Top Considerations for First-Time Home Buyers

Jamie: 00:00:01

Welcome to Thoughts from the Crawl Space, a podcast where our goal as home inspection experts is to support and serve our community.

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Today we're going to talk about first time home buyers and home what you need to know now if you're not a first time home buyer, I think you can learn a lot from just listening to this episode.

But first time home buyers, it's a kind of a murky process, a lot of things involved and you don't want to just do it in a hurry and get it over with because you want things to go well and you want to have the house be a blessing to you and not a, and not a burden. So let's talk about first time home buyers. First.

You know, you know you've lived in an apartment, you lived in your parents basement, you've lived here, you've lived there and now's your chance. You think, is it time to buy a house? Is it, do I have enough money to do it?

You know, you've watched enough HGTV that you think you can do about anything, right? And so if something's not right, maybe you think I can fix that up, no problem.

So I want to just jump into some of the facts, some of the things to think about today on specifically for first time homebuyer. So first, let's understand the process. So one of the main stages of buying a home is getting pre approved.

Now this is assuming that you haven't been very diligent and very above average and saved all the money. And to buy a cash house, that's ideal, obviously buy it, have no payment, that's a way to build wealth.

But if you're not in that situation, you need to get pre approved.

You're going to go to your bank, you're going to go to your mortgage lender, you're going to find out what amount will you loan me, what do I qualify for. Many real estate agents talk about this regularly. Don't even start looking for a house until you've been pre approved. It's simply not worth it.

It's like golfing without a hole at the end of the hole, you know what I'm saying? You might hit it on the green, but where's the hole? Where's the cup? Where's, where's the payoff?

So don't go looking for homes if you don't Know how much you're approved for. They may tell you you're approved for $250,000. Okay, now we know our budget and we know what we can look at and what is unrealistic to look at.

So first of all, get pre approved. Then you can start house hunting. This is where a real estate agent comes in. Now, is it possible to find a house without a real estate agent?

Yes, and many do. They'll look online, they'll follow, you know, different websites that show houses.

But at some point, unless you're experienced, I would highly recommend using a real estate professional.

They're going to be able to dive into it and get you connected with all the professionals involved in it, from a lender to a home inspector to an appraiser and all that. And so you need to contact one of them. If you need a contact for a real estate agent, we'd be glad to give one of those to you.

We work with literally thousands of them and we would be glad to give you a name of one that would be in your area.

So after the home, after the pre approval, after you get a real estate agent and you start, you know, you look at houses, then you're going to make an offer. If your offer is accepted, then you'll have time. There'll be a contingency period between the accepted offer and closing.

And that is the time where you typically will get an appraisal, a home inspection, anything else associated with it that you need done. Could be water testing, it could be environmental inspections. You know, in certain counties they require those types of things for each transaction.

Not home inspections, but maybe septic or well inspections. And so all that is done in that contingency period.

And then finally you have closing where you, well, you close, you get, you sit down with the agents involved and the buyer and the sellers are together and you're signing papers and documents basically to transferring that house to you based on the money that you have put down or gotten from the bank for that. So let's talk about that money aspect, budgeting for a home. Now we're home inspectors. I'm a home inspector, business owner.

I'm not a financial guru, but I have seen some things that are more common sense or what works best, especially for first time home buyers. And so I just want to give you some options here. Of course you're going to talk to your agent about this.

You're going to talk to a financial counselor before you dive into anything. This is typically the biggest purchase you'll ever make. Until you buy an even bigger house.

So first time home buyers make sure that you are doing your homework financially before you jump into buying a house. So first thing is budget. How do you get a budget for your down payment, monthly mortgage, utilities, insurance and maintenance costs?

You, you know, if you have a house, you buy a house. Let's say you buy a $200,000 house and you get a mortgage payment. Let's say it's $1,500 a month and you think, $1,500, I can afford that.

Well, find out, does that include insurance? Does that include the property taxes?

can, if your basic payment is: 1500

If you don't put down 20%, you typically will have to pay private mortgage, insurance, PMI, and that will usually lead to a higher rate and the way they configure the loan and all that. So there's some things to think about financially. Credit scores. I'm not going to dive too much into credit scores.

