House Hunting Tips for First-Time Buyers
House hunting can be the most exciting part of the home-buying process. This is especially true for first-time buyers who have never owned a place of their own. But you must never let those emotions cloud your judgment. You need to balance your enthusiasm with a healthy level of detachment. It is an investment, after all -- and a large one at that.
This article presents a wealth of house-hunting tips to help you navigate the process like a veteran, even if it's your first time. We will start at the very beginning, with the financial self-assessment:
Before You Start Shopping
You can't just dive into the house-hunting process. I know you're eager. I know how much fun it is to look at homes and imagine how you'll decorate them after moving in. But first thing's first. You've got some financial homework to do, before you start shopping for homes. Here's your list of tasks for this step:
- Start saving your cash. Start today. You'll be surprised at how much money you need during the home buying process. Most first-time buyers are caught off-guard by these expenses. The down payment, the closing costs, the cash-reserve requirements ... it adds up.
- Check your credit score. If your score is below a certain point, you might not even qualify for a mortgage loan. There's no point in house hunting if you can't get financing. You'll probably need a FICO credit score of 620 or higher to get approved for a loan. Learn more
- You need to shop within your budget. So you'll first need to create a budget. This is not the lender's job, by the way. It's yours. Take a look at the amount of money you earn each month, after taxes. Compare this to the amount you spend on your debts and expense. Your housing budget lies within the difference between these numbers. Learn more
- Once you determine the maximum amount you can spend on a mortgage payment each month, you'll have an easier time house hunting. Granted, you still haven't been pre-approved by a lender yet (see next item). But you're one step closer to having a price range.
- Get pre-approved by a mortgage lender to establish your second spending limit. The first spending limit is your own budget. You should use the lower number as your maximum spending limit. During pre-approval, the lender will examine your credit situation, your income, your debt situation and more. Then they'll tell you how much they are willing to lend you. Learn more
- House-hunting tip: Schools affect property values. Homes that are located within desirable school districts generally appreciate faster than comparable homes outside of those districts. The same goes for the desirability of neighborhoods. So start researching schools and neighborhoods in the area where you want to buy. Find out which ones are the most sought after.
Identify Your Housing Needs
What kind of house do you prefer? Do you lean toward any particular architectural style? Do you want a one-story home or two? How many rooms? How much square footage? These are questions you need to answer in advance, before you start house hunting. You need to know this information, and your real estate agent does as well.
- Here's a universal truth of home buying. You will never find a house that has every single thing you want. But you will find a place that has most of the things you want, and possibly all of the things you need. So be flexible.
- There's a big difference between needs and wants. One is a deal breaker, the other is not. If you find a house that meets all of your needs and some of your wants, you've probably found your new home.
- Be realistic about the pricing. Remember the budget we talked about in the first block of house-hunting tips? It's going to limit the features you can afford when buying a home. If you want a three-bedroom home with at least 2,500 square feet, but your budget is more in line with a two-bedroom home of 2,000 square feet, you'll have to make some compromises. There will always be compromises when buying a house. File it under 'R' for reality.
- Your must-have items should be on a separate list. These are things you simply can't do without. If you're moving up from a two-bedroom home because your family has outgrown it, then a three-bedroom home is a must-have item. You can't compromise on this. Put these items on a separate list from the other things you want, or highlight them in some way for your real estate agent.
- When creating your list of needs, focus on the things you cannot change. A home with "nice carpet" should never be on your list of must-have items. You can always replace carpet down the road. Your list of needs should only include things that would be hard or impossible to change (the location, the lot, the size of the home, etc.). We will revisit this in another batch of house-hunting tips below.
- Try to avoid painting a picture in your head. The homes within your budget will never live up to it. If there's a big discrepancy between (A) what you can afford and (B) what you see in your head, you're going to have a long and frustrating home search.
Get Pre-Approved for a Loan
Mortgage pre-approval is when a lender reviews your financial background to measure your qualifications as a borrower. Based on this review process, they will tell you two things: (A) whether or not they can approve you for a home loan, and (B) how much you're qualified to borrow. Here's what you need to know about it:
- Getting pre-approved by a lender will help your house-hunting efforts in several ways. First, it helps you identify any problems you have from the lender's perspective (too much debt, credit score too low, etc.). Secondly, it helps you limit your shopping to the types of homes you can afford. Being pre-approved will also help you find a real estate agent. Pre-approval is practically a requirement these days, with most agents. Lastly, sellers will be more inclined to take your offer seriously, since you have your financing lined up.
- House-hunting tip: Once you have a budget and a pre-approval amount, you can use a mortgage calculator to "reverse engineer" some home prices. This helps you connect the dots between the lender's pre-approval amount and your monthly budget. The lender's number will be a maximum loan amount. But you need to break it down into monthly payments to see if it falls within your budget. Just plug the pre-approval amount into a mortgage calculator, and see what the payments come out to. You might find that your comfort zone lies below the pre-approval amount.
- It makes no sense to put the house-hunting process before the pre-approval. If you spend a lot of time looking at homes online or in person, but you don't know how much you can borrow, you're wasting your time. Do things in the order recommended above, and you'll have a more efficient process. Determine your budget. Get pre-approved. And then start looking at houses.
- You actually have two price limits during the house-hunting stage. You have your own budget, and you have the lender's maximum loan amount. You should use the lesser of these two numbers are your spending guide. Don't let the lender's pre-approval steer you into a mortgage loan that's too big for you.
