Similar to how a professional athlete trains for months and weeks in advance to get ready for a big game, so too in home buying there are many important pre-game things to do in order to be in the best “shape” to buy a home. Another reason that it is key to being properly prepared is that you need to know what a “good” deal looks like, and also be in a position of strength to act when you finally find what you’ve been looking for.
10 Key Things You Can do to Prepare in Advance
- Understanding how long you intend to live in the area
- Understanding your unique needs in a home
- Understanding your wants in a home
- Understanding your level of job stability & security
- Understanding the housing market in your area
- Understanding the components of a credit score, what yours is, and at what level you need it to be and making it happen
- Understanding what your can afford
- Understanding your downpayment strategy
- Understanding your savings rate and having an Emergency Fund and enough saved up for the downpayment
- Start looking before you’re “ready” to help you understand your needs vs wants better, and gain a realistic picture of what is achievable in your target timeline
Let’s take a look at each of theses 10 activities.
1) Understanding how long you intend to live in the area
Why It Matters: It takes years for most people to be ready to buy their first home. Naturally, you want to get it right the first time. If you don’t see yourself staying in the same area for at least 5 years, preferably 10+ years, then you may want to take a close look at whether it really makes sense for you.
Firstly, buying a home is expensive.
You’re likely going to pay 1-3% of the purchase price in closing costs. On a $300,000 home that’s somewhere between $3,000 to $9,000. Add in a downpayment, earnest money, home inspection fee, necessary repairs, cosmetic repairs that “need” to be made, and all of a sudden that can quickly become a large percentage of your lifetime savings.
In order for you to get ahead financially on a home, although unpleasant, it is wise to account for the possibility that the value of your house will decrease after you purchase it.
Yes, housing prices have increased over the long-term. However, if you purchased in 2007 and sold in 2010, chances are very high that you would have lost money on your home. Now, if you’d purchased in 2007, but held on until 2019, chances are very high that you made a profit if you sold you home.
Bottom line, buying a home is expensive and it makes sense to give yourself the best chance to come out ahead. In order to do that, you need to give enough time for the long-term housing trends to work in your favor.
Secondly, it is a huge time investment.
We must have looked at 15+ homes over multiple weeks trying to find “the one” that we liked and made financial sense. If you’re not seriously planning on staying in the area for a good deal of time, it may not be worth your time as well.
2) Understanding your unique needs in a home
A need is an aspect of the house that absolutely have to have. It is non-negotiable. Even if there was a home that you really liked otherwise, but if it didn’t have these key features, you would walk away. That is a need (vs. a want which we’ll talk about next).
Only you know what your needs are. Whether you’re buying alone, or with a partner, it can be very helpful to talk through and list out all of your wants and needs in a home to get on the same page. It will make the rest of the home buying process so much smoother and help your agent a ton.
Some examples of needs in a home:
– 3 bedroom, 2.5 bathroom
– 1,200 to 1,600 square feet
– 2 car garage
– Within a 10 minute drive of a good school
– Safe neighborhood
3) Understanding your wants in a home
A want is something that would be nice to have. It would make you smile, and feel even better about making a decision, but you would be willing to compromise on your wants if you needed to.
Again, if you are buying with a partner, please do yourselves a favor a get clarity early on as to what is a want vs. a need. When you’re confronted with the price of homes, it often makes people re-evaluate their wants and needs and that’s fine. Just make sure that you’re in it together so that you can get the best outcome.
It may be helpful for you to talk through and prioritize the below as a starting point:
– Safety
– Proximity to quality hospitals and health care providers
– Proximity to good schools
– Proximity to work
– Proximity to parks
– Proximity to church/place of worship
– Neighborhood charm/attractiveness
– Exterior appearance of home (curb appeal)
– Interior room layout and design
– Amount of work it will require to get a passing grade from you
– Potential for future appreciation
– Age of the home
– Quality and age of home appliances
– Size of home, garage, backyard etc
– Number of bedrooms, bathrooms
– Amount of natural light
– Direction of bedrooms etc
* Ignore this is you don’t need more help in navigating the home purchase process and learning how to save thousands of dollars in the process.
However, if you could use an easy to follow, straight forward and fully transparent guide that shows how I successfully bought my first home and saved over $90,000 in the process, take a look at my online course here. 100% satisfaction guarantee.
4) Understanding your level of job stability & security
Do you work in an industry that has high unemployment, or that is going through a difficult time? Is the local economy on the upswing? What is driving that? Is it likely to continue? How likely could you change jobs and maintain your current income?
