First time home buyers take note: it’s a good time to move. From the east coast, to the Midwest, home sales saw strong gains in 2015. When compared to 2014, the Washington Post reported home sales up 9.5% in the DC Metro area. Here in Wisconsin, the Wisconsin Realtors Association (WRA) documented 2015 sales up 11.4% over 2014. Not only that, interest rates remain low, and median prices have begun to climb. Despite the slight rise in prices, affordability, says the WRA, has remained high. This may signal ‘for sale’ home inventories will be on the rise in 2016. And first time home buyers may be searching for some much needed direction.
Step 1: Your Budget Is Yours
This is easy to forget. We all want a great house in a great neighborhood with great interior design. However, what our friends and colleagues can “afford” is not your barometer here. First time home buyers should understand that banks and other lenders will likely approve you for a monthly payment of 35-45% of your pre-tax income. The other, more conservative approach, offered by personal finance and budget guru Dave Ramsey, would be to target 25% of your monthly after-tax income. That’s quite a spread between the two. Your comfort level should reflect budgetary items including other debt: students loans, credit cards, auto loans, and any other obligations. Whatever your number, make sure you remember owning a home is expensive beyond your monthly payment. Factor ongoing costs like water, gas, electric, and cable utilities, lawn care, furnace filters, and more. Also, consider deferred maintenance items that carry big price tags: paint, siding, roof, furnace, air conditioning, and flooring. Don’t buy a home because you want to; buy a home because you want to, and you can afford it. The bottom line: know your expenses.
Step 2: This Is Home
Location, location, location. It’s the cliche of real estate: when you buy real estate, location matters. For you, the first time home buyer, it means so much more. It’s less about home value appreciation and more about answering a question: “Will I live here for the next 5-7 years?” Staying in a location less than that amount of time after purchasing a home can be risky. Short term home values can change, and your investment may have you upside down if you go to sell in a short amount of time. The interest, remodeling, and closing costs involved in buying a home make it difficult to sell soon after you move in. Be sure the city and neighborhood you choose is where you want to be for the foreseeable future.
Step 3: Make a Friend
The next step on your home journey involves finding a lender, and there are many. With that lender, it’s important to determine your pre-approval amount. But don’t forget: just because you’re approved doesn’t make it right for you. (See step 1.) The important thing is to meet with a lot of them and see what they can offer you, not the other way around. If you’ve gone through the first two steps and determined you are in a position to buy a home, then you likely will qualify for a home. Don’t settle for the first lender that approves you. Shop your situation to credit unions, banks, and referrals that friends and colleagues have provided you. Lenders have varying programs, interest rates, and community relationships. Meeting with them, feeling comfortable with them, and watching them work for you matters. It should feel like you’re beginning a friendship, not a cold business transaction.
Step 4: Make Another Friend
The final step in your process involves creating another relationship: your realtor. The #1 way most people find a realtor is through referral from a friend or relative. Everyone seems to “have a realtor.” Unfortunately, they’re not all created equal. Just because a friend or family member has used a real estate agent, does not make that person right for you. Finding an agent is similar to finding a lender: interview several; understand what they can offer you and your situation; feel like you’re developing a friendship, make sure they know the local market. In the age of discount brokerages, understand those offices are generally not giving you the service level of full commissioned agents. While commission is negotiable, you will likely get what you pay for: saving a percentage point in commission is over-rated. Good agents will save you money beyond the commission and make your home buying experience a great one. Whether it’s finding you a great deal due to their knowledge and hustle, or negotiating a fantastic price on your first home, paying a standard 3% commission is not a flaw. Just make sure they are giving you the value you need.
It’s an exciting time in real estate, especially if you’re about to begin the process of home buying. Following these four steps may help!
Brian Lawton is a licensed Wisconsin REALTOR®, real estate investor, entrepreneur, and Director of EXIT Realty HGM’s Janesville, Wisconsin offices, where he lives with his family. Connect with him on LinkedIn.