- You learn more about the process (or apply for pre-approval) on this page.
Find an Agent to Help With House Hunting
The Home Buying Institute encourages all first-time buyers to use a real estate agent. When you consider the amount of money on the line, you can see why it makes sense to have professional guidance. Here's what an agent can do for you during the house-hunting process.
- At a minimum, your agent will do the following: (1) Search the Multiple Listing Service for homes that meet your needs. (2) Coordinate showings of these properties. (3) Help you evaluate the seller's asking price by using recent sales data. (4) Help you determine an amount to offer, and write up the offer to present to the seller. (5) Negotiate with the seller on your behalf. Are you comfortable doing all of this by yourself? If not, hire an agent.
- In addition to handling the specific tasks above, an experienced agent is like a treasure trove of house-hunting tips and advice. They've been through the process dozens, possibly hundreds of times. So they'll be able steer you straight.
- A personal recommendation is the best way to find a real estate agent (but certainly not the only way). So tap into your social network. Ask if anyone has bought a home recently, and if they can recommend a talented agent. Ask around at work. Ask your friends and family who live in the area. Ask it on Facebook.
- Here are three more ways to find a local real estate agent.
- Find out who pays the agent's commission. In most states, the seller pays the commission. But you need to find out for sure before signing an agreement.
Shop for Homes Online
The Internet can be a tremendous help during the house-hunting process. It allows you to preview properties online first, before you try to arrange a showing. The technology has come a long way, too. A lot of listings have virtual tours, video content, and other features to help you screen properties. Here are some tips for taking your home search online:
- The goal here is to reduce the number of homes you have to visit. You do this by weeding out the ones that don't meet your needs. You start with hundreds of houses for sale. Then you use the Internet to screen them based on size, price, appearance and location. Suddenly, those hundreds of properties have been reduced to a few dozen contenders (or less). Now you're ready to do some actual house hunting.
- Realtor.com is one of the oldest and largest of the property websites. It offers a variety of features to help you with your home search. I recommend searching this site daily during your housing search.
- Trulia.com is another great website for property listings. This site has become increasingly sophisticated since it was first launched. Today, it rivals Realtor.com in terms of features and usability. I think Trulia is actually a better site in some ways. Use them both when house hunting, and throw in the next website as well...
- Zillow.com started out as a tool for getting property-value estimates online. While they still offer that function, they now have real estate listings as well. You should use all three of these sites when looking for a home.
- RealtyTrac.com is another website to use if you want access to foreclosure properties. Short sales and bank-owned foreclosures make up about 40 percent of the market these days, in terms of inventory. So it's hard to ignore them.
- House-hunting tip: All of the websites mentioned above will allow you to save your searches. This can be a real time-saver. The next time you visit, you just log in with your user name and password, and all of your previous searches and criteria are right there for you.
Visit the Homes on Your Short List
So you've created a list of properties you want to visit, and your agent has arranged for some showings. You're well on your way! Here are some things to keep in mind as you start to look at homes:
- Take a digital camera when you look at houses. When you get home, download the photos into a folder labeled with the property address. This will help you recall the details of a particular home later on, when you're comparing one house to another. If you don't label the folders with the address, you'll never remember which photos go with which home.
- Bring your checklist with you. This is the list of "wants versus needs" we talked about in a previous batch of house-hunting tips. Use a separate checklist for each house, so you can make notes on them. Write the property address at the top of each checklist.
- Don't just focus on the home. Pay attention to the neighborhood as well. Does the house back up to a busy street? Can you hear the noise inside the home? Do the neighbors take care of the their lawns? Is there any major construction planned in the area? Remember, neighborhoods affect your property values.
- Focus on the things you can't change. This includes the size of the home, the number of bedrooms and bathrooms, the lot, the view and the location. Don't worry about the decor -- you can change all of that. Who cares if the house has ugly wallpaper and carpet? You can change those things in a couple of days, and without a huge investment. Look beyond the surface.
- In most cases, there are actually two rounds of house-hunting visits. The first time around, you're looking at homes you may have pre-screened online. The goal is to create a shorter list of actual contenders. The purpose of the second visit is to decide if you want to make an offer for one of the contenders.
- You won't be as excited the second time you visit. You'll be calmer and more analytical. This is a good thing. This is how you spot things you might've missed the first time around.
Use Comps to Evaluate the Price
The house-hunting tips below will help you evaluate the asking price. This is the first step to making a smart offer on a home.
- Many homeowners overprice their homes when they first list them for sale. I'd venture a guess that more than 50 percent of sellers end up reducing their asking price -- at least once. So don't take the list price as gospel. Validate it.
- How do you know if a particular home is reasonably priced? By using comps. Ask your real estate agent to create a list of comparable sales (or comps) for any house you are seriously considering. That way, you can see what similar properties have sold for in the same neighborhood.
- You will need to adjust your offer price up or down from the comps, depending on how the target house compares to the comps. If it has certain valued-added features that the comparable homes are lacking, you should offer more than the average of the comps. If the property is nearly identical to the comps, you can offer the average of those sale prices. You are using current market conditions to build your offer.
- And when you're ready to make an offer on a house, watch this video first.
I hope you've enjoyed this collection of house-hunting tips. You'll find hundreds of additional lessons and tutorials on this website. You can use the search tool at the top of this page to continue your research. Good luck.