Introduction
Buying a home is a monumental step, one that requires meticulous consideration regardless of whether you’re a first-time homebuyer or have gone through the process before. Surprisingly, a significant percentage of homeowners (78% to be exact) admit to having regrets about their home purchases, with unforeseen expenses and unexpected problems topping the list of woes.
As someone who’s navigated the intricate path of property ownership, I’ve come to understand that the journey isn’t as straightforward as it might seem. From credit scores to hidden costs, there’s a wealth of knowledge to be acquired before you commit to homeownership.
In this blog post, I’ll share seven essential insights to empower you as you embark on this significant investment.
Your Credit Score
Before delving into property prices or interest rates, there’s a vital checkpoint to address: your credit score.
In the context of conventional loans, your credit score functions as a financial report card, conveying your aptitude for managing money. It’s determined by several factors: payment history (35%), owed amount (30%), credit history length (15%), credit mix (10%), and new inquiries (10%).
To enhance your credit score, pay bills punctually, maintain low credit card balances, and limit new credit applications. Depending on the loan type, aim for a credit score over 580 for FHA loans and over 620 for conventional loans. A higher score translates to better interest rates, which can save you substantial funds over time.
Only Buy what You Can Afford
While the allure of a dream home can be tempting, never underestimate the wisdom of staying within your means. Falling into the trap of purchasing a house beyond your financial comfort zone can lead to a precarious situation known as being “house broke.” This term describes the scenario where mortgage payments, taxes, insurance, and repairs consume so much of your income that you’re left with little for other essentials.
To avoid this predicament, adhere to the 28/36 rule: allocate no more than 28% of your gross monthly income to housing expenses and keep total debt, including mortgage and other payments, below 36% of your income.
Shop Around for the Best Rates
Just as you wouldn’t buy the first car you see, don’t settle for the initial mortgage rate offered. Scouring for the best rates is crucial since homeownership significantly impacts your finances. Consult multiple lenders or mortgage brokers to compare rates and explore specialized loans for first-time buyers, such as down payment assistance programs.
Get Your Emergency Fund In Order
Prepare for the unexpected by building a robust emergency fund. While the excitement of homeownership might tempt you to invest every available penny, resist this urge. Homeownership entails inevitable surprises, from leaky roofs to malfunctioning AC units. An emergency fund acts as a safety net, providing financial security when unforeseen circumstances arise.
Aim for at least six months’ worth of expenses saved alongside your home funds.
Check the Property Out in Person
Beyond online listings and virtual tours, physically inspect the property you’re eyeing. Walk through the interiors to gauge necessary repairs and assess your comfort level. Additionally, scrutinize the neighborhood during various times to determine noise levels and the overall environment. Evaluate your proximity to essential amenities and consider safety factors, ensuring you’re making an informed decision about your potential new home.
Check the Purchase Agreement
Before sealing the deal, meticulously review the purchase agreement. Verify crucial details, including buyer and seller names, offer price, financing terms, earnest money deposit, contingencies, closing costs, and deadlines. This step ensures accuracy and prevents costly oversights.
Get A Home Inspection
Once you’re content with the property, engage in a home inspection to uncover any hidden issues. Though you might have done an initial walkthrough, a professional inspection unveils potential problems beneath the surface. If discrepancies emerge, negotiate with the seller or evaluate the feasibility of proceeding with the purchase. Remember, a home inspector’s expertise can save you from future financial burdens.
Conclusion
Embarking on the journey of homeownership necessitates careful planning and consideration. Armed with these seven insights, you’re better equipped to make informed decisions and navigate the complexities of purchasing a home. Take your time, conduct thorough research, and ensure your finances are in order.
By doing so, you’ll not only find a house but a place you’re genuinely excited to call home.
Below is a transcription of the podcast. This transcription was taken from Otter.ai so it might not be completely accurate:
Sharon Tseung 0:02
This is the digital nomad quest podcast with Sharon Tseung. teaching people how to build passive income, become financially free and design their best lives.
