Being a first-time home buyer can be a very scary and stressful time.
I purchased my first home when I was 18. Luckily, at that time, my soon to be husband (now ex-husband) handled all everything. All I had to do was show up and sign papers. To be totally honest, I had absolutely no clue what was going on with the home loan. I didn’t know what PMI was, or even what our interest rate was. I guess I didn’t really care at that point, to be honest. I was not financially savvy AT ALL!
Live and Learn
Fast forward a few years and I am remarried and now I am the one handling everything. Now, my husband is the one has just had to show up and sign.
And holy man, did I learn a lot! But now I can tell you exactly what my interest rate is and what we are paying on our premium.
Now whether or not you or your partner (or both) handle the finances, it is important to know what you are getting into. Especially if you are purchasing a home with someone. Because heaven forbid something were to happen and you didn’t know anything about your home loan. You could potentially lose your home.
Guest contributor Sasha Belopoljanskijoins us today to share his expert tips on how we can go into a first time home purchase with confidence!
Decided to finally move out of your parent’s?
Finally managed to lay off the avocado toast and ready to buy your first home? Congratulations, you’ve joined a very select club. You’re now ready to move away from the majority solution in the US, which is (yikes!) to live with your parents. But before you sign on the dotted line, there are a few things you need to know.
Note: We’ve tried to make these tips usable for a worldwide audience, though some of the examples use lingo specific to a particular country, such as (primarily) the USA. The general advice stands and should be applicable to you too, no matter where you are. Also, we’re not serious about the avocado toast.
How’s your credit?
Before you start on your home buying journey, make sure your credit is up to scratch. It’s going to be the most important factor in getting approval for a decent loan. If your credit is being dragged down by something that is within your control, do something about it.
Clear some of your debts, dispute anything that’s incorrect, and do everything you can to present your best credit self to your potential lender.
To avoid your credit taking an unexpected tumble after you apply for a mortgage, limit the activity on your account. This means avoiding opening new credit cards or car loans, for example. The focus needs to be solely on your new house purchase. Now is not the time to buy a new vehicle!
Get (independent) advice
Most people don’t opt for professional legal and financial advice when buying their first home.
Sure, they’ll listen to their mortgage adviser and will get a proper valuation of the property they’re about to buy, but the rest is usually just seen as an additional expense. And when you’re about to fork out thousands of dollars, you need to cut corners where you can, right?
You’re about to make the biggest purchase you’ll ever make in your life. The contract you’re signing will lock you in for twenty-five years (or thereabouts!). Do you really think it’s a good idea to put pen to paper before having a professional look over things? The investment in advice at this point of the home loan process can save you a lifetime worth of headaches. Get independent advice. We mean it.
Do your own research
We know, we know. We’ve literally just told you to get independent advice when buying your first home. But just because you’ve hired a fancy financial adviser doesn’t mean your brain should now switch off.
Always do your own research. Remember, no matter how diligent and professional your lawyer or financial adviser is, your pending mortgage is probably not what they think about right before they hit the sack. It’s not what keeps them up at night. Ultimately, you are the one signing that loan document; it’s your responsibility to ensure everything is as it should be.
Avoid the lemons
An obvious one, but still worth mentioning. You need to be extremely careful that the property you’re about to buy isn’t a ‘lemon’. What are the things that make your would-be dream home a certifiable lemon?
Rising damp. Cracking. Structural faults.
These are just a few of the (many) possible examples.
The repairs necessary can turn your dream home into a horrific nightmare. They can be expensive and time-consuming to fix. It’s common to see first-time buyers needing to go to their banks to ask for an additional loan for tens of thousands of dollars.
It’s extremely important that you hire a reputable building inspector to ensure your property doesn’t come with hidden costs. Even if your potential purchase requires some repairs, that doesn’t necessarily mean you need to rip up that contract and keep looking. You can use this as a point of negotiation, with the potential of slashing a significant amount off of the purchase price.
Do not underestimate or overextend
It’s a sad story: happy first-time buyer gets a home loan. They get the key to their wonderful new home and everything seems rosy. Then the unexpected invoices start coming in. Lawyer, inspector, mortgage broker, the whole gang.
A pipe breaks, you need to call a plumber.
Family emergency, you can’t work for a few months.
