Dust off your down payment. Here are some tips for first time home buyers who are ready to enter the current real estate market.
I remember how just a few short years ago, I felt eager about jumping into the real estate investing market as a landlady. Somehow, it seemed more compelling then, to try out our luck as real estate investors: the housing market was booming, house prices were catapulting into the stratosphere, and I knew several people with multiple mortgages who were on their way to building their rental empires.
Looking at how things have turned out today, I am relieved that I hesitated and avoided pursuing this strategy (not that I have any more money left to invest 😉 ) while I cautioned many friends to hold off on buying at the housing market peak. Unfortunately, for many people I know, my second opinion fell upon deaf ears. As we survey the landscape of fallen foreclosures and deflated house prices, the irony is that the current period is a much better time to consider buying a house or investing in the real estate market. This buyer’s market is handing us bargains, but I have to admit that it’s not as much fun as it was a few years ago, when everyone was doing so well. Busts can be a bummer.
That said, being a contrarian today will serve you well. If you’re a first time home buyer waiting in the wings to buy a house, then you should feel like that proverbial kid in a candy store. The next few years will continue to be sore ones for the real estate market, so it’s a good thing you waited (to buy your house) — you’ll now be getting good value for your money.
The following tips are for first time home buyers who are entering the real estate market at this opportune time. Note that these tips are meant to be “timeless” so that they remain useful regardless of when you decide to buy your first house.
Strategies For First Time Home Buyers
Let’s say you’re in your mid-twenties with a beau who isn’t much older. Full of love and ideals, you set out to look for a house as you are getting married in a few months. You are both working as teachers and your total annual gross income (before taxes and other deductions) amounts to $80,000 or approximately $6,600 a month. Some questions you may be contemplating:
- Would it be better to rent vs buy a house, or would you just waste money by giving it to the landlord?
- Should you buy a new house or an older home?
- Where do you find the down payment for your dream home?
Let’s check out a few pointers:
1. Should you time the market?
Is it time to buy? I’m going to say ‘it depends’. If you’re buying a home as your primary place of residence, market timing isn’t as big an issue as it is when you fancy yourself as a real estate investor. It’s not that difficult to recognize if we’re in a bubble or in a bust; the signs are everywhere — the state of the market is like the elephant in the room that we giddily talk about and which we respond to with a herd-like mentality.
When the bubble was going on, we all wanted to buy. When it popped, we couldn’t all get fast and far enough away. We all have this tendency to charge through the exits at the same time. But this is the time to become a contrarian. Buy when prices are low — whether it be now or in the next few years. You probably won’t go wrong entering the market today, especially in certain areas and markets that have hit the ground floor (at least, as compared to a few years ago!).
2. Gauge housing prices.
This advice is old hat, especially now that we’ve learned quite a few property market lessons: get a feel for prices before jumping in. Check out sales comps data and price per square feet. Talk to real estate brokers about where the values are.
3. Have a big enough down payment.
We’re in an age where we face tighter credit and greater loan limits. It’s a time to be more conservative about getting into debt (in this case, we may not have much of a choice). It’s a good time to think about buying a house if you have enough saved for it, though stretching your housing budget is no longer the “in” thing.
4. Get a home inspection.
Buying a house is probably the most important financial decision of your life. Any mistakes you make may come back and haunt you. For example, consider a young couple I know who bought a recently built house very close to a lake. After 2 years, they had water seeping through the floor of the living room and the seller refused to repair the damage, asserting that they never had a problem. You don’t want to go to court, even if you win the case. So be very careful, have a third party who is certified by the state inspect the house from top to bottom before you sign anything.
5. Do your due diligence.
It’s usually cheaper, especially in today’s market, to buy a used house; many people are facing foreclosure and some would be happy to “unload” their house at a bargain price. But be careful with buildings that are more than 15 years old. Check carefully; don’t be seduced by the seller’s good nature. Ask a certified expert to give it a clean bill of health. Take note that location is very important if you want to resell later at a good price. Check your target home’s surrounding environment and get to know some neighbors. Now is the time to perform your due diligence.
6. Determine how much house you can really afford.
Consider how you’ll be using your house over the long term. As it grows, will your family continue to live comfortably in your house, or will you need to consider upgrading into a larger home in the future? Take into account the possibility (or the reality) of children in your home — a growing family will increase your expenses every month and should be factored into your budget. It’s important to determine how much net income you can count on every month after various payroll deductions.
7. Crunch the numbers to confirm your true affordability.
Go through some numbers to determine your home buying budget. Let’s assume again that your net take home pay ends up being around $5,000. If you want to buy a house, you should not pay more than 20% (recommendations vary on this) of your take home income as monthly mortgage, or approximately $1,000 in this case. Many people face foreclosure today because they can no longer afford the loan. But if you have some savings (if you don’t, you shouldn’t even consider buying a house), it would be wise to give a down payment of at least 10%, and more if you can. These days, calculations will need to be much more conservative than they’ve been in the past.
And so, for this example, our recommendation is to buy a house (used or otherwise) that does not exceed $130,000. If you give $15,000 down, you would have a monthly payment of around $720 (6.44%*, 30 years), to which you should add another $300 to cover escrow**, insurance and an additional $50 to reduce the length of the loan. There is also the possibility of buying a condo if houses in your area are too expensive.
* Recently estimated quote
** Escrow is the amount the lender keeps in reserve to pay taxes and hazard insurance. You should let the lender take care of that so you won’t have to worry about paying the local taxes yourselves. Make sure that you keep a sharp eye on the process as lenders sometimes make painful mistakes (to the detriment of the consumer).
8. Embrace the home buying process!
Now go ahead and start looking, and when you find the house of your dreams, make sure nobody else is aware of your excitement (just like playing poker) before you sign on the dotted line. Find a reputable mortgage lender and haggle with the owners. Make them an offer they can’t refuse!
This post is brought to you by SVB and Jacques Sprenger.
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