If you are thinking about buying a home, the details and considerations can be overwhelming. You may be getting advice from all directions, from parents or friends or co-workers, and it’s enough to make your head spin. It can help to break the process down into more manageable bites.
Are you ready?
For first-time buyers, this may be one of the most difficult questions. The heart may be ready before the pocketbook! Here are some considerations when determining if you are ready to purchase your first home:
- Are you prepared to stay for at least five years? Buying a home is a long-term proposition. Because of the upfront costs of getting mortgage financing, it can take around 5 years before you can sell the home and break even or make a profit. In some markets, it might be a little less, because home values rise more quickly (Northern Virginia is one of those areas). However, a good rule of thumb is you should plan to stay five years or more.
- Are you ready to put down roots? For people who like mobility in their jobs or just enjoy the flexibility of living in different places, then buying a home may not be the best investment. However, if you feel that your life and career is settled, then you may be ready.
- How are your finances? In general, your home should not exceed 3x your annual salary, and the monthly mortgage payment should be less than 28% of your monthly income. There are mortgage options with slightly more lenient financial requirements, but your are more likely to be able to weather potential future hardships of you don’t overextend. In general, your debt service (meaning your monthly payment obligations, including your mortgage) cannot exceed 36% of your total monthly income.However, don’t look at just your debt. Take into consideration ALL your expenses, such as childcare expenses, medical expenses, insurance, utilities, etc. Plan to put together a slush fund for home repairs and and upgrades, as well as the unexpected expenses. If you can manage the mortgage payment, plus all your other obligations, plus put money aside for a slush fund, retirement, etc., then you may be ready.
- How is your credit? Ever since the mortgage melt-down a decade ago, credit has been really tight. Many lenders will not even consider you, unless you have a credit score in the high 600’s or low 700’s. There are FHA and VA programs that will allow slightly lower credit scores, but you should be actively monitoring and managing your credit long before you start the process to buy a home. If you fall into the lower range, take steps now to improve your credit score. A good score will be rewarded with lower interest rates and more favorable terms, so it’s best in the long-run that you work to get a good credit score and maintain it.
- Are you pre-approved? The very first step in buying a home should ALWAYS be getting pre-approved for a mortgage loan. Sellers will not take you seriously if you are not pre-approved, and many Realtors won’t even show you homes if you aren’t pre-approved. Pre-approval gives the lender an opportunity to evaluate your financial situation and determine whether you will be a good credit risk.Sitting down with a lender is a good idea, even if you aren’t quite sure if you are ready. They can help you decide if your situation is favorable for getting a loan, and they can make recommendations for how to improve your credit or improve your financial situations so you can get approved.
The bottom line is that if you are paying rent, your payment is going toward your landlord’s mortgage and equity. Ideally, you want to be building your own equity! However, you shouldn’t buy a home just to buy a home. It needs to be right for you. Renting avoids all the associated costs of home ownership, like taxes, insurance, maintenance, etc., leaving you with the flexibility to move whenever you want without the hassle of selling. Renting may be the right option for some people, so don’t let yourself be pressured into buying if you really aren’t ready.
Searching for a home
The home search is often described as the fun part of buying a home. It is very seductive to look at beautiful homes and imagine living your life in one. However, you need to anchor your dreams with some practicality if you are going to successfully find your next home.
- Limit your search to homes in the range you are qualified for. In the NoVA area, you are unlikely to get a seller to take a low-ball offer in order to get the home in your price range. There is too much competition. You should plan to offer at least 97-98% of the asking price, and sometimes you may need to offer more. So it’s best if you limit your search to homes that are well under your pre-qualified amount, to give yourself a cushion.
- Make two lists. Before you start your search, make two lists: the “Must Haves”, and the “Wants”. Must haves should include those things that you can’t live without and are the highest priority: proximity to work, schools, or public transport, number of bedrooms, location (suburb or urban), type of home (single-family or condo, etc.), basement, etc. The list of wants should include optional things you’d really like but aren’t the highest priority: types of appliances, fireplaces, garden tubs, etc.
- Get a Realtor. Many people don’t know this, but the services of Realtor are free to buyers. The fee is paid out of the seller’s settlement funds. However, the advice and expertise of a Realtor can be invaluable, especially when you may have to negotiate with a seller. They can help you find homes in your budget and show you what to look for when walking through homes.
Don’t use the listing Realtor to represent you. Their first priority is the seller. To avoid conflict of interest, find your own Realtor who will be fully tuned in to your needs and who will make you the priority.
The best recommendation for a Realtor is a referral. Talk to your friends and ask them who they have worked with and who they would recommend. Look at online reviews on Zillow, Yelp, or Facebook. Then talk to several Realtors before you select one. You want one you have a rapport with and who is knowledgeable of homes in your price range and location, and who is patient with first-time buyers.
- Use the tools at your disposal. There are many online tools to help you search for a home, but your Realtor is also a resource. Online searches will only give you listed homes, whereas a Realtor may have the inside scoop on homes that have not yet hit the market. They can help you narrow the search from the entire universe to the 15-20 homes that truly fit your needs.
- Be an investigator! Research the neighborhoods online, look at proximity to recreation, schools, stores and other amenities. Drive by the home during different times of day to assess traffic patterns. Are the neighbors out walking? Are kids out playing? You want the neighborhood to be a fit, too!
- Don’t overlook diamonds in the rough. Look past paint or decor. That can all be easily changed. Focus on the “bones”, or the things that are difficult or expensive to change. Do you like the layout? Is there enough storage? Is it structurally sound and it good repair? Are there obvious signs of delayed maintenance? These may not be deal breakers, but they definitely could mean you’ll be spending more to turn the home into your “dream home”. However, if you are willing to take on homes that need a little work, then you may find them a better value than move-in ready homes.
- Don’t skip the home inspection. A home inspection provides information you need to know before you move in. You don’t want hidden surprises that could be costly in the future. There could be hidden problems you would never see in a showing. Even if your offer is not contingent on the inspection, you should still get one.
The mortgage process
Once you have found the home and have an accepted offer, you’ll go back to your mortgage lender and complete the full mortgage process. During the underwriting process, the lender will completely evaluate all your financial information, your credit, job stability, etc. Once this part of the process is complete, the title company will ensure that all the legalities are in order and will work with the Realtors and the lender to prepare the settlement documents for closing. During the mortgage process, don’t sabotage your mortgage approval. Changing jobs, buying furniture or a car on credit, going on a big spending spree, or even taking a big vacation can cause the mortgage process to come to a screeching halt. Be patient.
If you are looking to buy a home in Northern Virginia, we are always here to help! We have extensive experience working with first-time buyers, and we love to help clients make their dreams come true. Contact Jason at 703-298-7037 or Jason@JasonAndBonnie.com.