A credit score is nothing more than a measure of how well you borrow money. So, you know, some people don't want to borrow money at all. You don't have to have a credit score to buy a house. There are other ways to do it.

If you've proven that you are a reliable citizen, that you've, you've paid rent, that you've paid whatever, you don't necessarily have to have a credit score to qualify for a loan. There is maybe a step or two extra that you have to take. And there are some lenders that won't work with you. But that's okay if you are that sort.

You haven't borrowed money for a living, but you do need to borrow for a house. There's a way to do that through manual underwriting. And you can find some of those folks if you look.

So I think the most important thing, if you're thinking about a house or you have a timeline that you'd like to buy a house, I think you got to look at just flat out saving. How much can you work? How much can you save? Can you sacrifice right now to save up what you need for a down payment?

The typical down payment amount is 20%. There are options for those that don't put that much down. FHA and VA loans are two examples.

And some of those, you know, I think They've had zero down mortgages or 3% or 1%.

And while that sounds attractive and it might be right for some people, the thing to consider when you're putting that little down, you're basically financing the entire house. Your interest rates are going to be higher and you're going to pay more over the long haul of that loan by a large amount.

And in some cases those mortgages, those rates have penalties for early payment. And you definitely don't want that.

Because I think the number one thing you can do as a homeowner, and this is just my opinion, is once you get in that house, pay that thing off. There's a train of thought out there is like, oh, you want a mortgage, you want to take that interest off your taxes.

Well, here's another little fact. 100% of bankruptcies occur on homes with a mortgage. So if you don't have a mortgage, you're not going to have a bankruptcy on your house.

So make sure you take that into consideration. Consider what the long term payoff for this is. How can we get this paid off quickly?

How can we not drag this thing out 20, 30 years and pay an insane amount of money to the bank for that loan? So other costs to consider in all this is, well, home inspection fees, right? You need to get a home inspection.

So that's a fee you need to have included in there closing costs, homeowners association fees and property taxes. We mentioned taxes earlier. Choosing the right lender, number four, choosing the right mortgage and lender. And we don't do anything with that.

But there are many types of lenders out there that will be glad to discuss the different mortgages and what's right for you. Just make sure you know what you're getting. If there's something that's confusing to you, don't sign it. Get somebody else to look at it.

Have an attorney look at it. Make sure, you know, is this a fixed rate? Is it adjustable rate? Is there a balloon payment?

Do I have, you know, a great rate now, but in 15 years I owe the balance on this mortgage? Now that might not be a good option for you. So make sure you choose the right mortgage and the right lender.

So obviously a point in buying a home is determine what you want in a home.

Defining needs versus wants, you need to distinguish, but what you absolutely need in a home, such as bedrooms, location and what would be nice to have, like a swimming pool, a large yard, a beautiful deck, whatever, you know what I'm talking about. What do you absolutely need? You got Three kids, you're in a two bedroom apartment, maybe it's time to get out of there. What do you need now?

Not what, maybe what your dream home is, but what do you need so you can be get out of the rental business, get into financial independence, start building wealth. And how can you do that in the best way?

So make sure you know what you want and try to avoid looking or make sure you know what you need and try to avoid just going for once. Location matters. The importance of choosing the right neighborhood is highly crucial. What kind of neighborhood do you want your kids to grow up in?

Do you want one with a lot of other kids so that they can play, develop friendships?

Do you want to be close to schools if you don't have a car, do you want to be close to public transportation so you can get around and not have to pay for car and upkeep and maintenance and all that on a vehicle? And you know, finally some other things to think about in a home. Do we want stairs? Do we want multiple levels?

Do we want, you know, wide doors for handicap accessibility? And maybe you have somebody in your family like that that needs wider doors.

So you want to look at those kind of things going in and not just think about that at the last minute after you think you've already found a home. So, okay, now you think you know what you want, you've chosen the right mortgage lender, you've been pre approved.

The home search is starting with a real estate agent. So keep an open mind. I think everybody has in their mind kind of what they'd like when they start.

And so it might be hard to get excited about some homes you see right off.

