The homeownership rate in the U.S. is about 66%. Of the 34% left that are renting, 76% say they would rather own their home, so I’m writing this for you guys. I thought about all the things I knew, but more importantly, the things I wish I knew before buying my 1st house.

Know What You Can Afford

The 1st thing you need to know is how much you can afford to spend on a mortgage every month. If you live in an apartment and are just barely getting by paying $1400 per month. Don’t buy your first house if it will cost you $2000 per month, unless you plan on house hacking. Stick to your budget.

House Hacking

a strategy that involves renting out portions of your primary residence to generate income that is used to offset the cost of your mortgage

This is not a time to keep up with the Joneses or impress your friends with your fantastic new house. I promise losing your home won’t affect them, but it will affect you. It doesn’t matter what kind of house your cousin or brother just got. You don’t need the same size house as your parents…and just because your coworker with the same job title has a huge house doesn’t mean you need that, too.

Pre-Approval Letter

You are going to go to a bank to get pre-approved for a mortgage. If the bank’s pre-approval number is higher than the number you came up with…IGNORE THE BANKS NUMBER!!! When we were buying our first house, we were paying $740 per month in rent. We had wiggle room in our budget to pay up to $900 per month, which at the time was about $130K. When I went to the bank, I was pre-approved for $250K.

A lot of realtors want to see a pre-approval letter, because they don’t get paid if you don’t buy. We were specific about what our price range was, which was like finding a needle in a haystack, but they kept trying to show us houses that were around $200K. We kept firing agents until someone understood our needs. Pick a number and stick to it, because there are expenses with owning a house, and if you are already beyond your means, you’re screwed when something pops up!

Understand the Costs for Buying Your First House

There are a lot of costs associated with buying our first house. There are going to be some upfront costs(closing costs). We have to pay for these before we get the keys. Then we have recurring costs…some yearly…some monthly.

Buying Your First House: Upfront/Closing Costs

The bank is going to need some guarantees that your house is ok and the buyer is going to want to know you are serious. This is why these costs are usually paid before you get the keys, and can’t be rolled into the load in most cases.

Down Payment

Let’s start with the most common cost, you need a Down Payment. This number will vary based on the type of loan you get. It can be $0 for a VA Loan or USDA Loan. You may pay 3.5 – 5% for an FDA Loan. It can also be 20% for a conventional loan. Those are just a few loans and potential down payments, but the options are truly limitless. There are also government programs that can assist with this.

Earnest Money

This is something you will usually pay the seller when you put in an offer. The amount will vary, as this is very negotiable. When you put the house under contract, the seller can no longer accept other offers. If you fail to complete the purchase, the seller wants to be compensated, and that is what this money is for. If you complete the purchase, this money can go toward your closing costs. Again, it’s all negotiable. 

Home Inspection

Unless you are in the construction business, you are going to want to know the kind of shape your house is in before buying your first house. Truthfully, even if you are in the business, it’s a good idea to get the house inspected. The last thing you want to do is get a house, thinking it was a great deal, $20K less than homes like it in the area…BUT you now have to spend $50K to fix the foundation and replace the roof. At the end of the day, it’s up to you, but I highly recommend getting a home inspection for your safety and security. 

Termite Inspection

Like a home inspection, Termite inspections are important. I’m sure we all know why, but just in case someone has no idea what a termite is. It’s a bug that eats wood. Why does that matter….well, most homes are made of wood, and if termites are eating your house…it will eventually fall apart. Again…it’s up to you, but I highly recommend this inspection.

Tip:

Don’t try to save money with the seller’s inspection report. Pay for your own!!!

Land Survey

A land survey tells what the boundaries of your property are. You may be wondering why you should care about that. Well, some of the home’s value is tied to the size of your lot. If it is not correct, that should affect what you pay. Then, what if a neighbor built a fence that is 5 yards over the property line? You have just lost a good bit of space, and what if something happens on their side of the fence, but on your property, and YOU get sued for it? It seems silly, but you should know where your property borders are to protect your investment.

Appraisal

An appraisal tells you and more importantly, the bank, what your house is worth. This is important because the bank is loaning you a certain amount of money based on the home’s value. 

For example, let’s say you are going to purchase a $100K home, and the bank agrees to loan you 80%(you pay 20% for the down payment), and the house appraises for $90K. The bank was going to loan you $80K based on a $100K house. Now that the house was determined to be worth $90K, the bank will only loan you $72K, which is 80% of $90K.

