And yes, there is ugly, and there are sacrifices. Here’s what nobody is telling you that you might need to know about buying a house (especially for the first time).
You don’t need to put 20% down
In most cases and with most lenders, putting 20% down is ideal or even required. But this isn’t always true. For example, the Veterans Administration (VA) offers loans for veterans that don’t require any down payment money at all.
Other loan-backers, like the Federal Housing Administration, will allow loans with only 3.5% down, but buyers have to pay mortgage insurance on those loans. They’re riskier because the buyer has less equity in the home, so buyers can expect to pay a percentage of the loan amount in mortgage insurance over the lifetime of the loan. (Or refinance the loan once they do have at least 20% equity in the home.)
There is down payment assistance available in both loans and grants, so it helps to talk to a real estate professional (like an agent) and see whether they know of any programs that might help you secure more money down.
… But you do need to put any new credit line plans on holdYour mortgage rate is going to depend in part on your credit score, and your credit score is going to get dinged with every new line of credit you open before buying a home. So to get the very best deal on your mortgage loan (and potentially afford more house), make sure you’re not going crazy with new credit cards right before you start shopping — and definitely don’t buy anything like a yacht or car on credit!
You’re not locked into one particular lender
Some people think they should immediately dive into a relationship with the first lender that accepts them and offers to back their mortgage loan. But here’s the problem with that strategy: There may be a better match out there for you, and if you don’t shop around a little bit, then you aren’t going to find it.
Talk to a few different mortgage brokers and ask them what their best deal is. Your credit won’t get dinged by this, so please feel free to explore your options!
Your monthly mortgage payment includes more than just the loan payback
Every month, you’ll be paying back your mortgage loan — that much you probably figured. But of course, there’s also the interest on your loan (which under many contracts gets priority for repayment above the loan principal). And you’ll also be paying homeowners insurance, which is required for the lender to approve the loan, plus taxes, every month.
If you’re not sure how much you can afford based on all of this, it’s probably not a bad idea to sit down with a mortgage broker (or five — see above) and talk about your options.
… So the mortgage amount on portals is not necessarily accurate
It’s tempting to look at the “average mortgage amount” on a real estate portal and take it as gospel truth, but often those are based on a loan with 20% down and usually don’t include the insurance or the taxes. Talk to an expert to get a good sense for how much you’ll expect to pay every month.
School districts are important even without kids
If you don’t have kids or don’t plan on having any, then you might be tempted to ignore the school district when shopping for a home — what’s it matter?
School districts definitely could be very important to buyers a few years down the road when they decide to purchase your house. And homes in neighborhoods with good schools tend to appreciate in value faster than homes in neighborhoods where the schools are just so-so. Make sure you’re considering your future as you’re shopping, which includes your future after this home.
You don’t need to spend your entire pre-approval amount on the home
It’s tempting to buy at the very top of your preapproved price range, but remember that you’re going to have to pay interest on the entire amount over many years, and don’t forget about the other costs of owning a home.
Financial experts suggest that you spend no more than 30% of your household income on your mortgage, so if the amount you’re spending is creeping beyond one-third of your household income, that could be tough to meet. So don’t overextend yourself!
You’ll look at homes out of your price range (and crave them)
It’s only human nature to look at things you can’t have, and that goes for housing, too: You will not be able to refrain from looking at homes just above your ideal price range and thinking about how nice it would be to buy that house instead of the disappointment you walked through last week.
But what’s worse than living in a house that you might need to fix up a little bit? Living in a really nice house that you can’t afford and having to sell it — or worse, go through a foreclosure. Look if you must, but don’t let it influence your decision-making.
You may get outbid, more than once
Some markets are hotter than others and have more cash buyers, which can be devastating if you’re using a loan and don’t have the wherewithal to pay cash for a house. Sellers often opt for cash buyers because the closing process is less cumbersome, and it can be hard for buyers to experience bid after bid rejected by the seller.
Stay strong and have faith that your house is out there. It might not be a smooth road, but you will get there.
Agents get paid on commission
Real estate agents typically don’t get paid until the closing table, when the house is officially yours. Then the seller will cut the agent a check. This is because agents are paid on commission: They’re taking a percentage of the sale.
If you have an agent who isn’t upfront with you about how payment works — or worse, one who is trying to talk you into more house than you can really afford — then it’s not a bad idea to question whether your agent is really the best fit for you. You want someone honest who will protect your interests, and that’s not too much to expect from an agent.
Talk to a contractor before closing
The inspector might identify some issues that need to be addressed, and usually this is negotiated with the seller, but to be entirely sure that you understand what will be involved and how much it will cost, it’s a good idea to hire a contractor and go over the inspection report. Some contractors offer free consultations, and most will be able to give you a ballpark figure to use as a jumping-off point for negotiation.
Speaking of closing: Introducing closing costs!
It costs money to close on a house, and closing costs can be picked up by the buyer, the seller, or both. This is usually outlined while negotiating the contract, but if you didn’t pay close attention to those terms, then it might sneak up on you. Clarify with your agent and mortgage broker who is responsible for closing costs and make sure you’ve got the money available if you’re the lucky winner of that responsibility.
Your mortgage will probably be sold to a servicer
After all that time looking for the right mortgage broker and lender, you may feel like it’s destiny, but the reality is that your lender probably doesn’t feel the same. Most lenders sell mortgage loans to a servicing company, which will be the entity collecting your checks every month for the next 30 years (unless the gets sold again, of course).
Be prepared for an announcement that your loan has been sold to a servicer and ready to cancel any checks or payments that slip out the door at the wrong time. It’s unfortunate, but it does happen, and you don’t want to pay your mortgage twice in one month.
Parking isn’t always guaranteed
There may be a space with your condo, and perhaps you have a garage or a driveway, but if you live in a major metro area or have several kids of driving age (or roommates, for that matter), then it’s possible you might have a struggle with finding parking.
This is information that’s usually included in listings, and it might also help to ask agents about parking situations in different neighborhoods. Street parking might work fine, but it’s usually a good idea to know how scarce or ample it is at the very least.
You’ll need to buy furniture
Maybe you’ve bought all of your furniture at antique stores, and it just doesn’t look right in your new mid-century modern home. Or perhaps you have several more rooms to fill than you did before. Whatever the case, be aware that you’ll have some purchases to make on the furniture front, and budget for them if you can — and definitely do not buy a bunch of furniture on credit before the loan closes, whatever you do.
You’re on the hook for any home repairs
The nice thing about renting is that when something breaks, the landlord will theoretically be by to fix it, or send someone, sooner or later. You don’t need to worry about how much the new sump pump or sewer line costs.
But all of that burden becomes yours and yours alone when you become a homeowner. The drain is clogged? The water heater won’t heat water? If you don’t fix it, or arrange for someone else to fix it, then it’s staying clogged and cold.
Those nearby empty lots won’t be empty forever
Everything changes, and some places change more quickly than others. Almost nothing gets a neighborhood riled up like the words “new development” or “strip mall,” and you cannot take it for granted that the rolling (empty) hills around your brand-new pride and joy are going to remain empty, unless you happen to own all the land, too.
It’s not a bad idea to stop in at your city or county offices and ask what they know about any development plans or zoning for the area, and then keep tabs on things once you move in. Better safe than sorry and surprised, right?
It might take a while to feel like “home”
You’d think that once you’ve gone through all of this trouble for a house, it’ll automatically “feel” like yours … but that’s not necessarily true. It may take a few weeks or even months before you start settling in and feeling like a homeowner.
So if the words “this is my house” don’t roll off your tongue quite like they should in the beginning, take heart: You’ll be claiming it without thinking about it before you know it.