Preparing To Buy Your First Home

Buying a home can be a daunting task. The challenges of being a first-time homeowner can be intimidating, particularly for people who are moving away from home. Let's look at a few guidelines to help take some of the stress out of the decision.

The house you buy may not be forever.

Because of the soundness of real estate as an investment, many first-time home buyers want to get the most prominent house they can. They may be trying to start families or getting more space for their existing families to grow. Whatever the motivation, buying a home is one of the few times when people try to plan their lives 30 or more years down the road.

That's a huge gamble. Any unanticipated changes might happen in 30 years: Your job or your partner's job may force you to move, your parents may have medical problems that need more excellent care, or you may decide to change careers or start your own business. This unavoidable uncertainty means it's not in your best interest to plan for a future that's so far away.

Look for a house that suits your immediate needs and understand that every place is adaptable. A den or an office can become a nursery, a shed can become a workshop, and a basement storage area can become another bedroom. Don't think you need to plan your life out forever if you choose to buy a home. Make some reasonable, educated guesses about your life for the next ten years or so, and buy the house you need for that time.

Don't become "house poor."

Many first-time home buyers also fall into the trap of figuring out the most they can afford to spend on a new home, then spending precisely that amount. The reasoning behind this decision is simple: money paid to repay a mortgage isn't really "spent." Homes can be refinanced or remortgaged if money gets tight or repaid when the house is sold. That's sound reasoning, but only to a point. People who spend most of their monthly income on a house payment leave little for other debt repayment, retirement savings, or building an emergency fund. They need to prepare for an unexpected medical bill or car repair. They also need help to take vacations or make home improvements. That's an unenviable position.

Avoid this trap with a bit of financial consultation. Understand that your upper limit for housing expenses should only be a worst-case scenario. Buy the house you need, not the most expensive house you can afford. You'll be happier in your home and your budget.

Understand the process

There are a lot of factors that go into obtaining a mortgage. First, you and the seller have to agree on a final price, which includes the money you pay for the house and a host of fees, like the inspection, appraisal, and title transfer. The realtor selling the home can walk you and the seller through the process.

Next, you'll need to arrange financing. You'll want to shop around for the best prices, but new regulations can make that costly and time-consuming. Each financier has to appraise the home's value and compare their estimate to the price you agreed on with the seller. The more significant the difference between these two values, the more expensive your home loan will be, but that's not the only factor. The financing institution must also check your credit, verify your income and assets, and confirm your employment to follow new regulations passed after the last financial crisis primarily fueled by bad mortgages.

These regulations can make it more challenging to get a home loan, much less at a reasonable rate. This is particularly true if your employment history is short or you're just starting a new business.

You can help this process by buying a house you can afford, building your credit score by reducing the amount of credit you're using, staying with the same employer, and saving for a significant down payment. It would help if you aimed to have at least 20% of the sale amount for a down payment, as this is the threshold to avoid having to pay for private mortgage insurance (PMI). A larger down payment also reduces the loan risk to the lender and can help get you a less expensive mortgage. This, in turn, makes for a less expensive housing payment. You can also ask for help from Mom and Dad; a cosigner on a mortgage may improve your credit score and lower your interest rates.

Don't go it alone

Many prominent national lending institutions advertise appealing mortgage specials on billboards, TV, and the radio. The rates may seem reasonable and even enticing. In reality, though, those rates go only to a small percentage of borrowers with exceptional credit, significant income, and a considerable net worth. As a first-time home buyer, you probably will not qualify for the rates those large, faceless corporate lenders are using as bait to pique your curiosity.

Given the difficulty of shopping around, make your first stop at the institution with the best chance of giving you the best rates from the start. Your credit union is there to help your community, including assisting new homebuyers to secure loans for the first time. You're making the right decision by looking for a home during a buyer's market. Make another intelligent call by speaking to a credit union representative about mortgage rates. When you're ready to leave the basement, your first stop should be your credit union.