger houses tend to have higher expenses. It costs more to cool/heat a larger area, landscaping, maintenance, etc. Plan for your goals here. If you expect to have kids in the next couple of years, get a place with more bedrooms. A more oversized yard is more important if you have a dog. Define what you are looking for and what you want to narrow down your search.
Consider the amenities you want in a home. Do you need a garage, a yard, or a pool? Do you want a house with a fireplace, hardwood floors, or an updated kitchen? Make sure the home you're considering has the amenities important to you.
You can always add things to a home but be sure to plan for that in the budget section above. I recommend making a list. When I bought my property, I made a list of amenities I needed and amenities I wanted and was willing to make sacrifices on the wants to fit into my budget. For example, I needed a dishwasher and a washing machine, but central AC was a want. When I found a place that fit into my budget and was a good fit for me, I made the call to forgo the central AC. This is a great strategy to help define what amenities you need vs. what "would be nice."
6. School District:
If you have children or plan to have children in the future, consider the quality of the local school district. Research the schools in the area and make sure they meet your standards.
School districts can be wonky, and gerrymandering is real. Do some research on what school district the home you are looking at falls into. This will also affect your taxes. More attractive school districts tend to equal higher taxes, so make sure that fits your budget.
7. Home Inspection:
Before making an offer, always have a professional home inspector check the home for any potential issues. A home inspection will give you an idea of the home's condition and any repairs that may need to be made.
It was common for people to forgo inspections in 2022. I cannot be more explicit in saying that this is a bad idea and can lead to detrimental results. Inspection results can range from minor fixes, where the seller might pay to fix something, to significant issues, such as slanted floors or cracks in the foundation. Some of these significant issues can cost as much as $25,000. Inspections should always be done. You should always know what you are buying.
8. Future Plans:
Consider your future plans when deciding to buy a house. Are you planning to start a family, take on a roommate, or work from home? Will the home be able to accommodate these plans? Make sure you're buying a home that will meet your needs now and in the future.
As mentioned above, be sure to plan for the future. What are your goals one, five, or ten years from now, and where does this property fit in? Here are a couple of options you might want to consider:
When are you starting a family?
Do you want to rent it in the future?
Will your job require you to move?
How many people will be living there?
Is it a good place for pets?
9. Resale Value:
Consider the resale value of the home. Will the home be easy to sell if you need to move in the future? Make sure you're buying a home that will hold its value and be easy to sell if needed.
Many factors contribute to the resale value of a property, and it is essential to consider these in the context of resale when making a purchase. These factors include:
Location: as mentioned above, location matters for your needs and resale. Is the property close to popular places such as restaurants, grocery stores, malls, etc.? Is the value of properties in the area on the rise? Are new people moving in?
Schools: This is a significant factor in resale value and something you should consider if you plan to have kids. Living in an area in a good school district will significantly increase the potential buyer pool when it comes time to sell the property.
Curb Appeal: How does the property look? Many people care about the outward appearance of their property. If the place you are considering has many undesirable external features, it will limit the resale value in the future. However, if these unwanted features are easily fixable such as an unflattering coat of paint, it could be an easy way to add some value and increase the resale value down the road.
Floor Plan: Make sure the floor plan works for a broad pool of buyers and does not restrict to only one type of lifestyle. I made this decision when looking at a place with a steep spiral staircase. I knew that this was not something that someone with kids or older people would want in the future, so consider this when buying.
Neighborhood: Is it in a safe community? Is it up and coming? Drive around the area before buying a place to scout out the neighborhood. You can tell pretty quickly by how people take care of their yards, if there are any run-down homes, new developments in the area, etc.
10. Homeowner's Association (HOA):
If the home is part of a homeowners association, investigate the HOA's rules and regulations. Ensure you understand what is expected of you as a homeowner and the fees involved. Keep in mind that it is common to have an HOA fee that you should factor into your budget. On top of this, there are usually limitations within the HOA that could impact your lifestyle, such as quiet hours, restrictions on what you can put on your lawn, or constraints on colors of paint and house additions.
In conclusion, buying a house is a big decision, and taking the time to consider all the factors involved is essential. Use this checklist as a guide to help you make an informed decision. By taking the time to consider all of these factors, you can ensure that you find a home that meets your needs and fits your budget.