From Renter to Homeowner: Buying for the First Time
The day I first considered buying instead of renting, I was looking at the free newspaper I’d snagged from the laundry room.
We’d just received notice that our rent would be going up, and needed somewhere more affordable to live. One ad in particular caught my eye as I scanned the rentals: “Cheaper than rent!” it proclaimed.
I doubted that could be true, but gave it a read anyway.
The ad was from a real estate agent who helped buyers bid on foreclosed HUD homes. I gave her a call and she quickly determined that yes, we probably could afford something, and yes, that something could in fact be cheaper than rent.
(That happened to be true in our case, but it might not be for others. Just because someone SAYS you can afford something doesn’t mean you actually can. There are a lot of things to take into consideration.)
That’s how I started the home-buying process, even though I was completely clueless about how worked. Here are the things I learned along the way that have served me well ever since.
You need a down payment, unless you’re paying cash
In our case we qualified for an FHA loan, which required 3% down at the time. (Currently the FHA says that down payments “can be as low as 3.5% of the purchase price”.)
Since our loan amount was ridiculously small, the down payment wasn’t very much at all. People pay more for regular cars now than we did for that condo. A more traditional down payment would be 20% down.
You need money for closing costs
Closing costs can be tricky to pin down until the very last minute when you get your settlement statement, and they can be MORE than you’d expected, even though lenders are required to provide a good faith estimate ahead of time.
3-5% of the purchase price is a pretty typical amount for closing costs.
Sometimes the seller will pay all or part of those costs. If you want to ask the seller to pay closing costs, you should do so while you are negotiating the sales contract.
Some of the closing costs themselves can be negotiated too. For example, lenders may be willing to reduce or eliminate some of their fees to win your business.
Get a low interest rate
If you’re taking out a mortgage, you want to get the best interest rate possible on it.
To get the very best interest rates, you either need to be in excellent shape financially and able to undergo manual underwriting or you need to have an excellent credit score. (My feeling is that if you can only get a subprime loan, you’re not ready to buy a house.)
Credit scores are a whole additional topic, but before you check into those it’s a good idea to check your credit reports for free at annualcreditreport.com) to be sure there are no errors on them. You should also pay your bills on time and in full for a long period of time so that you don’t have any black marks on your report.
In other words, be ready to buy financially, not just emotionally.
Shop around for a good mortgage
Once you’re ready to buy, do your mortgage shopping within a short period of time so that all the dings on your credit are lumped together.
Don’t be afraid to negotiate. Not all mortgages are created equal. Be sure you understand exactly what you’re being quoted and what the quote applies to, especially if the rate you’re quoted seems MUCH better than the other rates you’ve gotten. Sometimes things are too good to be true, or there are catches like not being able to pay off your loan early without penalty if you move or want to get rid of your mortgage down the road.
There’s a lot of paperwork involved in buying a house
You should READ and be sure you UNDERSTAND all the paperwork before signing it, even if it feels awkward while they sit there waiting for you to sign. They’re not the ones agreeing to pay huge amounts of money for the next 15-30 years.
Don’t take the word of your real estate agent or mortgage broker as to what the paperwork means or says. They may mean well, and they may be completely honest, but they are also not the people who wrote those documents or who will be signing them. Plus they have a vested interest in the process.
Talk to a lawyer if you have questions, or at least consult a variety of sources that don’t have an interest in you obtaining a loan or buying a house. Also, be sure the paperwork that you do sign is correct. Very few of the mortgages I’ve signed over the years have been 100% correct on the first go-round.
An emergency fund is an essential component of owning a home
You need an emergency fund anyway, but you especially need one if you’re planning to be a homeowner.
Owning a home brings with it a horde of accompanying expenses that you might or might not have thought of: deductibles when part of your roof is ripped off by a freak wind, service calls when the water heater springs a leak, increased water bills due to the many gallons of water that leaked down your driveway for an entire day, etc.
Your general expenses are likely to increase too
When you own a home, your expenses will almost certainly increase. Related expenses include things like insurance premiums, property taxes, PMI if you didn’t do a conventional loan, HOA fees that can be raised annually, special assessments, higher heating & cooling bills (since most people buy larger places than they rent), replacing old appliances, buying new furniture to go with the house, maintenance (paint, carpet cleaning, lawn care), improvements (new windows, new flooring), etc.
As a homeowner, you need to be sure you can afford those planned and unplanned expenses WITH money leftover in case you’ve underestimated. (Or in case you’d like to have a life outside your home. It’s no fun being house-poor.)
This means you need to have a decent income with prospects for increases as time goes on. You also need to have your debts under control, and to be managing your money wisely.
There’s nothing urgent about buying a home
Prices go up, and prices go down. There are always bargains to be had if you’re patient enough.
There is no such thing as the perfect home. Be sure you get an inspection, and be prepared to let the house you’re looking at go if the inspection does not go well.
If you feel an almost panicked urge to buy, that is probably exactly the WRONG time to buy.
Location location location really is extremely important
It’s a lot easier to leave a rental than it is to sell a house, so make sure you’re buying in a good location and are comfortable with it.
Visit the neighborhood at different times of the day & night before putting in an offer. Talk to the neighbors if you feel comfortable doing that. Compare crime statistics (usually available online or from the police department) with other neighborhoods that you can afford. If you’ll have an HOA, be sure you agree with all of the bylaws.
It’s also wise to consider resale value. That means things like not buying the nicest house on the block and checking out the school district, even if you don’t have kids.
Not as intimidating as it seems
With all that said, the home-buying process is not as intimidating as it seems. There will be plenty of people willing to help you through it, and at the end of it all you’ll have a house that you can make a home. (A house that may even add to your bottom line as the years go by.)