The seller still wants $100K for their house. If you still want this house, you now have to figure out where to get the extra $8K. You were prepared to put $20K down, but can you afford $28K?

Get the appraisal, so you know buying your first house is worth it!!

Lawyer and/or Title Insurance

The title to the house is what determines who owns it. We usually pay a lawyer to investigate this and purchase insurance that says if somehow, someone else owns this house, we can get compensated. In many states, this lawyer also handles the closing documentation. This is different in different states, but Title Insurance is well worth it when we are talking about the potential of losing hundreds of thousands of dollars.

Home Warranty

This is pretty self-explanatory, but even with an older home, you can get a warranty. I would try to ask the seller to purchase this for you in the offer negotiations, but it can be valuable. We had something break within 8 hours of buying our first house. We called the warranty company and had it repaired. A few months later, our AC went out, and we had that repaired. We ended up having three repairs total, and if we had paid for the warranty, it would have been well worth it.

Points

Points are a fee you can pay to the bank to reduce your interest rate. If you are only going to be in your house for a few years, this is a cost you would probably want to ignore. However, if you are going to live in your house forever, a half percent change in interest can be a very large amount of money. Play with a mortgage calculator and see what your savings would be.

Buying Your First House: Recurring Costs

Property taxes

Property taxes are based on the location of your home. Sometimes, you pay county taxes only, but you may also have to pay a tax to your city. The property taxes are what pay for police and schools and parks, and everything it takes to run an area. This is a cost that is generally paid through the bank where you have your loan. They take the money you pay them each month and put it in an account to make sure it is paid every year. This is a part of your mortgage payment. It will not be a surprise to you.

Insurance

Insurance is based on the location and type of your home. The prices vary, so shop around. This is also paid through the bank you have your loan with. The bank pays your taxes and insurance to protect their investment. If your house burns down, they want to recoup their money. This cost is also a part of your mortgage payment.

HOA (Home Owners Association)

Depending on where we buy our first home, we will have to pay an HOA. An HOA is there to provide uniformity and protect the value of your house. There are rules that are set by the HOA that everyone in the neighborhood must follow. If they do not follow these rules, they face penalties/fines that can in some cases lead to the loss of your house. I have my own opinions on HOAs, but this is about costs…not opinions. HOA costs vary wildly and cover a vast array of things. If your house is in an area with an HOA, remember to add this cost to your monthly budget!!

Lawn Care/Snow Removal

Unless you live in the desert, you will probably have lawn care to pay for. Even in the desert, there are trees and weeds to deal with. You can pay someone to take care of this for you, or buy a lawn mower and do it yourself. If you live in an area where it snows, you’ll need to remove it when it comes. Pay someone else or buy the equipment to do it yourself, but either way, there’s a cost.

Maintenance

Maintenance is required for all things, and your house is no different. When you lived in an apartment, they had a maintenance team! You had a problem…you called maintenance to come to fix it. You should set money aside to pay for these things. There is no office to call anymore, it’s all about you! Lights will break, and appliances will need to be repaired or replaced. It would be smart to create a fund to take care of this.

Emergency Fund

This is an account that you build to whatever amount makes you comfortable. $2K would be a good amount for most. This would cover most Insurance Deductibles, as well as most major repairs. It would be enough to replace any major appliance in the house. I prefer my emergency fund to be bigger than that, but that is the preference of my family. Whatever amount you choose, please just be sure you have one set aside!!

Home Types

There are different types of homes to consider when buying our first house. Do we want a house that no one has lived in but you? Would we rather do a little work to our house, while we live there? Do we want to do A LOT of work to our house, while we live there? Maybe we’d rather bring in a construction crew and rebuild the whole house before we ever move in. While there are many options to consider, I’ll give you the pros and cons of the most common.

Buying Your First House: Pros & Cons

New Construction

You’ve decided to purchase a brand new Shiny house! Are you making the right decision, or should you rethink this?

Pros

There can be many upsides to purchasing a new house. The maintenance costs on this type of home should be very low, since…well, everything is new! Most new constructions are built in neighborhoods that have an HOA (Home Owner’s Association). These were created to hopefully provide better protection for the value of your house. This type of house will be ready to move in on day 1. No construction projects are needed. Depending on the contractor you went with, you can get a custom build. This will more than likely cost more, but it should be what you want. New homes also usually come with some sort of warranty, just like a new car does.