But you need to keep an open mind and realize that real estate professional, if you've given them the right information, if you communicate, communicated with them properly, if they're a hard worker, they're going to find what you need. It might take a while.

In this market, homes aren't as plentiful as they once were, but you will find them if you are patient and work with the right agent and so be prepared for that emotional rollercoaster. You're excited and then you're not, you're disappointed and then you're optimistic and so forth. So stay level, stay calm.

I guess you should say it's kind of like when you're fishing, you get a bite, you think you got a big one, gets near the boat and then it gets off the hook. And that can be disappointing.

So hang in there, you're going to find what you Want if you're patient enough, if you're pre approved, and if you have the right agent working for you, then after you find it, you want to make an offer. All right, and here's where your agent really comes into play. They know what's going to work and they know what isn't.

You know, you find a house for 250,000, you got a $240,000 budget. You want to offer 230, well, that might have worked 10 years ago, but it doesn't usually work right now.

If there's multiple offers on a house and you find this thing, you're going to probably have to offer 250,000, you might have to offer 260,000. Your agent is going to know that and they're going to have the insight on the market and recommend what they would have you offer to get that house.

If you really want that thing, maybe it's a house. You're just like, you know, I'm not completely sold on it. I'm going to give them this low ball offer and see if they'll take it.

You know what, that might work in some cases, especially on houses that are run down or the owners can't really afford to fix anything up. They just want to get rid of it for whatever reason. That may work, but that's up to you and your professional to figure out.

Then when you do get your offer accepted, it potentially is negotiation time. Home inspectors are never there to tell you how to negotiate or what to negotiate for.

But we will tell you things that we find in the house that need to be addressed. We'll tell you any defects we find, safety issues, mechanical problems, et cetera. And then it's up to you to decide. I can fix those myself.

I want to ask for these to be fixed now. I want to make sure these are taken care of before I move in for the safety of my family and on and on.

So we're going to give you a great list of things, and that is point number eight, the home inspection. They are crucial. A previous episode we did mentioned just how crucial home inspections are. It busted 13 different myths about home inspections.

And I highly recommend you go look at that. But this is in our view.

You know, obviously you can't get to a home inspection if you haven't put a purchase down or an offer down and got it accepted. But this after that is probably without a doubt the most important part of the home buying process.

You want to know what's up with your house, you may have some experience, you may not, you may go in and not even know that you have a furnace filter that needs replaced every month or every three months or whatever type of filter it is. You might not know what kind of shingles you have, what kind of insulation. Do you have enough insulation? Are my windows rotted out?

Do they operate properly? Do I have shifting in the foundation? And on and on and on.

We could go on all day about home inspections, but you want to get an inspection and use that to give an honest assessment of the home. And you just need to be honest. Is there a walk away point? Home inspectors are never going to push you to that point or recommend that at all.

But there could be realities to the home that you didn't notice, your real estate agent didn't notice. They aren't trained to notice those things that would diminish the value of the home, be costly to fix and nobody can afford to fix them or whatever.

You know, if you have a foundation problem, a wall caving in, bowing in a little bit, and it's going to cost 15 to 25,000 to fix your foundation issue and the sellers don't have any money, how's that going to work? And so all those things can create, you know, it's not 100% that you can buy this house at this point.

So anyways, just some things to think about with the home inspection. So you're going to use that and negotiate and then you're going to close.

What to expect at closing, you're going to be signing papers until your hands are sore and you're going to pay closing costs, you're going to finalize this mortgage and then you're going to start with adulting even more. Right? So now you got a mortgage to pay for each month.

One of the guidelines that we've used in counseling others when it comes to, well, how big should my mortgage be? And I don't recommend taking a bank's advice on this. They want you to pay it back, there's no doubt about that.

They don't want you to default on the mortgage. But what we have found is, and the research we've done that the folks that we follow recommend about a 25% mortgage to be 25% of your take home pay.

All right, that's just your take home pay after taxes. Make sure that your mortgage is about 25% or less of that.

And that's going to give you the flexibility in your budget to save for retirement, to save for vacations, to do maintenance, repairs around the house and so forth. If your mortgage payment is 30, 35, 40, 50% of your take home pay. You don't have much margin and you're going to be stressed.

