Last year, 31% of homes purchased in the United States were made by first time home buyers.
That included yours truly 🙂
To say that Mrs. TVM and I were nervous would be an understatement. We were in our mid-20’s and literally making the single biggest purchase of our lives.
As a result, I wanted to document both the process we followed as well as the lessons that we learned along the way in order to assist other first time home buyers who are starting their path to home ownership.
Warning: It was nothing like HGTV 😀
Doing the Research
How much can I afford?
The most important step on the path to home ownership is doing the research ahead of time.
For most people, a house represents the largest financial obligation that they will ever have.
As a result, the first question that needs to be answered is “How much am I willing to spend on housing?”
Because housing is the largest of the big 3 expenses, your answer will have a ripple effect on your financial goals.
Once you’ve come up with a number, stick to it. The last thing that you want is to become house poor.
Back in 2018, I attempted to purchase a home that was over my budget. However, I did eventually pull out of the contract after realizing that house would impede on my long term financial goals.
Fortunately, there are no shortage of tools that can help you understand what you can afford.
Both SmartAsset and Nerdwallet have solid online mortgage calculators that can be used to determine what your monthly housing expenses would potentially be.
What are homes in the area selling for?
The next step on the path to home ownership is by casually browsing listings in your area.
This can easily be done using websites such as Zillow and Realtor.
What this will do is level set your expectations on what kind of homes are being sold in your budget.
Furthermore, this can assist with creating a realistic list of what features you should consider essential in a home vs features that are nice to haves.
As an example, it was realistic to have a large yard on our essentials list. However, it would not have been realistic to have included a fully updated kitchen and bathrooms on our essentials list and expect to stay in our budget.
By establishing realistic expectations on both price and features, you can create a housing rubric that will help weed out houses in your area that meet your requirements.
What are other important things to consider?
The path to home ownership also includes things other than the actual home.
Any real estate agent will tell you the most important piece of buying a home is location, location, location.
You can change any part of the house, just not where it is located.
That is why Mrs. TVM and I made sacrifices on our wish list in order to ensure that our house was located in a good school district. So when we start our family, our children will have access to the best schools.
If school districts are important to you, I’d recommend checking out GreatSchools.org’s School District Locator Tool.
We cross-checked each potential listing using this tool to verify whether or not the home was in our desired school district.
Another important thing to consider when buying a home is the crime within the area.
Fortunately, websites such as Realtor and Trulia offer features that can show you both crime density and the types of crimes within potential areas.
Saving for a Down Payment & Closing Costs
What should I do about the down payment?
You now know what houses are going for in your desired area based on your requirements (budget, features, etc.)
The next step is saving for a down payment.
Conventional wisdom recommends saving for a down payment equal to 20% of the home’s value.
If you don’t put down at least 20%, that will result in having to pay for private mortgage insurance or PMI as part of your monthly mortgage premium.
In a nutshell, PMI is a type of insurance the lender takes out that protects them in the event that you can’t pay your mortgage.
However, like many young married couples, we didn’t have a ton of cash on hand.
Therefore, we made the decision to save for 5% down payment instead.
Despite having to pay PMI on the loan – which doesn’t go towards your mortgage balance – there were several reasons why we decided to do this:
- We could have put 10% down, however the difference in our monthly payments was minimal and therefore decided instead to earmark that money for initial high priority projects around the house
- The homes in our desired area area were consistently raising in value, so it would have been difficult to keep up with trying to save a whole 20% with the increased home prices
- As long as home prices keep going up, we could eventually refinance at the higher home value to get rid of PMI
- We wanted to lock in a low interest rate
How much do I need to budget for closing costs?
Closing costs are the ‘cost of doing business’.
They are all the administrative fees, inspection fees, real estate agent fees, and other miscellaneous fees or transaction costs associated with buying a new home.
Aside from the down payment, closing costs represent out of pocket expenses that don’t go towards mortgage loan.
Closing costs can also quickly add up – often between 3% and 6% of the total loan value.
This is was another driving reason why we opted to only put down a 5% down payment. We needed to make sure we had enough money to close the deal.
It’s worth nothing that you can technically negotiate for the seller to pay part or all of the closing costs (aside from the down payment).
However, this technique could backfire if you are looking in a particularly hot area.
All other things being equal, asking the seller to pay closing costs is a less attractive offer then another buyer who is willing to pay closing costs.
Getting a Preapproval Letter
After saving the necessary cash for the down payment and potential costs – it time’s to show potential sellers that you are serious about buying a home.
The best way to do this is by getting preapproval letter.
A preapproval letter is a letter issued by a mortgage lender vetting that you are able to buy a home.
Your mortgage lender will provide you with a preapproval letter after performing a hard credit check.
These letters are good for between 30 – 60 days. Because getting a new letter requires another hard credit check, it’s important not to have your lender pull your financial information until you are serious about buying a home.
A preapproval letter is different than a prequalification letter. A prequalifcation letter may involve either a soft credit check or informally providing your financial information to the lender (without any actual verification of information).
For this reason, prequalification letters are good with helping understanding how much you can afford.
However, preapproval letters make your offer more competitive because this shows that you have already spoken to a lender who has vetted your financial information. This is important because it signals to the sellers that you are less of a risk of falling through on the deal.
On a side note, that is why all cash offers are so attractive.
Because you don’t need to vet anything with a lender – resulting in less friction through the process – an all cash offer should result in a quicker closing.
The Fun Part – House Hunting!
What is the best way to find a home ?
