Thinking about buying your first home? Here, realtor.com lays out all of the must-know details of purchasing for the first time, whether it’s getting a mortgage, choosing a real estate agent, shopping for a home or making a down payment.
1. How much home you can afford
Because homes are a large expenditure, you’ll likely need a home loan (or mortgage), along with a large down payment. Before that, however, you’ll need to know what price you can really afford to pay for a home. That depends on your income and other variables, so enter your information into a home affordability calculator like the one at https://www.realtor.com/mortgage/tools/affordability-calculator/ to get a ballpark figure of the type of loan you will be able to manage.
Experts typically recommend that your house payment (which will include your mortgage, maintenance and taxes) shouldn’t exceed 28 percent of your gross monthly income. For example, if your monthly (before-tax) income is $6,000, multiply that by 0.28 and you’ll see that you shouldn’t pay more than $1,680 a month on your mortgage.
For a more accurate assessment, visit your lender to get pre-approved for a mortgage, which means your credit history, credit score and other factors will be assessed to determine whether you qualify for a loan, and if so, for how much. Mortgage pre-approval also puts home sellers at ease, since they know you have the cash for a loan to back up your offer.
2. Choose the right real estate agent
While you buy most things yourself, purchasing a home is not so easy. It requires transfer of a deed, title search and plenty of additional paperwork. Plus, there’s the home itself—it may look great to you, but what if there’s a termite problem inside those walls or a nuclear waste plant being built down the block? There’s also a lot of money involved in for the of a down payment, loan, etc.
So, before you make a massive payment, you will want to have a trusted real estate agent by your side to explain the entire process. Make sure to find an agent familiar with the area where you’re planning on purchasing because the agent will have a better idea of proper expectations and realistic prices. Also make sure to interview at least a couple of agents, because once you commit you will sign a contract barring you from working with other buyer’s agents.
3. Know there is no such thing as a perfect home
You’ve likely dreamed about the ideal house and don’t want to settle for anything less. But understand that real estate is about compromise. As a general rule, most buyers prioritize three main things: price, size and location. Realistically, however, you can expect to achieve only two of those three things.
So you may get a great deal on a huge house, but it might not be in the best neighborhood. Or you may find a nice-sized house in a great neighborhood, but your down payment is a bit higher than you expected. These types of trade-offs are par for the course, so find something you can live with, grow into and renovate to your taste.
4. Do your homework
Once you find a home you love and make an offer that’s accepted, you may want to move in right away. But don’t purchase a home or make any payments without doing your due diligence, and add some contingencies to your contract that will give you the right to back out of the deal if something goes wrong.
The most common contract contingency is the home inspection, which allows you to request a resolution for issues (such as a weak foundation or leaky roof) found by a professional. Another important first-time home buyer addition is a financing contingency, which gives you the right to back out if the bank doesn’t approve your loan.
If they believe you’ll have trouble making a payment, a mortgage lender will not approve your loan. A pre-approval makes the possibility of having your loan application rejected much less likely, but a pre-approval is also not a guarantee that it’ll go through. You also might want to consider an appraisal contingency, which allows you to back out if the entity giving you a loan values the home at less than what you offered. This will mean you will have to come up with money from your own pocket to make up the difference.
5. Know your tax credit options
The first-time home buyer tax credit may have gone by the wayside, but there are other tax breaks of which new homeowners might not be aware. For example, the mortgage interest deduction is a boon for brand-new mortgages that are typically interest-heavy.
If you purchased discount points for your mortgage, essentially pre-paying your interest, these also are deductible. Some states and municipalities may offer mortgage credit certification, which allows first-time home buyers to claim a tax credit for some of the mortgage interest paid. Check with your Realtor and local government to see if this credit applies to you.