For many, the American dream still means owning a home, and with earnings on the rise and mortgage rates relatively low, that dream has become more reachable.
But if you’re thinking about purchasing a house or an apartment, you need to become familiar with the basics of ownership. Educating yourself is essential before you act.
Here’s our advice:
Figure Out How Much You Can Afford
Looking at houses is the fun part. Purchasing one is about money. It’s not so much your salary or household income that matters. It’s the mortgage you get, since the amount you borrow and the terms of your loan determine what size home will fit your budget.
The national median home price is $225,000, though prices in big cities are higher, as is true of high-income states like California, where it’s $550,000.
So let’s say you’re thinking about a $300,000 loan. Upload that figure into a mortgage calculator (there are good free ones, including this one and this one.)
At 4.5 percent, over 30 years, the loan will cost about $1,500 per month. Can you afford that much? Do you have student loans or other debts that will prevent you from making the payments?
If you can swing it, divide that $300,000 by the average price per square foot in your zip code -- you can get that information from a real estate broker or online -- and you’ll have a general idea of how big a place you can get for your money.
Let’s say home prices are too steep in the area you want. Perhaps there are options nearby that are more affordable, particularly if you see signs of gentrification and you’re willing to wait for improvements. On the other hand, if you’re set on being in a hot neighborhood, accept that you might have to settle for less space.
As you push the numbers, factor in closing costs of the sale, which include legal fees and a property inspection, as well as annual real estate taxes and homeowners insurance.
And you’ll need a down payment. Many first-timers assume they have to put up 20 percent of the purchase price. Usually that’s not true. It can be as little as three percent.
Get Pre-approved For Your Loan
There’s an application and fee but you’ll begin the journey. A lot of lenders are out there, and the mortgages they offer are based on where you live, your credit score and the type of home you want (single family, condo, etc). Those and other factors determine the rate. Start the process before you go looking at properties. If your credit score is low but can be raised, it could pay to try to do that first. You’ll learn fast that rates do vary. Find a lender you trust and bring them onboard with your plan.
Work with a Broker
The broker’s job is to represent your interests, so be specific about what you want. Tell the rep your budget, your desired location and priorities. Is the most important thing having three bedrooms? A renovated kitchen? Outdoor space? Good school district? Low taxes? Proximity to a park, shopping, dining, nightlife? A good way to evaluate a broker is whether she shows you places that match what you’ve asked to see. If not, find someone else. Consistently looking at similarly priced homes is a great way to discover value. Sellers typically pay the broker’s fee, by the way, though some seek to recoup that cost by raising their asking price. The fee is usually split between their broker and yours. Sometimes you can claim part of it yourself. Ask. Once you decide on an offer, make it in writing.
Get the House Inspected
A termite infestation or faulty foundation aren’t the only potential nightmares. A good inspection can reveal mold, suspect plumbing or electrical wiring and potential obstacles should you want to renovate. If you discover problems, but they can be fixed, start discussing how much less you’re prepared to offer. Purchase contracts typically have a 30-day exit clause, so you get one month to complete your due diligence.
Reach a Bit
If you feel slightly uncomfortable about how much you’re spending, that’s not a bad thing. Why? Because a few years down the road, when you’re earning more money, the monthly payments will seem less of a burden. And unless you do an expensive addition to your new home, it won’t grow. Your needs might, however. If you have a child, or take on a new business, or suddenly start working from home, you’ll appreciate the added space.
Be Realistic About Features
It’s generally true that upgrading kitchens and bathrooms is money well spent. So a home with shiny new appliances or fresh tiling around the shower could jack up the sales price. And the opposite is true. If you’re handy or have access to a trustworthy contractor, you can save plenty by buying a place in need of those renovations. It’s also OK to just really want something because you want it. Like a pool or a landscaped garden. But know that some features don’t actually add much value to a house.
Make Use of Free Resources
The feds offer great terms on down-payment help through a program called FHA. You have to have a 580 credit score, but the rates are just 3.5 percent and the loans are fairly easy to get. This link provides the basics. Check out this story in Forbes, which includes tips for first-time home buyers, as well as this guide. This one lists five mistakes to avoid. And here’s another 26 tips from various experts. Note the attractive options if you happen to be a veteran or member of a credit union. This report from Business Insider ranks median home prices for every state, as well costs per square foot.
Meredith is a Philadelphia native with a bachelor’s degree in Integrated Marketing Communications from Duquesne University and has worked in digital marketing for over seven years. She’s passionate about writing to women to help them feel more confident in their financial lives.
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