Contrary to popular belief, the answer is not to constantly refresh Zillow or Realtor.
While these third party websites are great for casual browsing – if you are serious about buying a home – you’ll want to view the listings at the source.
And by source, I mean the Multiple Listing Service (MLS).
The MLS is the website where realtors actually create home listings.
These home listings will eventually make their way to third party party websites like Zillow or Realtor. For Zillow specifically, it can take upwards of 24-48 hours to show up after being listed on the MLS.
Therefore, the MLS allows you to see when properties as soon as they are listed on the market. For highly desirable areas, a 24-48 hour time advantage can make all the difference between whether or not you can make an offer on a home.
We were able to advantage of this ‘listing arbitrage’.
The house that we purchased was initially under contract. However, our realtor called us immediately once the MLS status changed from “Under Contract” back to “For Sale.” We were able to jump on the opportunity and be the first to make another offer on the home!
In order to access MLS Listings, you will have to work with a licensed real estate agent.
Should you use a realtor?
The short answer is YES.
The long answer is YES and here is why…
Other then doing our research ahead of time, teaming up with an amazing realtor team ended up being the single most helpful thing that we did while going through the home buying process.
We decided to use a realtor for several reasons:
- Realtors have direct access to the MLS
- Realtors keep you grounded and assist with leveling your expectations
- Realtors are experts in what to look for in homes (avoiding shiny rock syndrome)
- Realtors network with other realtors (more knowledge of when homes will be going for sale)
- Realtors can be worth their weight in gold during the negotiation process
I really want to emphasize that last point.
If you don’t use a realtor, don’t have your rationale be that you want to cut costs. If you have a great realtor, the benefits will surpass the costs in the long run.
As an example, here are a few things that our realtor did for us:
- $10,000 decrease in the purchase price down
- $15,000 new roof installed
- $1,500 in electrical work fixed
The $26,500 benefit that we received was more then the cost of our realtor team.
The Inspection, Appraisal & Potential Repairs
What is a home inspection?
A home inspection is an inspection that is conducted by a third party to evaluate the condition of the home.
According the American Society of Home Inspectors, inspectors will evaluate the following components of a home:
- The Home’s Structure
- The Home’s Exterior
- The Roof
- The Home’s Plumbing System
- The Home’s Electrical System
- The Home’s Heating System
- The Home’s Air Condition System
- The Home’s Interior
- The Home’s Insulation and Ventilation
- Any possible Fireplaces or Solid Fuel Burning Applicanace (SFBA)
While home inspections are technically optional, don’t let you that sway you from not getting one.
The couple hundred dollars that you spend on an inspection can potentially save you thousands of dollars in the long run by identifying potential problems that you or your realtor may not have not noticed.
Home inspections offer a valuable opportunity to get more insight into the guts of the home.
If the home inspection finds problems that the seller was unaware of, this can give you more leverage to potentially lower the purchase price of the home.
Our inspection revealed revealed hail damage on our roof – in Florida of all places – as well some major electrical problems that needed to be fixed. All of which was fixed prior to our closing date.
The last thing you want is to end up like Tom Hanks in Money Pit…
What is a home appraisal?
A home appraisal is an inspection that verifies the fair market value of the home. The home appraisal is also used to determine what the property taxes would be.
The home appraisal can result in 3 different situations:
Worst Situation – The house appraises for lower then purchase price.
This means that the bank is not willing to give you the full amount of the agreed upon purchase price.
Assuming the seller doesn’t budge on the price – you would have pay the difference out of pocket between the purchase price and appraisal value directly to the seller.
Neutral Situation – The house appraises for the purchase price.
This would result in the bank providing you a full loan for the purchase price that was accepted by the seller.
Best Situation – The house appraises above the purchase price
This would result in an instant equity in the home (your down payment ‘bought’ more house).
Personally, our appraisal came back a tad above the purchase price, which means we instantly got more equity in the home!
Doing the Final Walk Through & Closing the Deal
It’s time for the final walk though.
The final walk through represents the final opportunity to make sure that the home is in the buying condition and to make sure any additional repairs were completed.
This is the last chance to make sure that any problems with the house are resolved before you complete the transaction.
As a result, you should be as thorough as possible:
- Are all repairs that were stipulated in the contract finished?
- Are there any issues with the landscaping?
- Have all personal belongings been removed?
- Do the appliances work?
- Is there any mold?
- Do the electrical systems work?
- Was their any moving damage?
- Does the HVAC work?
- Does the plumbing work?
- Is there any wall damage?
Make sure to notify the seller or seller’s realtor of any issues that you identify.
Minor issues can typically be resolved before closing i.e. removing personal belongings, etc.. However major issues have the ability o push back the closing date or even enable you to walk away from the deal entirely.
When we did our walk through, the broken down hot tub that we requested to be removed was still there. Fortunately, after bringing it to the seller’s realtor’s attention, they were were able to be remove it before we attended closing.
However, if you are happy with the condition of the home after the final walk though, then the last step is to attend closing.
Closing involves signing a thick stack of papers which will then officially transfer ownership of the home to you 🙂
Final Thoughts
The path to home ownership is a long and winding road.
While it’s important to remain level headed throughout the process, make sure to also have fun and relish the experience! You are becoming an home owner! 🙂
Are you in the process of buying your first house? If you already have a home, was there anything that you wish you knew prior to starting the process?
Thank you for reading! 🙂
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Full Disclosure: Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities, please see my Terms & Conditions page for a full disclaimer.