But you're saying that you don't know where to start? You're not alone. You're also of the mind set that when it comes to buying a home or getting the best loan, the advantages are for the richer and older more established person; someone with a lot of money as well as more knowledge and experience. And yes, you're correct...at least most of the time.
That thinking is a fallacy when it comes to buying your first house or even your first few homes. Typically someone in your shoes will get far cheaper loans, lower down payments, as well as loans that the "richer, fat cats" can’t touch. Why you ask? Well, the short answer is that for decades government guaranteed loans have been available. And many people simply didn't know about them.
O.K. so you want to buy that first house. Forget about Letterman's top 10 list. Here's your 10 easy steps to buying your first home:
1.) Go to a mortgage broker or banker that you have been referred to or know personally. That was easy... but you're got to "Just do it," as the old Nike commercial reminds us.
2.) Have the broker or banker do a credit check as well as a full analysis of your particular situation. It isn't as simple as “You earn this, so you can borrow that”. Have them look at all your debts (you'll need to come clean here). If it doesn’t look like you can get the mortgage you want, ask them what needs to improve on your credit score. It may be as simple as paying off your credit cards or stretching out your car loan to show lower payments. Remember, with an FHA loan you'll only need 3 ½% of the purchase price for a down payment. That's only $3,500 for a $100,000 home, $7,000 for a $200,000 home and so forth.
3.) Find a realtor you like and trust. Just like number one above, find someone you can talk to, gives you the time you need, answers your questions and that you're comfortable with. But not too comfortable. You're going to have to stretch a bit and possibly feel some trepidation or pain as you move forward. It's natural. Personal references for realtors might be a good way to start. Do you know a friend who has successfully worked with an agent? You might want to interview a few agents until one "feels right." You'll know.
4.) Once you're starting to look at properties and areas, figure out the minimum space you'll need to live as well as the minimum acceptable location. No, you're not going to get beachfront property this time around. And if you want extra bedrooms, you may want to wait and get them in another property with people that pay you rent every month. It’s substantially cheaper to have dual purpose rooms, and put up guests on a couch or in a hotel, than pay for that room all year. Don't want to live alone? Do the math on the cost of the extra dedicated bedroom vs. what kind of rent you can command from a current roommate or friend. Remember the old adage: "It's better to turn a roommate into friend than a friend into a roommate." They'll never take care or care for your home like you will. It can put a significant strain on any relationship. Even your best friend from junior high.
5.) One of the secrets to building wealth is to live on last year’s income, not next year’s income. Think about it: living smaller than your income will pay off. Your standard of living will improve almost every year of your life. Pay yourself first each month just as if you're paying rent or a car payment to yourself. Socking away some of your salary religiously (no, we don't mean taking money off the collection plate) each month will build up the savings necessary to get the down payment you need to buy that home.
6.) Once you're chosen the place you like, lock in an interest rate for the length of the mortgage. Most bankers or brokers will usually suggest a 30 year loan. If this is going to be a longer term living situation AND if can swing the payment, go for a 15 year loan. The loan payment will be quite a bit higher, but the interest rate will be a bit lower and you’ll pay less than 50% of the interest that you would have in a 30 year loan over the life of the 15 year loan. Are you planning to retire with a mortgage still on your house, or would you like to get that weight off your back early in life? If this isn't a longer term living situation but more of a starter property, get a 30 year loan so you can save for the next down payment so that you can purchase your second home. Since you'll want to hold onto your first property make sure that the one you're buying will rent for 1% of the purchase price a month or more. For example, a $100,000 property needs to rent for at least $1,000 a month to work as an investment property when you are ready to buy your next property.
7.) Don’t forget to budget for property taxes (1.16% of purchase price annually in San Diego), Home owner association (HOA) fees, if applicable. (we prefer properties without an HOA), insurance of $500 to $1,500 a year and repairs of about 1.5% of the value of the property annually if you live in it or 2.5% if you rent it out. That's $1,500 a year in repairs if the property is owner occupied; $2,500 a year if you don't occupy it. Many mortgages include the taxes and insurance. That’s called a PITI payment, short for "Principal, interest, taxes and insurance."
8.) So you're thinking that the payment is more than you were paying in rent! Really? Well yes, you're renting 1/3 or 1 bedroom of a house that rents for $1,200 a month. Add in utilities and your share is about $450 per month. So let’s look at this very carefully. On a $100,000, 30 year fixed rate loan at 5% interest the payment (PI = principal, interest) is $536 a month. $116 of that is principal repayment. Your loan is that much smaller by that amount every month and you stop paying interest on that amount forever, so next month you'll save even more. That’s your money, back in your pocket. The $420 per month interest you're paying (or $5,000 a year) is tax deductible, as well as your property taxes. This could save you $1,000 to $2,000 a year in taxes that you'd normally be paying. You don't any kind of write-off as a renter. Plus with the purchase of a home, on top of the tax write-off you'll receive each year, you're also building equity for the future. In other words, chances are the $100,000 home you buy today will be worth $150,000 in a few years.
9.) "But, I'm 25 and single and I want the biggest and cutest (or baddest and showiest if you're a guy) place I can get." We understand. We’d like you to get that too, but later, with the tenants from your earlier properties paying the costs of it for you. Let your money work for you, rather than you work for it.
10.) Ready to put the plan in action? Following these ten important yet necessary steps will more than likely land you in your first new home. Don't believe us? Try step 1. and see what the banks tell you. Check back often for more information on how to be smart with your money. And please let us know what you think of this information.