And because you’ve overextended yourself on your home loan, you suddenly can’t afford your bills.
You know where this is going…
To avoid a painful financial situation, you need to do two things. First, make a spreadsheet with every single possible cost of a potential home loan. Don’t leave a single stone unturned and ensure you have a full understanding of what you’re getting into (more on that below).
Second, ensure you leave enough for a rainy day. Create a budget that is realistic to your situation. Don’t do mathematical gymnastics to convince yourself you have enough money to buy that dream house that’s just outside your budget. The consequences can be painful.
We usually give most people this advice: stay under the preapproved limit at all costs. While yes, it’s true that the maximum limit is something you can technically afford, it doesn’t mean it’s a good decision.
Know your home loan product
It’s downright scary how often a first time home buyer will sign a 25-year home loan without really knowing the ins and outs. They see that monthly payment figure, decide they can afford it, and off they go without giving the small print a second thought.
This type of person asks questions such as these: comparison rate? What’s that?
Legal fee? I didn’t know there was a legal fee! You get the picture.
If you’re already confused, we’ve put together a quick guide of most of the variables you’ll need to consider before choosing your home loan.
Comparison rate vs Interest rate
A number of companies (L&C, Calculator, Lendi etc.) offer up useful online tools for you to be able to calculate your way to your future property. Depending on your country and choice, upon using these tools you’ll be hit with two different rates.
Confused? The interest rate is the rate you’ll pay on the loan. The comparison rate takes into account all other costs (we’ll go over these) and reworks the rate based on these additional amounts. These are some of the ‘hidden’ rates you may have to pay:
● Application fee.
● Annual fee.
● Monthly fee.
● Legal fee.
● Establishment/Settlement fee.
● Valuation fee.
Pay attention to the annual fee in particular. These will run for the duration of your loan. Say you’re paying $299 per annum over 25 years. That’s approximately $7,500, excluding interest.
Note: the advertised comparison rate is based on a set loan amount and duration (e.g. $150,000 over 25 years). This means that the rate should only be used to guide your decision (and calculations!). Once you’ve created a shortlist of mortgage products, narrow down your choices further by doing a manual comparison rate calculation. This will give you the comparison rate for your individual situation.
Principal and interest vs interest-only loans.
The principal is the original home loan amount before interest starts to accrue. It’s the most common home loan type. With current interest rates being so low, it makes sense to carve into the principal so that you can pay your loan off faster.
For most people, the interest-only loans are to be avoided. These loans are literally neverending, as you’re only paying the interest on the loan. However, they’re often used by investors who speculate on the market. They can often use tax breaks to minimize the effect of the interest, and they’ll sell the property for a profit. This has worked extremely well in Australia’s burgeoning property market, but beware: there are signs that prices are starting to plateau (Sydney and Melbourne are even seeing steady drops).
Think beyond the home
Buying a property isn’t just about buying a property if that makes sense. You also need to take the location into account:
● Crime rates. You want to feel safe in your new neighborhood, don’t you? There’s also
another reason: homes in areas where crime is common can suffer a downturn in prices.
● Public services. What’s nearby? Hospitals? Libraries?
● School district. Even if you don’t have kids (yet?), this is a biggie. Schools can be good markers for the overall suitability of a new home. Good schools are generally found in good neighborhoods.
Are you eligible for assistance programs?
If you’re a first-time buyer, many countries have assistance programs to help get your foot on the property ladder. Governments know that millennials, in particular, are having serious trouble buying their first homes, which is why it’s quite possible that you’ll be eligible for a helping hand from your local government. The United States, for example, offers the popular FHA loan.
This means that the loan is insured by the Federal Housing Administration, which allows for a smaller down payment and shaky credit scores. The VA loan system, created specifically for veterans, is also an excellent option for many families. Of course, every situation is different: just make sure that you look for both federal and state programs.
Enjoy the ride!
These tips were not meant to scare you off buying your first property. It’s an exciting time and getting your hands on those keys for the first time is a memorable moment in anyone’s life. Just make sure you also do your homework!
Sasha Belopoljanski is a content manager on behalf of Lendi – a place where you can see compiled expert advice, easy-to-use tools, and FAQs, so you can find the right home loan for your needs.
What did you learn purchasing your first home?
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