When you buy your first home it will be a big deal. One of the biggest of your life. Most new home buyers could save themselves a lot of headaches and heart aches if they had just a little more information. I sold real estate for many years and most buyers chose homes that were at the very upper limit of what they could qualify to borrow. The end result is they wound up with homes with little to no equity and a huge mortgage debt they could barely afford. Did I try to talk them out of it? Of course not – it was my job to sell real estate. I also believed it made sense at the time.
We were all told the smart thing was to use other peoples money. This was leverage, this was power. Borrow as much as you can and don’t spend your cash, if you have any – and most people didn’t. In theory all seemed well. If a buyer had a good job, and could make the payments then everything was O.K. So long as they had the income. Even that wasn’t a big deal because most people with good jobs could usually find another job if something did happen, such as their current company going out of business etc.
One other objective was to keep the mortgage payment as low as possible while still getting the maximum loan amount. The way to do that was to get as long of a term as possible. That meant a 30 year mortgage. Do you know what the amortization schedule looks like on a 30 year mortgage? It’s a sad and scary thing. For years most of the payment goes to interest only with just a small amount being applied to the actual principle balance.
This wasn’t considered a problem because real estate always went up in value, or so it was widely believed. Besides who cared if the term was 30 years because nobody was going to keep a home that long anyway. Most people would sell and move within a few years and by then they would probably have enough equity in their current home to sell it and still get a few thousand dollars to use to move or put a down payment on their next home – which would almost certainly be bigger and more expensive. Life was good, even if in truth it was just a fantasy.
The reality is and was that people do lose jobs. Sometimes they can’t immediately replace the lost income, and even when they do it takes time. During the time it takes to get a new job and start generating another paycheck they fall behind on all their debts. They start accruing late fees and all kinds of penalties. Their stress level is off the charts by then too.
The first thing to think about when buying a home is what you can actually afford. I like the all cash method – that means buy only what you can pay for in full right now with money you already have right now. Money that is yours and is not borrowed from any source. That means unconventional housing options more often than not, which is a different topic. I know most home buyers aren’t going to live in an RV, tiny house on a trailer, aboard a boat or in some other unconventional type of housing. Not even temporarily as a means to saving up money to build a more conventional home.
Most people are going to borrow money in the form of a mortgage to buy a home – no matter what anyone else tells them. That’s life. Its just the way it is. So if you are determined to be normal and you are going to go in debt with a mortgage, then at least minimize the potential problems. Get a fixed rate 15 year mortgage and put as much down as you can scrape up. Don’t borrow the maximum amount you qualify for either. Make extra payments to the principle every year. Make sure it goes to the principle balance and not to the interest.
Get rid of as much other debt as you can before you buy a home. Try to reduce or eliminate credit card debt, car loans, student loans and any other debts you have. Set up a personal financial management plan. Most people call this a budget. Know what is coming in and what is going out and manage it. Establish and maintain an emergency reserve fund. This is money for when crap happens and crap will happen.
When you start looking at homes and think you have found the home you want, go back and look at the area at night. Some places are a lot different in terms of noise and activity at night than they are when most people are at work. Stay awhile and look for things like aircraft using your home as a navigational aid. I’m only half kidding here. If your home is in the flight path of an airport or military base its going to get loud. Does it matter? That’s up to you, but better to know before you by it than after.
You need a home inspection. That means a real home inspection – not uncle Bob. Even when you use a qualified home inspector understand they are not all equally qualified. Some are excellent, some shouldn’t be allowed to hold a screw driver or flash light. Even the best are only looking at what they can see at a given time. They are human and can not possibly detect every single defect. So hire the best inspector you can find and take what he or she says with a grain of salt. Go through the home and inspect it yourself too. Preferably twice. Once with your inspector and once on your own. Take pictures.
A good home inspection will cost a few hundred dollars on a typical single family house. If you cant afford a home inspection then you cant afford to buy and house. That may not be popular to say but its the hard cold truth. Wait until you can afford it and do it right.
If you can handle it buying a fixer upper is a good way to get more equity faster. Buy the worst house in the best neighborhood then fix it up. Paint, landscaping, new kitchen and bathrooms and other repairs, improvements and upgrades can add thousands of dollars to the value of a home quickly. On the other hand if you cant do any of the work and or don’t know what you are doing you can lose your shirt too. Single family homes are almost always better than any other type of conventional home. I like them better than town homes, and condos by a long way.
If your life is complicated and unstable – don’t buy a house yet. It will only make things worse. Instead get your affairs in order, get your bills and debts under control and then buy a house when it makes sense to buy a house.