These are just a few of the hard questions that is worth asking yourself. No one thinks that they are going to get laid off until it happens. It is almost always a surprise. That is all the more reason to be cautious and “real” when taking a look at your earning power.
5) Understanding the housing market in your area
This topic is covered in depth in an article in the link above. What you’re trying to do is understand if the area you plan to buy in has attractive economics or not.
For example, is the area population growing, shrinking or mostly the same? How many new homes are coming onto the market? Is it a sellers market, or a buyers?
It takes a bit of research to figure it out, but the article will take you through it step-by-step.
6) Understanding the components of a credit score, what yours is, and at what level you need it to be and making it happen
The details of this are beyond the scope of this post, but at a high level your credit score is impacted by.
– Loan/debt repayment history
– Credit card utilization rate
– Type, number and age of credit accounts
– Public records, like bankruptcy
– Total amount of debt
– Number of new accounts recently opened
– Number of hard inquiries on your credit score
You can learn more on the subject here.
Having a sufficient credit score matters a great deal in the interest rate that you’ll have to pay (if you qualify). In my case, because I didn’t have a lot of credit history from living overseas (Japan, Thailand, Vietnam, India), I had to start small and work my way up. It took me around 6 months to improve my credit score 100 points or so to where I benefitted from the most preferential interest rates the lender could offer. It was interesting to me that for this particular lender, if you had a credit score of 720, you had the same interest rate as a score of 780 or 830. So, know what you need to get it to in order to be good enough.
7) Understanding what your can afford
This is another topic that deserves your full attention and some time to really know where you stand. This is the number one thing that can derail your best intentions and financial situation more quickly than overextending and buying more of a house that you can afford.
In the above article, we help you understand three different frameworks to assess whether a home is expensive or not, as well as give you the tool kit to know what you can afford.
8) Understanding your downpayment strategy
Are you better off saving up to be able to pay 20% down and avoid PMI, or just pay the bare minimum? In the above article we’ll dive into all of that and more.
9) Understanding your savings rate and having an Emergency Fund and enough saved up for the downpayment
Now that you know your downpayment strategy, are you saving enough? Are you in a healthy financial position?
Read through the above article to make sure you’re squared away and in a good position to buy, or if you need to wait a few more years.
10) Start looking before you’re “ready” to help you understand your needs vs wants better, and gain a realistic picture of what is achievable in your target timeline
If you ask a someone who has never eaten authentic Indian cuisine, if they prefer dal makhani or saag paneer, we’ll have to forgive them if they don’t know. Similarly, if you’ve never spent much time contemplating or looking at houses, you can’t be expected to know what you’ll want that fits within your budget.
That’s why I think it makes a lot of sense to start looking at homes, talking to real estate agents, exploring different neighborhoods, learning about the process, the credit score you’ll need etc well before you are actually in a position to buy a home.
Go visit the neighborhood before work and try commuting from there. Go into the “good” school and meet the principal and teachers, get a feel for if the school is indeed amazing, or is overhyped.
Here are some of the benefits you will gain:
Firstly, it will bring some reality to the features of homes that are in your budget, which will help clarify for you what are your wants vs. your needs.
Same for the location, commute time, actual vs. perceived quality of school and so on. Take the time to do the research early on, in little pieces, as it can be very overwhelming if you try and do it all at once.
Secondly, it will help focus your search and save you time later on.
Thirdly, it will give you a specific and clear reason to save. We all know the power of having a concrete goal that we can feel. This is no different. Put up pictures of the neighborhood that you want to live in, preferably that you’ve taken, use that as a motivating factor to help you save more today for tomorrow.
Lastly, you will be well positioned to act when you do find the right home and you won’t need to second guess yourself, because you will know from all of the ground work that you did in advance.
Got everything covered? Read all of the other articles in the First Time Home Buyer Series?
If you could use additional help, that’s what we’re here for.
We want to make sure that your first home purchase is an easy (as possible) process and that you’re aware of the pitfalls and stumbling blocks in advance. My real estate agents and bank loan officers didn’t spend much time educating me (they had homes to sell and loans to write), and even though I have a degree in International Business Economics, build complicated financial models and have a family background in real estate investing, there was still a lot for me to learn.
That’s why I built this course for people like you. I show (vs. tell) how I successfully bought my first home and saved over $90,000 in the process. I’m here to help, and am confident that our online course will prepare you for success. We stand behind our work, so we have a 100% satisfaction guarantee.
