We bought our first home when we were 29 and 30 years old. I had just graduated with a PhD and started a new job at a semiconductor manufacturing company, while my fiancée at the time, Chhavi, had been established in her job for over six years. In terms of finances, we complement each other very well and share common goals. One of those goals was to buy our first house within a couple of years of moving to the Pacific Northwest. Now, having had time to reflect on our experience, here are the five things we believe are critical to buying your first home.
#1 Location
Location is the most important factor to consider when buying your first home. Depending on your life stage and career, you may want to live close to work to avoid long commutes, or you might prefer a home in a popular school district for your kids. Alternatively, if you enjoy the vibrant city life, you might want to be downtown, even if it means a longer commute.
Other factors to consider regarding location include whether the house is near a busy street or railway track, which can be especially important if you have or plan to have kids. Such locations might be less desirable due to noise and safety concerns. Additionally, these factors can impact the resale value of your home or its rental potential if you decide to move or upsize in the future.
Life can be unpredictable, and new job opportunities may arise, necessitating a move. Planning for future changes and considering the potential for resale or rental can help ensure your investment remains sound.
#2 Critical Needs vs. Nice-to-Haves
Understanding your critical needs versus your nice-to-haves is essential. Critical needs are the deal breakers. What would make you say, “Absolutely not!” if it were missing from your home? For instance, if you have pets, a yard (or even a large yard) might be a critical need. If your parents visit often and cannot access bedrooms on the second level, a bedroom and bathroom on the first floor become essential. Perhaps a ranch-style home is necessary to avoid stairs entirely.
Consider whether you want a Homeowners Association (HOA) to maintain community standards, such as yard upkeep and keeping trash cans out of sight. (yes, HOA can be a double-edged sword, but that’s a discussion for another day.)
Nice-to-haves might include a large three-car garage (although my wife would argue this is a critical need). Perhaps you dream of the smell of a brand-new home with a full warranty, or maybe you prefer an older, well-settled home in the best part of town. Deciding between a townhouse and a single-family home is another important consideration, influenced by your budget and desired location.
This exercise will help you establish clear criteria for what you’re looking for in your first home. It will make the process easier, less stressful, and the pre-work will help you shortlist homes that match your expectations.
#3 Budgeting Wisely
It might come as a surprise that budget is this far down the list. While the cost of a home is crucial, it is influenced by your needs and wants. Your expectations must be grounded in reality, but the budget ultimately comes down to factors like Loan-to-Value (LTV) ratio, monthly mortgage payments, and other financing options—all of which can be adjusted to fit your financial situation.
When considering your budget, we recommend performing a detailed exercise to understand the monthly and long-term costs of home ownership. Many people are surprised by the hidden costs associated with owning a home. To avoid surprises, factor in all potential expenses. A good rule of thumb is to ensure your total monthly costs are under 40% of your household’s gross income. This rule helps cushion against unexpected life events. Below are some key items to consider in your budget calculations:
Monthly Payments:
- Mortgage Payment: This depends on the house price, loan terms (interest rate and term length), and your credit score.
- Utility Bills: Include electricity, water, internet, cable/TV, and trash handling. These are variable expenses, so get estimates from locals in the same area.
- Home Taxes: Depending on your mortgage terms, this may or may not be a monthly payment. We recommend budgeting for this monthly to avoid a large year-end expense.
Other Costs:
- Down Payment: This is the largest chunk of money you will likely spend upfront, typically between 3-20% of the home’s value. Planning for 20% is a good rule of thumb, though exceptions apply for very high-cost-of-living (VHCOL) areas.
- Closing Costs: Often surprising, these can be as high as 1% of the home’s value. Do your research and explore options like having the seller cover some costs or leveraging mortgage options.
- Reserves: Many banks require reserves beyond other costs to ensure you can make monthly payments and avoid defaulting. Plan for this ahead of time.
Understanding these costs and planning accordingly will make the home buying process easier and less stressful. Doing your homework will help you shortlist homes that match your financial expectations and ensure a smoother experience.
#4 Choosing the Right Mortgage
Selecting the right mortgage is crucial, as it significantly impacts your budget for your first home. Mortgage shopping can transform an unaffordable dream home into something within reach. Here’s what we learned through the process:
- Shop Around Extensively: Don’t feel obligated to go with the first few banks you meet. Don’t limit yourself to large banks, although they often have access to better deals. Talk to credit unions, local banks, and explore all options, including private loans or seller financing if you’re savvy. Large banks can often match or beat loan options if you bring in competing offers. Use every available option to secure the best deal.
- Understand Different Loan Types: The 30-year fixed-term loan is popular, but it may not be the best fit for everyone. Consider factors like whether this is a starter home, current mortgage interest rates, home prices, and refinancing options post-home improvement. Understand the terms of each option, policies around refinancing, and interest rate buy-down options to find what suits your needs best.
- Closing Costs and Timeline Discussions: Choose a bank with a reputation for closing on time, as delays can result in additional charges. Additionally, closing costs are often negotiable. Work with your lender to establish a deal that works for you.
- Rate Lock and Extension Options: Rate lock allows a lender to freeze a particular rate when you confirm your loan with them. Many lenders offer options to buy down or change the locked rate a fixed number of times to ensure you get the lowest rate available.
#5 Tips for additional savings
Alright, here are some additional tips to help you save even more money during the home buying process. These little strategies can make you feel like you’ve scored a win (as if buying a house wasn’t exciting enough)!
Get a GREAT Real Estate Agent: We cannot stress enough how important it is to find a great (not just good, but GREAT) real estate agent. Shop around and remember, you’re not locked into any agent—don’t let anyone tell you otherwise! A great agent can save you tons of money by spotting issues during initial inspections or final walkthroughs, recommending good localities, and using their connections to get you extras like a refrigerator, washer/dryer, or additional home warranty at no extra cost.
Inquire About Seller Credit Options: Sometimes sellers have preferred lending partners who can offer additional credits towards closing costs. This isn’t always mentioned upfront, so be sure to ask and potentially ease the financial burden.
Consider Rent Back Options: If you have extra time before you need to move out of your current place, consider a rent-back option. This can save you money and ensure that you close the purchase on time.
Leverage Referral Bonuses: If you’ve built strong partnerships with lenders or real estate agents, explore referral bonuses. Discuss creative options with your agent to see if there’s a deal to be made that benefits both parties.
By
By
