When I first bought a home, I was scared sh*t-less. It felt incredibly overwhelming and I had no idea how I was going to learn the lingo and ins and outs of the process. You have things like escrow, PMI, FHA loans, and closing costs. Thankfully, the process is easier than we thought because we have realtors and lending agents to help us wit the process.
But even though I have purchased a house, these were 5 things I wish someone would have shared with me BEFORE buying a home.
Go get pre-approved for a home loan first
Before you start shopping and falling in love with a specific home, go talk with a lender and get pre-approved for a loan first. This will give you some really great information like- how much home can you afford on paper, how much of a house payment are you truly comfortable with (keep it less than 30% of your take home pay), what the current interest rates for a mortgage are, and what types of loans you qualify for (which directly impacts the amount of money down you’ll need). You are also able to discuss how to “lock in” your mortgage rate. I’m reiterating here to keep your mortgage payment less than 30% of your take home pay!!! Going over this threshold makes you incredibly vulnerable and in a precarious financial situation.
Aim to have 20% down
Good financial planning suggests having 20% down for your mortgage. Now, I understand that 20% seems like a lot, but there are good reasons to come in with 20%. First and foremost, you avoid PMI (private mortgage insurance) and MIP (mortgage insurance premium). If you qualify for an FHA loan, most first-time homebuyers use this, you are able to purchase a home with as little as 3.5% down.
Sounds great in theory, until you realize that sometimes, the MIP is tacked onto your loan as an additional monthly fee of ($100-$500) for the life of the loan. PMI usually drops off after you pay down 20% of the loan. But that can take nearly a decade. Just do your best to avoid that extra fee and start a savings account earmarked for your a house down payment.
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Try to find a home with a passive cash flow opportunity
I fall under the group of money nerds who believe your primary residence is not an investment. (I’ll go into specifics of why I believe that in another post). However, just because you’re purchasing a home for you to nest in, doesn’t mean you can’t make some money off of it.
Look into house with a larger lot that allows for a tiny house you could then rent out. Or a basement that could be converted into a rental unit. Or if you get super lucky and score a duplex, in some cases, you can essentially live without having to pay a mortgage or at the very least– live super cheaply. Theses types of properties are not always easy to come by, but if you can find one AND are creative enough to optimize how you can make money on your residence you’ll be glad you did.
I purchased my first home when I was 19. It was when the market was crashing in 2008 and I was able to get a brand new home. I then got a couple of my friends to rent a room from me and my portion of the mortgage was a fraction of the house payment. If you’re into the FIRE movement, we now call this “house-hacking.” My house-hacking didn’t stop there either. I rented a room to my brother for 3 years while he was going through school. He got cheap rent. I got passive income.
Just get creative with your properties and figure out a way to make extra money on your property– if possible.
Always pay for a home-inspection (even on a brand new home)
My mom is a real estate agent (let me know if you would like a connection) and we just had a conversation about this. She was at a training and heard of a family that moved into a brand new home and didn’t hire an inspection. Huge mistake! The house they bought was thrown up within 3 months and didn’t even have insulation in the walls. I’m not sure if a home inspector would have caught that, but the important piece here- always pay for an home inspection for used AND brand new homes.
Don’t be afraid to get your hands dirty
Some people prefer move-in ready homes. I get the draw. In fact, that’s where Tony and I differ. I prefer properties that need a little love and he would prefer not to do a damn thing. Neither way is right or wrong, it depends on your skill level and additional cash flow. I personally find that when you have a property that needs updating AND you are willing to do some of the work, you can negotiate further and start to make the home unique to your style and preferences.
I hope this helps you when thinking about your next home!
Of course, if you need help saving for your home and could use some accountability to helping you stick with your day-to-day financial decisions so you can buy your dream home– reach out to me. As a financial coach, my purpose is holding you accountable and helping you create a plan to achieve your financial goals.
Happy house hunting!
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