Buying your first home is one of the most stressful, yet exciting, moments you can experience. But before you sign on the dotted line, find out what you need to know when buying a house. We've gathered a few of the top tips from the experts on preparing, financing, saving, shopping, and insuring your new home. So without further ado, here are seven things you need to know when buying a house.
1. Know your credit score.
Your FICO credit score is a little like a report card. It takes into account your payment histories, debts, types and length of credit, and whether you have recently applied for new credit. The highest score possible is 850, but the median American score falls in the 720's, which can get you a great mortgage rate. If your credit score isn't quite that high, don't count yourself out.
"Homebuyers who pursue an FHA loan, one of the most common loan types for first-time purchasers, can usually secure a loan if their credit is 620 or over."
But Bankrate reports that if you go much lower than this, you'll have to pay big fees and higher rates, or wait until your score looks better. A few years of faithfully paying several different credit lines and keeping up with bills can have a great impact on your FICO score, and that means better mortgage rates in the long run.
2. Know how to save for a rainy day.
Buying a house takes cash, not just credit. The housing bubble burst long ago, and the days of the sign-and-go loan are long gone. The standard down payment amount to save is 20 percent of the loan amount, but one fifth of first-time buyers go with an FHA loan, which means down payments can go as low as 3 percent. If you buy in a rural area, you may be able to secure a USDA loan with a 0 percent down payment. However, CNN Money reports that any down payment under 20 percent will mean that you must pay for mortgage insurance, which will cost you roughly 0.5 percent of the loan amount each year.
In addition to the down payment, you also need a buffer of emergency cash. Many lenders recommend that you have at least three to five months of mortgage payments stashed away in a savings account. This can save you from losing the house if a major roof repair or plumbing disaster strikes when you least expect it.
3. Know the average closing costs and property taxes for your area.
Closing costs are another expense you'll have to pay with cash, so keep saving. According to Zillow, closing costs can range from 2 to 5 percent of the price of the home. If you're going with a low down payment on an FHA loan, that equates to a second down payment, or more. These costs vary by region, and they include the fees that the lender and others have to pay for your credit report, loan paperwork, inspections, discount points (to get you a lower mortgage rate), survey, titling, escrow, recording, appraisal, and underwriting.
Another regional expense you'll have to account for is the property tax. You will need to research this ahead of time, and factor it into your monthly housing expenses. Otherwise, you may overestimate how much house you can afford, and find out too late that property taxes in your area add another $200 or more to your payments from month to month.
4. Know what you can comfortably afford.
To calculate the right house payment for your budget, you'll need to know all of your current debts, monthly health insurance, car insurance, utility payments, and your usual spending habits. Totaling these expenses can give you a better idea of how much room you have in your budget for house payments. The lender focuses on very specific numbers, however, so it is largely up to you to consider the bigger picture. These are the ratios that banks consider when figuring out what you can afford:
- Debt to income: CNN Money says that your total debt payments each month (including mortgage, car payments, credit cards, and student loans) should amount to less than 36% of your total income.
- House payment to income: The house payment is the sum of your mortgage payment, homeowners insurance payment, property tax payment, and mortgage insurance payment. After you add those up, the house payment should equal around 28% of your monthly income. This ratio can go as high as 33% of your income, if you are comfortable with a tight budget, and the bank approves.
CNN Money advises that you also need to know how much you need to set aside each month for your retirement, your kids' college funds, and any other financial goals you and your family set. These expenses should be anticipated and included as part of your monthly budget before buying a home.
5. Know how much house you need.
Buying big isn't always the best idea, and many home buyers are changing their idea of the perfect house. MSN Money reports, "The average U.S. home is 2,438 square feet. But contractors surveyed by the National Association of Home Builders say that homeowners are increasingly interested in affordable mortgages and greener homes that are cheaper to heat and cool."
The NAHB predicts that by this year, most new houses will fall under 2,150 square feet. If you are buying your first home, chances are that you have two children or fewer, and don't need much more than a three bedroom, two bathroom abode, with decent energy efficiency and a reasonably-sized yard.
It can be easy, and fun, to get caught up in the dream of the perfect open-plan layout with the giant kitchen and game room and a finished basement, but in reality, the bigger house payments and extra utility expenses may turn sour later on. Many home-buying experts recommend a 10-year approach to home planning. Think about how many children you plan to have, plus whether or not you will work from home, whether you plan to keep a dog, whether you want to garden, and how you feel about siblings sharing rooms. Then go with the home that accommodates your 10-year plan with just the right amount of flexibility and creativity.
6. Know how to walk away.
When it comes to deal negotiation, here's what you need to know: He who is willing to walk away wins. This is hard, especially when your emotions are tangled up in a home that you have come to love and want for yourself and your family. That's why it's especially important to keep emotion off the table as much as possible, and keep your eyes on the numbers and the facts. Once you're safely in your new home, let the good feelings flow. But when you're still in the process of buying your house, be on guard against the following red flags, according to Fox Business:
- The neighborhood is going down. If home prices in the area are dropping, crime rates are up, or it just feels sketchy, it may be time to step away. “You’re not buying a house, you’re buying a neighborhood,” says real estate expert Michael Corbett.
- The inspection reveals serious structural issues, or shows that the house needs repairs that total more than 3% of the cost of the home. Almost all homes have issues, and almost all homes pass inspection anyway. That's why it's important to attend the inspection and get all the gory details of what needs fixing, before you continue with the deal. If it starts to get too involved or too pricey, it's probably time to walk away.
- The appraisal is lower than the asking price. In some housing markets, such as Orange County, CA, homes are overvalued across the board, so you may not always be able to find a house priced at the appraisal value. But in a healthy housing market, beware a deal that asks for more than what the home is worth. You might have to pay the difference out-of-pocket.
7. Know how to find the right homeowners insurance.
The lender may recommend an insurance provider, if you don't already have a preference. This might seem convenient, but usually isn't the best deal out there. For the best prices and coverage, you need to get a customized policy that is tailor-made for your home and your budget. An independent agent is usually the best source of help for finding the coverage you need. Independent insurance agents will shop many different insurance providers, to find the most ideal company and policy for your home. Usually you can find an agent right in your home town, which can come in handy if you ever need to file a claim or get advice.