In this week’s podcast we provide advice for a would-be first time home buyer.

 

*This episode is part of my summer re-run series of popular episodes*

 

How to decide whether to buy or rent:

* Duration

* The longer you plan to live in the same place, the more it makes sense to own it

* The shorter you plan to live in a place, the less it makes sense to own it

* Costs

* Compare apples to apples between an owning choice and a rental choice

* Compare only money that is being “thrown down the drain”

* Remember that principal payments when owning are not “down the drain” –> those you are trading for more ownership (equity) in your home

 

Things to consider in buying a home as a first time home buyer:

* Plan as much for the long term as possible, but be aware things can change

* It’s unrealistic for your first home to be your dream home

* The purchase price you agree to ≠ actual total cost you’ll pay –> you also have to account for closing costs and fees

* Lower monthly payment ≠ lower cost –> you may end up with a higher interest rate and paying more in interest and have less cash to show for it in the end

* Recurring home ownership costs

* Principal

* Interest

* PMI if down payment < 20%

* Home owner’s insurance

* Property taxes

* HOA fees

* Repairs

* Keep your debt/income ratio well under 33% when considering the amount of mortgage to take on

* Keep a financial margin of safety and err on the side of conservatism when taking on a mortgage

* When you buy, you become responsible for all the repairs and maintenance (and to pay for it!)

* As a renter, you can just call your landlord and have them fix and pay for maintenance

* Old appliances and equipment that need to be replaced can cost a lot of unexpected money

* Full inspections are valuable and can tell you about problems

* A fixer-upper may take more investment and effort than you expected

* If you have or are going to have kids, the school district where the house is is important

* Ask as many questions as you can before buying

 

Process to follow as a first time home buyer:

* Define your lifestyle, what you want in a house, and your budget

* Wants: determine your time-horizon, location, size, quality, convenience, cost, etc.

* Consider all of the costs that go into buying a house

* Mortgage down-payment

* Mortgage principal payments

* Mortgage interest payments

* Private Mortgage Insurance (PMI) premiums if down-payment is less than 20%

* Home Owners Association (HOA) fees

* Property taxes

* Home owner’s insurance premiums

* Repairs if stuff is old or broken

* House price budget: make your mortgage payment/income ratio much lower than 33% (ex. $3,000/month income à monthly mortgage payment needs to be less than $1,000/month)

* Down-payment amount: Put down as much as possible without straining immediate needs (keep 6 months of living expenses in savings)

* Keep your expectations in check

* Qualify for a loan

* Approach a lender by reaching out to a bank or lending company

* Provide personal information documentation

* Pay stubs

* Tax returns

* Bank statements

* Rental history

* Net Worth calculation

* Get pre-approved for a mortgage loan

* Be careful, remember the bank is not your friend, they’re trying to make money off of you

* Shop around for houses

* Use real estate websites like