Buying a home is an exciting experience, whether it’s your first time or your fourth. There’s nothing like the thrill of walking into a home and knowing you’ve found that perfect match. However, as you tour homes with your real estate agent, it’s important to make sure your expectations match what is realistic. Knowing your priorities can save you time, money, and effort in the long run.
One way to think about this is as a three-way balancing act between price, location, and quality. In this series of articles, we’ll explore each of these considerations, and what you should be thinking about when you set your home buying priorities, but if you are having trouble finding options for your price range then you could consider checking out home auctions.
When the Price is Right
There are two things to consider here: what you’re hoping to pay for your house, and the maximum amount you can afford. We emphasize “you” here because while you’ll find various formulas online to help estimate what is reasonable, this can vary significantly person-to-person. Never assume that just because your bank is willing to lend you x amount, you will be able to afford those payments, because every person has a different set of financial needs and priorities. For example, one person may be happy living on ramen noodles and mac & cheese so they can live five minutes from downtown, while someone else would be fine with a longer commute if it means they can cook gourmet meals every night and go out to eat often.
One good way to figure out if you can afford a certain mortgage payment—say, $1500 a month—is to try living as if you were spending that amount each month. So if you’re currently spending $1000 a month on rent, set aside the remaining $500 each month and see if you can (and are happy) living on your remaining income. You may want to start doing this before you begin house hunting so you can spend several months seeing how it goes. Bonus: this is a great way to save up for a larger down payment, which will decrease your monthly payments in the long run.
Remember that not only should you continue building your savings, you may need to increase your emergency fund when you own a house. When you’re a homeowner, it’s important to anticipate unforeseen events—a broken water heater, a leaky roof, etc. Even when an event such as hail damage is covered by your insurance company, you will still likely have an out-of-pocket deductible.
You also need to know what you can afford as a down payment plus closing costs. A down payment is the percent of your home’s price that a lender will require you to pay yourself. This can vary significantly depending on your type of loan. Closing costs are fees due when you sign the final papers for your house, and they can be significant. However, in some areas, depending on the market, you may be able to negotiate for the home’s seller to pay part of your closing costs (but not your down payment). Your real estate agent can give you a better idea you’re your closing costs will look like and whether asking for help from the seller is a realistic option.
As you’re calculating what you can afford, you should also be contacting lenders to find out how much they will be willing to loan you, what that will translate to in terms of mortgage payments, how much of a down payment they will require, and what different types of loans you qualify for. Real estate agents can often recommend lenders who they’ve had good experiences working with in the past, but it’s always a good idea to look around and compare your options. If you’re a member of a credit union or eligible to join one, check with them to see how their loan terms compare with commercial banks. Consider both the terms of a loan and whether the lender seems reputable and responsive to your needs.
Throughout the entire process, it’s essential that you work with your real estate agent. Your agent can give you an idea of what’s realistic in your area. They can suggest ways that you can stay within your price range while finding the home that’s right for you. For example, they may suggest neighborhoods that you might not have considered, and they can keep their eye out for great bargains where you may need to act fast to make an offer.
Be sure to be completely open with your agent. Let them know your preferred price range, and be clear (with yourself as well as your agent) about the maximum amount you can afford. Agents need this information to do our jobs. We are bound by confidentiality rules to keep your financial information private, and we take this duty very seriously. We are also sensitive to our clients’ needs and understanding of their concerns—our job is to help you find the right home, and we know we’ve done our job well when you’re happy.