Buying, renting, investing, or entering into the real estate market in any capacity can be a daunting prospect for many. On the one hand, you have the prospect of buying your dream home, and on the other, it is also imperative that this ends up being a sound financial decision. It’s important therefore that you do some basic groundwork in terms of research before opening up your wallet, especially given the state of the housing market today.
Despite what you may think, looking at actual properties to rent or own is pretty far down on the list of things you should be considering when entering the real estate market. Steps one, two, and three should all be about establishing your financial situation and setting your budget before going through with looking for a home. In the first place, it’s important to assess the amount of debt you are already in, and what type of debt category they fall into, be it short-term or long-term.
One useful metric to use in this instance is your debt-to-income ratio (DTI), both personally, and as a family unit, if any. The US Consumer Financial Protection Bureau recommends that prospective buyers maintain a maximum DTI ratio of 43% or lower. Looking for housing without having your existing debt in control is crucial before incurring more. You should review any credit card debts, any installment loans that may have been incurred in making larger purchases, and student loans.
Once your debt is under control, this puts you at liberty to actually start reviewing your actual budget. The budget should not stop at the price of the house itself, as there will be many other costs involved, beyond the mortgage payment. Other related expenses include homeowner’s insurance, maintenance expenses, repairs, furnishing expenses, property taxes, and security deposits. In the case that you need to borrow money, lenders will also likely need to be provided with security, or two months of reserve payments in the case of mortgages.
Getting pre-approved for a mortgage is the next step, which will enlighten you in terms of just how much purchasing power you have at your disposal to buy a home. Emotionally, it will also protect you from the disappointment of a harsh reality check going forward. This will also ensure that your real estate agent has that much more confidence in making offers on your behalf, as getting preapproved will position you as a serious buyer in the market—some real estate agents will not even take on a client that hasn’t been preapproved.
Something important to remember is that being approved to borrow a certain amount of money from the bank does not equate to you actually being able to afford it. It’s more prudent that you shop beneath the budget, which will allow for more leeway to bid above the asking price if necessary. It’s also important to remember that your expenses will not cease once you’ve made your purchase—your home will incur maintenance-related expenses throughout your ownership, whose impact on your daily budget will have to be accounted for in the future. One rule of thumb in this respect is that homeowners put 1-3% of the value of their property aside for maintenance and other costs each year. Older or larger homes with amenities that need regular upkeep such as a pool or jacuzzi will likely be even more expensive to maintain.
Factors such as property taxes, proximity to schools, availability of parking, and availability of amenities within walking distance will affect the desirability of a neighborhood, as well as the price of the home. Before actually getting in touch with a realtor, it is also useful to decide on the type or type of home that would best suit your needs. A few common categories of housing are single-family homes, duplexes, condominiums, and townhomes. The living space, privacy, and amenities will differ depending on the category of the home.
The next step would be selecting a real estate agent who can meet your needs and guide you through the negotiation and closing processes. You can talk to people whose word you trust and who have also bought homes recently for agent referrals. It is also best to talk to several different agents to get a better idea of what you can expect for your budget, as well as ensure that you pick the best out of the options available to you.
One good question to ask potential agents is whether they have actually worked with first-time home buyers before. Have an honest conversation with your agent about the price range you are willing to entertain and make the most of walk-throughs and open houses to evaluate the property as well as to learn about what you need to look out for when inspecting a home. These will give you an opportunity to meet with other prospective buyers and learn from their experiences in house-hunting in your area.
In sharing these experiences, you may be able to receive advice on tips and tricks on how you can negotiate savings for yourself. One such method is asking whether the seller would be willing to pay for repairs and maintenance checkups beforehand or lower the cost to account for them. Some sellers may even be willing to pay some of the closing costs. The entire experience of buying a house is a journey filled with many obstacles. However, it is important to keep yourself open to the experience every step of the way. In the end, the experience will be a part of the story of how you found your dream home.
(Theruni M. Liyanage)