For many, buying a home is the most expensive purchase they will ever make. Here are twelve key things to consider.
- Think long run
The home is usually the single most significant investment most people make. Also, it is the center of the family world and represents stability for many people. According to Realtor Magazine, the homeowner who sold in 2016 had lived in their home an average of 8.3 years. This is a record high, so the trend is toward more, not, less, stability. 46% of homeowners stay in the first home they purchased for more than a decade.*
It is essential to buy a home that you want to stay in for at least five years. If the home does not have everything that you deem as essential, make sure that it can eventually be changed into what you really want.
- The home should be to improve your life – not to make a profit
The home is not just where you put your money, its where life happens. The home is where your family will spend most of their time, you celebrate important events, family and friends will come to be with you, you raise your family, you do homework, you cook, and you read and relax. Also, the housing market is too volatile in the short run to make price predictions. Think in terms of the life you want versus prices and profits.
- Focus on what is important
There is and has been a housing shortage for many years. Make a list of the things that are most important to you. Then, prioritize the list and separate those things into “must-have’s” and “like-to-have’s.” Any home you buy should represent most if not all of the “must-haves.” Do not overpay for the “like-to-have's.” You may find yourself wondering why you spent so much for the home and the fault will lie in those shiny “like-to-have's.”
- Make a budget and do not stray from it
Set a budget EARLY in the process. The budget and the “must-have’s” should be your guide. 29% of homebuyers exceed their original budget. There is a pattern of overpaying. Zillow’s data shows that urban buyers are much more likely to go over budget (42%) than suburban (25%) or rural (20%) buyers.* Of course, the location for a home will be a large determining factor in the budget.
- Strive to make a 20% down payment
If you can afford it, a 20% down payment is ideal for three reasons:
- PMI – if you cannot put down 20%, you will end up paying PMI. This will add costs to your monthly payment. Depending on terms, some PMI’s can be eliminated once you have 20% equity, but some cannot.
- Better position to make an offer. If you can put down more, you will feel more confident making an offer. Zillow research found that buyers with higher down payments make 2.4 offers on average, compared to 1.9 offers for buyers with lower down payments.*
- Less financial risk – a larger down payment means less financial risk in that prices will have to decline further for you to be underwater (what you owe is greater than the value of your home).
- Six-month strategic reserve
Of course, saving for a down payment for a house is hard enough for most people, but the best situation to buy a home is to also have some reserves in case things go south. Most financial advisors recommend 6 months of emergency reserves in a separate account to pay for basic bills in case of an emergency. The reserve also provides another important benefit when buying a house; peace of mind.
- Pre-approval and a fixed-rate mortgage
Before you go looking for a home, get pre-approved. Pre-approval not only lets you know what to look for, but it also puts you in a much more powerful negotiating position when you find the house of your dreams.
Also, with rates at historic lows, it probably does not make sense to get an adjustable-rate mortgage. Lock in today’s fixed rates that are at historic lows and do not try to squeeze a little bit more house out of your down payment and risk higher rates in the future.
- Shop for your mortgage
Too many homebuyers do not comparison shop for their mortgage. As we have said, for many people the home is the largest purchase that will be made in a lifetime. That purchase will be financed over 15 or 30 years. Differences in mortgage terms can add up to serious money over a period of decades and it is, therefore, wise to speak to different mortgage companies and banks. 52% of buyers only speak to one mortgage provider.*
Make sure a lender caters to your specific needs, has the most competitive rates, and has a history of closing on time.
- Make sure your house payment is not more than a third of your income.
Lenders will be looking at your ratios, but make sure you set your own comfort level by confirming that your housing costs are a reasonable percent of your income. Leave yourself a comfort margin.
- Be willing to walk away.
Manage your expectations. Keep in mind the initial goal of the home search. Be willing to walk away if it is not a good deal for you. By knowing ahead of time that you are willing to say “no”, you will be in a better negotiating position and feel more confident about your decisions. There will always be another house.
- Do not waive inspections
There are times, especially in a very competitive environment, when a buyer may be tempted to waive the inspection to make an offer seem more competitive or because the seller asked for it. Do not do it. The risks are enormous. What looks good to the naked eye, may conceal very expensive problems. For example, the typical buyer won’t be able to spot asbestos, nor will they see evidence of termite infestation or a leak inside the HVAC system.
Some possible alternatives would be a pre-offer inspection or agreeing to move with an inspection in just 2 or 3 days.**
- Do not buy a home with the following problems
You are in the market for a fixer-upper, so you are expecting to pay less for a home because it has some issues. Here are eight issues that should stop you from buying a house.
- Faulty Foundation – If the foundation is crumbling, cracking or falling apart, the home is probably not far behind.
- Old Electrical - If the home has old knob and tube wiring or the electrical box was not built for the number of amps or volts needed, it could cause a fire in the future and to fix it with all the wires, outlets and box could run you well over $10,000.
- Extensive Pest Damage – If the home has termites that are invading every stitch of wood so much so that the house is being held together by a thread, you’ll probably want to pass.
- Condemned – If the house has been condemned by the local government, it may not be worth the fight.
- Buried Oil Tanks – Before electrical heating, many homes had oil tanks buried in the backyard to funnel propane to the home. Today, they are considered environmental time bombs.
- Major Mold – A little mold around the base of your tub isn’t a big concern, but if there is evidence of mold in a basement, odd, musty smells, or if someone has gotten sick in the home because of toxic mold or black mold, this may be a bigger undertaking than you need and an expensive one.