Cons

Now for some of the downsides. New homes are typically more expensive than homes that have been lived in before. Anything you buy new is usually going to cost more. There is a higher upfront cost, as sometimes, you have to pay for the lot in cash before the builder will start building.  The only equity you will have in your home is your downpayment. Most builders won’t reduce the price of their home, they will offer different options, when negotiating. As I said in the pros, there will probably be an HOA. The con is HOAs come with a cost of some sort…and they can be very high. This is also a cost that is not part of the mortgage payment. It is in addition to it.

Comfortably Livable Fixer Upper

This is a house that you can live in with no problem, and probably only needs minor things like paint or new appliances that look better to you.

Pros

The biggest plus to this is the lower cost, compared to new construction. Because of this, you will probably have a lower mortgage payment. You can also find homes that don’t have an HOA or maybe one that has a low-cost HOA. This home will be move-in ready, requiring very little more than paint, new carpets, or new appliances. After you make these minor changes, you should also get a small bump in equity. 

Cons

Buying an older home will require higher maintenance costs and not be as pretty as a brand-new house.  This type of home will require renovations, but not a lot. This will limit the number of customizations you can do with the house. It’s also more likely you’ll end up with a property that has no HOA to keep up the property’s values. From here, we head to a level a little deeper, the uncomfortably livable fixer-upper  

Uncomfortably Livable Fixer Upper

This type of home is probably ugly to most and requires some major work. The house can be lived in, but if you are renovating it yourself, it can take a while.

Pros

This type of house will be move-in readyish. You can live there from day one! You will be able to get this house for less money than a similar size house, that is already fixed up, and once you finish fixing this place up, you will have forced a lot of equity. Because this type of property requires so much work, it can be customized as you renovate. 

Cons

Homes that need a lot of work can sometimes be hard to finance, as they don’t appraise as high. Depending on how much work the house needs, some parts may not be fully accessible. This is definitely going to be an ugly house, and you almost certainly will not find an HOA, there. Your renovation costs will be high, and typically have to be come up with from your own money. Most banks won’t finance the renovation.

Complete Renovation

When buying your first house, if this is your choice, it can be a roller coaster ride. This type of home will be the least expensive and require the most, but the potential reward is outstanding.

Pros

This will be the least expensive type of house you can buy. It can be almost completely customized to just about anything you want. You likely won’t have an HOA. You should be able to force a good bit of equity in this type of property. If you are looking at your first home as an investment, you’ll probably get a good return.

Cons

Though this will probably be the least expensive, you will more than likely have to pay for it in cash. There are very few lenders that will finance a home that is not livable. You will also be paying for the renovation in cash. If you don’t have the house inspected we’ll, a house like this can be a money trap! You also need to be careful of the contractor you choose. The wrong contractor can quickly turn your dream home into a nightmare!

Location Location Location

Now that you’ve decided what you want to buy…where will you buy? This is SUPER important!!! You can change just about anything on the interior of a house, but you CANNOT change the plot of dirt it sits on. Pick your neighborhood carefully. It will determine your safety and security, as well as your future equity (Appreciation).

What’s Your Exit Strategy?

I know most of you are thinking, Why would I be thinking about how to leave the house I just purchased?!?  Knowing what your future is will help you determine what you spend and how you renovate.

Death

A good bit of us is expecting to buy our forever home. They want to buy the house, have two and a half kids, put up a white picket fence, and will the house to their kids when they die. There’s nothing wrong with this strategy. It will provide a great foundation for a family to start building memories that can last for generations to come.

Live and Flip

This is a strategy that most use. Just because you are flipping it, does not mean you are doing some major renovation. With a live and flip, you can make a few updates while you live there, but the appreciation that happens with time can sometimes be a big win. Bonus, if you live in the property for two years, you can avoid the capital gains tax that comes with buying and selling a house, quickly in a traditional flip. Bottom line is, if the live and flip is done right, it can provide a great boost to your income or get you into a much bigger house, without having to spend more money.

Rental Property

So you’re buying a house as an investment…smart choice!! If this is your exit strategy, be sure to Analyze the property, so you know you won’t lose money. Trust your numbers and don’t make an emotional buy! Be sure to have an emergency fund for your rental property, so you can keep your residents happy and your investment safe.

You’re Ready to Buy Your First House

There’s always more to know, but you now have a lot more knowledge than I did, I before I purchased my first house. Check your credit, get a pre-qualification letter from a bank (you don’t have to use this bank), and start looking!! I gave a lot of information but take your time. You’ve got this! You’re ready to buy your first house.

“We all learned to walk one step at a time after MANY failures, but we all survived it because we didn’t quit!!!”

-Doss Experiment

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