Whether you’re a first time homebuyer or have been through the process before purchasing a house is a significant milestone that requires careful consideration. A whopping 78% of people who own homes in the US have actually had regrets about their recent homebuyers. 49% confessed that owning a home turned out to be more expensive than they first thought 47% of homeowners said they ran into a bunch of unexpected problems with their homes. So clearly, there’s a lot to think about before you dive headfirst into home ownership. I think there’s a misconception that landlording is easy. And even that real estate investors have it easy. But homes can have a lot of upkeep and you have to take care of your tenants. Luckily, with our 34 units, we have property management companies who make things more passive, but it’s not like there’s no work to be done even with our own primary home homes can be more costly and involved than you think, especially if you don’t have a management company helping you out. And before that, you have to see if you can even qualify for a loan on the house if that’s the path you’re taking. So in today’s episode, we’re going to unpack seven things you need to know before you buy a house, especially if you’re looking for your first home as a primary homeowner, I hope to arm you with the info you need to make an informed decision on such a big investment. So let’s get started. Tip number one, if you’re thinking about buying a house, there’s one thing you need to check first. And it’s not the price of the house or the interest rates, something that’s all about you your credit score, if you’re going to go down the conventional loan route, they’re going to check your credit score. And your credit score is like a report card for your finances. It tells lenders how good you are at managing your money. So how do they calculate it, there are five things they look at your payment history, which makes up 35% of your score. And this is all about whether you pay your bills on time the amount you owe, which is 30% of your score. And when it comes to the amount you owe, having a high credit balance will negatively impact your credit score because of the utilization ratio, this ratio is taken by dividing your total credit that you’re using by the maximum that you’re allowed to take. And this shows how much of your total credit you’re using. As an example, if you’re allowed to use $10,000 on your credit card and you have $3,000 on it, your credit utilization is that 30% And a utilization ratio above 30% is seen as a negative to creditors. Lenders peek at this to see how well you’re handling your debt. So the best way is usually to cut down on your debt. And then depending on what’s going on with you, it might also make sense to think about bumping up your credit limits. All right, I know that’s a lot. But next is the length of your credit history, which is 15% of your score, the longer you’ve been using credit, the better and then your credit mix is 10% of your score, which means having different types of credit like credit cards and loans new inquiries makes up 10% of your score as well. And this is when you apply for new credit hard credit check might drop your credit score by up to 10 points. But you shouldn’t worry because in many cases it won’t hurt that bad. So if you’re thinking about buying a house in the next five years, you want to make sure your credit score is in good shape. So start by building your credit. Now open a credit card if you haven’t already, make sure to pay your bills on time and keep your credit card balances low and don’t apply for new credit too often. Now depending on the type of loan you want, you’ll need a certain credit score. So for FHA loans, aim for a score of over 580. And then for a conventional loan, you’ll want a score of over 620. And then the higher the score, the better your interest rates are going to be, you’ll probably want to get your credit report to see what you can do to improve it. And if you’re curious about your credit report, you can pull a free one year lead through annual credit report.com. And if you’re signed up with smart credit, which is a great tool to help you with boosting your credit, they also have their smart credit report which lets you understand everything a lot easier. Smart credit also has a lot of great features like their score builder, which lets you go in and check out the accounts are helping and hurting your score and most other tools are going to stop there. But with SCORE builder, you can click Fix Errors or ask for Goodwill corrections directly on the dashboard. Their score boost feature helps you add points fast in case you need to get a loan approved sooner than later. I’ll put a link to smart credit in the description below in case you guys need to work on boosting your score. Remember, a better score equals the ability to get a loan and the ability to get better interest rates. Now, aside from credit scores Tip number two is that you should only buy what you can afford. I know it sounds like common sense but it can be so easy to fall in love with a house that’s just a little bit out of your budget and you end up buying it thinking it’s all good, but trust me you don’t want to end up house broke. But what does that even mean? It’s when you spend so much on your house that you don’t have money for anything else. You’re constantly paying for your mortgage property taxes, insurance and repairs that you don’t have enough money for other things. And many people forget this but buying a house isn’t just about the mortgage. You’re also signing up for extra costs. Things like insurance, taxes, utilities and maintenance can really add up so How do you make sure you’re buying a house you can afford a good rule of thumb is a 2836 rule. This rule says you should spend no more than 28% of your gross monthly income on housing expenses and your total debt including your mortgage, car loans and credit cards shouldn’t