Tips for Buying a Home
Buying a home is a significant purchase that requires careful planning and consideration. From getting preapproved for a mortgage to budgeting for all-in costs, there are many factors to consider when buying a home. This blog post covers a few tips to help you navigate the home-buying process. Whether you’re a first-time homebuyer or this is a move to an upgraded house, these tips will help you make a sound purchase and potentially avoid costly mistakes.
One of the most common mistakes that homebuyers make is waiting to get preapproved for a mortgage. In a competitive real estate market, a preapproval letter is often required by sellers to even consider an offer. It indicates that you’re a committed buyer with the financial capability to make a purchase.
Getting preapproved for a mortgage is the process of applying for a home loan and receiving a commitment from a lender to give you a certain amount of money to purchase a home. This process involves a thorough financial analysis by the lender to assess your creditworthiness, including your income, employment history, credit score, and debt-to-income ratio.
Having a preapproval can speed up the home buying process, and with this in hand, you can quickly move forward with making an offer on the home you’re interested in. Without a preapproval, you’ll need to go through the mortgage application process from scratch, which can take weeks.
When shopping for a home, it’s extremely important to have a budget and to keep this in mind throughout the process. Often banks will preapprove you for a much larger mortgage than you can actually afford in the context of a financial plan with other goals. The bank is simply looking at your ability to make the mortgage payment and will not necessarily consider the full context of your overall financial plan. It is important to leave room in the budget for other goals, such as growing your family (which could lead to increased expenses), planning for financial independence and retirement, and saving for your children’s college education.
Before making an offer on a home, consider your monthly income and expenses and aim for a mortgage payment that you can comfortably afford. Don’t overcommit up front and end up with a mortgage payment that restricts other areas of your life (known as being “house poor”). A good rule of thumb is to ensure that the all-in payment (principal, insurance, and taxes) fits within 30% of your net take home pay. Another stress test is to not exceed 2x your gross household income in the actual value of home. So if your household brings in 400k (before taxes), then 800k would be the max home value we would recommend.
You can read about “how much mortgage you can afford” by checking out our recent blog on this topic- https://ewa-llc.com/blog/two-stress-tests-to-ensure-you-do-not-feel-house-poor-after-a-purchase/
When shopping for a mortgage, it’s important to do your research and compare rates and terms from multiple lenders. Don’t simply assume that your current bank or the first lender you talk to is the best option for you. Here are some things to consider when shopping for a mortgage:
By shopping around for the best mortgage, you can potentially save yourself thousands of dollars over the life of your loan. Don’t hesitate to ask questions, negotiate with lenders, and seek advice from a financial advisor.
Also remember that once you go down this road, real estate agents, and most mortgage officers work on commissions. So be aware of conflicts of interest as you navigate this process.
In a competitive housing market, some buyers may be tempted to waive inspections to make their offer more attractive to sellers. This is a risky move that could end up costing you in the long run. Inspections can uncover hidden issues like water damage, mold, or electrical problems that could be expensive to repair. Skipping an inspection could mean buying a home with significant problems that you didn’t know about. Inspections are an essential part of the home-buying process, and it’s worth the extra time and money to make sure you’re making a sound investment.
Buying a home involves more than just a down payment and monthly mortgage payments. You’ll also need to keep in mind that owning a home comes with additional expenses like property taxes, maintenance costs, and future renovations / projects that you may want to do down the road. It’s important to factor in these costs when considering how much house you can afford. Before you buy, make sure you have a clear picture of the total cost of home ownership. Maintenance can be a very surprisingly high expense on a home over your lifetime.
It’s important not to rush into buying a house, even if you have an assigned deadline (by a bank or builder for example), as this can lead to regret down the road. When you’re feeling the pressure of a deadline, it’s easy to overlook important factors like the total cost of home ownership, the location and neighborhood of the property, and the condition of the home. Rushing into a purchase without considering these important factors can lead to costly consequences later on. It’s better to take the time to do your research, weigh the pros and cons of different properties, and make a sound investment decision that you won’t regret in the long run. If you buy a home, and then have to sell it shortly afterwards, closing costs are generally 6-7% of the home value when you sell (which under normal market conditions would likely put your purchase and then proceeding sale at a loss) if your timeframe ends up being only a few years.
Ultimately, whether to buy or rent a home depends on individual circumstances, priorities, and preferences. While financial considerations are certainly important, these factors should be used as a guide to help you make the best decision for yourself / or your family.
If you ask around, there are certainly success stories and failures in real estate, and in my experience advising clients, the success stories are most often a result of good market timing and being in the right place at the right time. While homeownership may feel like a step forward, the reality is that after taking into account all the ongoing maintenance costs, the actual rate of return on the purchase may be lower than expected.
We generally recommend that lifestyle considerations should take priority when deciding whether to buy a home, with financial factors (meaning counting on the home as an investment) being a secondary consideration. Renting is often stigmatized, with the common belief that it is “throwing money away.” However, in some situations, renting can actually be a better financial choice than owning a home. This is because you could invest the difference that you would have otherwise paid in maintenance, taxes, and insurance (which would not be applicable in renting). You also avoid all the commissionable transactions of buying and selling a home. Statistically most people move several times throughout their life, which can be costly if you are a home owner each time.
Here are a few additional resources on the “rent vs own” decision:
In conclusion, buying a home is a big decision that requires a lot of thought, planning, and research. By following these tips and taking the time to make an informed decision, you can be well on your way to finding the perfect home. Follow the two stress tests referenced in this article, and make sure it’s a lifestyle decision (without justification), and you will potentially be in good shape with your decision.
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