How to buy a house when you know nothing about buying houses
How broke are you, really? And other questions to ask yourself before buying your first house.
You’d think that, at some point during our formal education, someone would sit us down and explain to us how to buy a house. The conversation might start like, “One day, you’re going to spend hundreds of thousands of dollars on a home for yourself (and maybe a family). That’s a lot of money but don’t freak out. Here’s how you should go about doing that.”
Maybe you’re lucky and someone gave you that talk. Or maybe you’re like me, and the majority of the population, stumbling around with our wallets open hoping a house falls into our laps.
First things first, close you wallet and open your laptop. You’re not going to want to embark on this adventure with a smartphone and a blank check.
Everything I’ve learned about home buying has been through trial and error and lots of online research. I wish someone had sat me down and gave me “the talk” about home buying. No one did. But maybe I can be that person for you.
My absolute favorite resource is Consumer Finance’s Owning a Home tool. It walks you through each step of the process and allows you to double-click into words or topics you need more info about (hello: ARM, FHA, APR, TGIF, J/K, etc.). It also has great printable worksheets that you can bring to meetings with lenders, real estate agents, and your attorney. No, this post isn’t sponsored, it just happens to be the best resource out there.
What it doesn’t give you, however, is some of the more soft advice and worse-case-scenario things to be prepared for. And that is the tricky stuff. Example: Try finding best practices for firing your real estate agent. Or how to legally protect yourself when buying a house with your not-yet-spouse. #StickySituations
But before we get into the meat of home-buying, the first thing you have to do is decide to actually by a house! Let’s get started.
The top 5 questions to answer about yourself before you decide to buy a house:
- Do you have a job? And have you had it for awhile? And do you think you’ll have it for a while longer?
- Do you like where you live/plan to live enough to hang out there for at least three years?
- Like how broke are you, really? We’re all “broke,” but if you lost your job tomorrow, could you float on your savings for four to six months?
- Is this your forever home or a place you plan to live for awhile so you don’t have to pay rent anymore?
- What do you want to do next? Like when you’re done with this home?
Do you have a job? And have you had it for awhile? And do you think you’ll have it for a while longer?
This is important for a few reasons. Namely, you have to be able to pay your mortgage and, to do that, you’re going to need steady employment. So having and keeping a job should be priority one. Also, if you have a work history full of holes or transitions, it might throw up a red flag to your lender. They could require you to jump through more hoops to get approved and you could also end up with a higher interest rate. And, pro tip, if a big part of your salary is based on bonuses, in some states you need to be at a company for at least two years for that to count as part of your income. For example, I’ve been at my current company for 18 months and receive a 10% yearly bonus. Since I haven’t been with my employer for a full two years, that significant part of my salary was not included in my income. This affects how high of a loan you can qualify for. So you might want to wait until you’ve been at the same company for a year or longer before you begin shopping. To find out if these rules apply for your state, call your bank or a lender you’re considering. They will definitely know.
Do you like where you live/plan to live enough to hang out there for at least three years?
Buying a home is kind of a long term commitment. The average first time home buyer spends between five and seven years in their first home. I mean, nothing is forever but you should probably enter into this thinking about at least three summers worth of barbecues on the back deck. Basically, the money you put down to buy the house (down payment, closing costs, inspection fees, etc.) represent a pretty substantial opportunity cost and it’s going to take a few years to recoup that value within your house (fingers crossed for no more recessions, y’all). There are options though. Let’s say you get a fabulous opportunity across the country and decide you’re going to have to leave. Fancy yourself a landlord?
Like how broke are you, really? We’re all “broke,” but if you lost your job tomorrow, could you float on your savings for four to six months?
Let’s do some quick math: (Home Price * 20%) + (Monthly Expenses * 3) = Minimum Funds Needed to Buy a House. This mess is expensive and kind of a big deal. Don’t be that guy who boasts about only having a $1 left to his name after closing. Bro, what’re you going to do if your water heater goes out and it’s not covered by the home warranty? #ColdShowers4Lyf The biggest risk in buying a home is the dependence on your financial security. You pay for fixes. You pay for maintenance. You pay for updates. So you need to have financial stability and a cushion so you can afford whatever comes your way. And yes, that might mean putting off your home buying dream for awhile. [This is where you should navigate to ConsumerFinance.gov and download their budgeting worksheet to see where you are now and exactly where you need to be financially to afford a house.]
Is this your forever home or a place you plan to live for awhile so you don’t have to pay rent anymore?
If you’re curious about whether it’s better to rent or buy in your area, I highly recommend this interactive calculator from New York Times. Just because owning a home is the old American dream doesn’t mean it’s right for you. But if it is, know that most of us won’t stay in our first homes for more than five years. So I encourage you to consider this first purchase as an investment opportunity. A forever home is an emotional purchase — you’re imagining holidays around the wood burning fireplace, sipping cocktails on the terrace, and drinking coffee at the marble island (or whatever makes you gooey inside). But buying a house is a business opportunity. If you approach your first home with this in mind, you’re going to be miles ahead of the rest when it comes to buying House Two. Your realtor really needs to know the answer to this question too so they can steer you in the right direction. This will determine if they pull houses in, say, an up-and-coming neighborhood that will be mad gentrified in a few years or a low-key fixer upper that some elbow grease could add equity into. Loan structures can vary based on a traditional home purchase or a renovation/construction situation, too, so your lender will need to be in the loop as well.
What do you want to do next? Like when you’re done with this home?
Yes, I’m telling you that you need to already be thinking about House Two. You’re buying a house, dude. Time to think long term. (If commitment is a problem for you, start here.) Much like question four, this is going to help you understand your goals in buying House One. This is an opportunity for you to make a little bit, or a-lotta-bit, of money in a few years so be thinking about your options. Do you want to sell? Or is this property worth holding onto — in which case, do you want to become a landlord? Things to think about…
If you’ve thought through the answers to these questions and are like, “Yes! I’m in. What’s next?” I recommend you navigate over to ConsumerFinance.gov for next steps (and no, this post really is NOT sponsored). In addition to completing the budget exercise I linked to, you’ll also want to check your credit report for any errors. If you see errors in your credit report, you need to get them resolved before you start reaching out to lenders. And finally, you’ll come up with an idea of what you want to spend on a house plus how much money you’ll need to close. Once you have this information, it’s time to begin. What happens next is when buying a house actually began to feel real to me. Exciting! Terrifying!
This was Part 1 of a series on how to buy a house when you know nothing about buying houses. Part 2 is about choosing lenders, realtors, lawyers and more. Read it here.