be more than 36% of your income. lenders often use this rule to see if they want to extend credit to borrowers. So say you’re making $50,000 a year, which is about $4,166 a month according to the 2836 rule, you shouldn’t be spending more than $1,166 a month on housing expenses, because 28% of 4166 is 1100 66. And that would leave you about $375 a month for remaining debt payments. So before you buy a house, make sure it’s a house you can afford. And remember a house is not just a home, it’s also an investment and like any good investment, it shouldn’t break the bank once you found the perfect budget friendly home. And next thing you want to do is shop around for the best rates just like you want to buy the first car you’d see without checking out other options, you definitely shouldn’t settle for the first mortgage rate you’re offered. Buying a house is a big deal, it’s going to have a big impact on your finances. So you want to make sure you’re getting the best rate possible want to talk to at least three different lenders or mortgage broker to see what rates they can offer you. And for first time homebuyers out there they’re actually special loans and programs just for you. So make sure to check out downpayment assistance loans as well. Now tip number four, you have to get your emergency fund in order. I know it’s exciting to buy a house and you might be tempted to put every penny you have into your down payment or your monthly mortgage. But trust me you want to keep some money in the bank because when you own a home, there are always going to be surprises. According to this CNBC article in 2022, homeowners spent an average of $6,000 on maintenance and repairs, maybe you have a leaky roof or your AC stops working in the middle of summer or as an investor and maybe you have to go a month or two without a tenant these things happen and they can be expensive. Having an emergency fund lets you have a safety net keeping you afloat if life throws you a curveball, a good rule of thumb is to have at least six months worth of expenses as your emergency fund saved up aside from the funds you’re using for your home. Now when you’re good with your finances, tip number five is to check the property out in person and do a walkthrough inside as well as see if you’re happy with the location and surroundings. So obviously, for your first home, it’s a good idea to walk through and get an understanding of what you’re getting into check what repairs may be needed at first glance and see if there’s anything you’re uncomfortable with but not just inside. When you buy a house, you’re not just moving into a new home, you’re also choosing your neighbors, maybe you have neighbors who love to party, or have kids who always run around, these are things you need to consider. So try to visit the neighborhood at different times, like at night or on the weekends to get a feel for what it’s really like. And not just that go outside and see what the noise levels are. We always like to check if there are any loud highways or airplanes flying by that’s going to cause a lot of noise and then go inside to see if it’s pretty soundproof or not. And of course, when you’re buying you should see if you’re comfortable with how close you are to different things you need to be around. Like for example, maybe the nearest grocery store is further than you wish or maybe you prefer to be closer to downtown. Most likely you’d have done this betting earlier but just wanted to bring this up as well. And at the same time, you want to make sure you’re not in a high crime neighborhood where you have to worry about your safety so check around and make sure you’re happy with the place and its surroundings. Tip number six is when you’re happy with the house thoroughly check over the purchase agreement should check over these details like the seller and buyer names obviously the offer price financing terms the earnest money deposit amount, any contingencies closing costs and terms and deadlines for acceptance. We’ve actually had times where things were incorrect and it was a good thing we caught it or also we would have had to pay extra. Another step you don’t want to skip is when you’re on the path to home ownership. Number seven is you want to get a home inspection. Now you may have already looked through the home but a home inspection will give you a clearer picture of any issues that might be hiding beneath the surface. And this actually happens after the contract has been signed. And if you have an inspection contingency you have the right to get the home inspected during a specific period of time. If the inspector finds something wrong, you can possibly ask the seller to fix it or try to negotiate or even cancel the contract. Regardless, it’s still good to get an understanding of what other costs you’ll have to incur when fixing up your home. Major things to look out for are roof issues, foundation problems and H Vacher. Water Heater issue and electrical problems that could be fire hazards. These things could be costly and are worth bringing up. You could potentially get a home inspector contact through your real estate agent or find someone through online searching but make sure to check reviews and do your own research. You’re generally looking at somewhere between maybe 300 to $500 for a home inspection report and it might sound like a lot but it’s worth Get to know exactly where you’re getting into with your new home because this will help you gauge if it’s the right move to buy or not. Now Buying a house is a big step but it doesn’t have to be a scary one with a bit of knowledge and preparation. You can navigate the process with confidence. So take your time do your research, get your finances in order and make sure it’s a place you’ll be happy to call home. So I hope you guys enjoyed this episode. Please make sure to rate review and subscribe. It really helps our podcast grow. And thanks again. I’ll see you guys in the next one.