The house is going to become a burden and you're going to be working your life away just to pay the mortgage. And that's not what you want your house to be. You want it to be a blessing.

You want it to be something that you don't have to worry every month, am I going to make it? Because that would be. That's stress inducing. It's hard on families and definitely don't want that.

In my opinion, it's better to live in a smaller house with peace and a lower payment than a nice big house that you think will give you everything you want, but you just simply can't afford it now. Maybe you can later, but right now you want to be careful about getting into that. So after you close, after the purchase, some homeowner tips.

We have home maintenance podcasts out there that you can go look at or listen to, but regular upkeep is just a part of homeownership. You can get an inspection and within a month you need to upkeep something.

Some siding blew off or your sump pump quit working or your water heater started leaking or whatever. These are things that need to be dealt with and you need to have a fund in place so you can deal with these.

Another thing that we've seen in the past that works really good is called your emergency fund. Before you buy a house, we recommend putting a certain percentage down, having an emergency fund.

These are the expenses in this emergency fund that it would take to keep you operating for three to six months, depending on the type of job you have. If you're single, you know, self employed or whatever, let's just go with three months.

Take your house expenses, take your every cost of living that you have. Food, mortgage, car, whatever. What will it take to live for three months? What if you lost your job? What if you got injured and couldn't work?

What if there was a pandemic that forced people to quit working? Would you have enough money in that account for three to six months of expenses and be able to keep your house?

I think that's very important going in. And I should have put this point a little bit earlier, but you want to have that emergency fund in place of three to six months of expenses.

And we recommended the guideline on percentage for your mortgage payment of your take home pay. Have that in place before you buy the house that you're really ready to go now that's a lot of money.

A lot of times a three to six month of expenses is, you know, 15, 20, $25,000. And that's a lot just to have in a savings account that's just there basically as insurance. It's really not an investment.

It's insurance against something, against life happening to you. All right? And so that plus the down payment, that's a healthy chunk of money.

I mean, you're talking about probably 50, 60,000 altogether, combining those just to get a basic down payment. But that's why we're doing this episode.

You need to be, you know, you need to know the realities of buying a home to be able to keep it and maintain it long term. So some of the, just to kind of summarize, some of the common mistakes to avoid in this whole home buying process is overstretching your budget.

We mentioned not having your mortgage payment too high, not above 25% of your take home pay. Don't skip the inspection. I understand it's hard to find houses. You got to overpay for them sometimes. Don't skip the inspection.

That's going to lead to bigger problems down the road. And don't get too emotionally attached to your home too soon.

We talked about the ups and downs, keeping an even keel, and that's going to be especially true. And it's exciting to buy a home. We want you to have a home.

Buying a home is one of the best ways to build wealth if you got the right home and you have the money to do so. But don't get too emotional too soon. It's a house, there are other houses. And if you don't get this one, you'll get another one.

And ultimately, what makes a house a home is you and your family. So if it doesn't have the right color or shape or is in the perfect neighborhood, you can overcome those things.

You can still have peace and joy in your household. So be patient, be flexible and embrace the process.

If you have the expectation that you're going to jump in and you're going to have a home in a month. Expectations sometimes are the death of any relationship. So go in. Just expecting this may not be quick. I'm ready now. I'm financially ready.

I'm pre qualified. But what if this takes me six months or eight months or a year to find the house that I want? That's okay. Nothing wrong with that.

And that's why real estate agents are professionals. They understand the process and they want to help you and, and help you to Enjoy the process.

I know patience isn't always a strong point of some folks, but have that patience. Enjoy the process.

And if we can do anything to help you here at Gold Key to inspect the home or guide you in the right direction, we'd love to help you out. That's why we're here. So give us a call. Thanks for listening. Share this episode Give us a five star review. We'd really appreciate it. Everybody.

Have a great day. Thank you for listening.

This week you can catch up on the latest episode of the Thoughts from the Crawl Space podcast on Spotify, Apple Podcasts and YouTube. For more information about Gold Key Inspection services, go to goldkeyinspect.com sat.