Buying a home for the first time can be both exciting as well as challenging. It isn’t like going to a store and buying an expensive piece of jewelry with a single cash payment since there are numerous extra, fluid expenditures that you’ll need to keep track of and manage.
Making a wrong or an impulsive decision can severely affect your financial plans and result in you paying a mortgage that you’ll barely be able to afford.
Here are a few tips to help you on your journey to purchasing a home.
1. Plan Your Budget and Pay Off Any Outstanding Debts
Purchasing a home, even with a conservative budget, will run you tens of thousands of dollars. Buying a house at a time when you already have existing interests to pay would be a bad idea.
So, your decision to buy property should only be taken after you have cleared your outstanding debts. This will not only help you plan your budget but also reward you with a better credit score that will be exceptionally valuable down the line.
When it comes to planning your budget, apart from the gross expense of buying the property, you’ll also have to take into account any miscellaneous expenses that might crop up during the purchase process.
These include attorney costs, agent’s commission fees, homeowner’s insurance, homeowner’s association fees (HOAs), online market analysis tools, and services. It is a good idea to keep a margin of 25% above and beyond what you plan to spend on a house for such expenses.
2. Find a Property to Match Your Budget
This might sound as simple as searching online for Illinois properties that fall within your budget range, but it will rarely provide fruitful results. Before you begin your frantic search for properties online, you should have a decent idea of all the features that you’re looking for in your new home.
This can include the number of rooms, bathrooms, the presence of a backyard/patio or balcony. Once you have that, let your agent know so they can then use a multiple listing service (MLS) to create a listing for properties that match both your budget and your desired feature set.
3. Narrow Down Your Search by Finding a Desirable Neighborhood
Merely finding properties within your price range is not enough to make an informed purchasing decision. The next step to narrow down your search would be your choice of a neighborhood.
The following are some of the variables that determine a buyer’s choice of neighborhood according to a 2019 NAR survey:
- Quality of Neighborhood – Most buyers decide on their choice of neighborhood according to its quality. The “quality” here can refer to security and crime rate, presence of convenience stores, demographic statistics, and availability of public transport.
- Convenient to Job- After quality, buyers prefer a neighborhood that is either close to their job location or has a convenient, well connected public transport system.
- Convenient to School – For homebuyers with families, the convenience of a neighborhood close to primary or secondary schools will take precedence over its convenience to jobs or shopping.
4. Attend Open Houses and Schedule Private Showings
Attending open houses is a great way to get a feel for and learn more about your desired neighborhood. You’ll also get a good idea of the price range of the actively listed properties in that area. When you do narrow down your choices, this information will help you make a more competitive offer.
After you have narrowed your search down to a handful of choices, you should schedule private showings to learn more about them.
During these private showings, make sure to enquire with the sellers, through their seller’s agent, on any defects or hazards that the house might have. This is important because, after the sale, you will have to pay for those repairs yourself.
5. Plan Your Mortgage
Planning your mortgage is the single most crucial factor in the homebuying process. The first fundamental decision while obtaining a mortgage will be whether to go for a conventional loan or a government-backed mortgage plan.
FHA-backed loans are recommended for most middle-class home buyers since they not only have a lower credit score requirement but also require a lesser down payment as compared to 20% of the purchase price in the case of conventional loans. The caveat is that FHA loans will also require you to pay a mortgage insurance premium with your monthly payments that will drive up the costs in the long run.
After deciding on the loan type, you’ll need to make a decision on the type of interest. These can either be fixed-rate or adjustable-rate mortgages (ARMs). Fixed-rate mortgages generally have a higher rate of interest than ARMs, but they do not change with market conditions and are much more stable in the long run.
To get the most out of your money, a conventional 15-year fixed-rate mortgage plan is recommended as compared to a 30-year plan since opting for the latter will result in you paying a lot more in the long run.
6. Have Enough Saved to Cover the Closing Costs
A critical mistake many first-time homebuyers make is not taking closing costs into account while planning their budget. This results in unnecessary complications during the mortgage approval process. Closing costs represent the additional expenses required to finalize a mortgage. These include:
- Appraisal and Home Inspection Fees
- Homeowner’s Insurance Fees
- Closing Attorney Fees (for Illinois)
- Credit Check Fees
- Title Insurance Fees
As a general rule of thumb, the closing costs will set you back 3.5-4% of the purchase price of your home. You’ll get an estimate of the closing costs in the Loan Estimate that lenders are required by law to provide you when you submit your mortgage application.
With Large Investments Come Great Responsibility
Buying property involves dealing with large sums of money and financial negotiations. While it is a somewhat complicated process, it can be quite overwhelming if you’re doing it for the first time. Make the best of the above tips as a starting point for your own home buying journey for your dream home!
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