Buying a house is one of the biggest, most intimidating decisions you'll ever make. It's easy to get swept up in the dream of homeownership. without the right preparation, the process can quickly become overwhelming. Fortunately, there are several strategies you can use to feel more confident and in control. Below are some essential tips to simplify your journey toward owning your dream home.
For background, real estate is my favorite asset class to build wealth. I bought my first property in 2003 and I've bought multiple homes since. Rental income now accounts for about 50% of my estimated $300,000 in passive income.
With the Federal Reserve embarking on a multi-year interest rate cut cycle starting on September 18, 2024, there will likely be more homebuyers looking to upgrade or buy their first home.
Tips to Make the Home-Buying Process as Smooth as Possible
Here are my eight tips for making your home-buying process a good one. It's important to be as thorough as possible in what is likely going to be the biggest purchase of your life.
1. Know Your Budget Early To Have Realistic Expectations
Before you even begin scrolling through listings or attending open houses, you need to understand exactly how much home you can afford. One of the biggest mistakes first-time buyers make is aiming too high and ending up in financial distress.
Start by reviewing your finances—your savings, income, and monthly expenses. Having a clear budget will help prevent you from falling in love with a home that could strain your finances.
The best home-buying rule you can follow is the 30/30/3 home-buying rule. If you follow this rule, you can buy with confidence. You also want get in over your head and have buyer's remorse after because you bought a home you can afford. Further, in case of an economic downturn, your buffer will help you get through difficult times.
2. Use a Mortgage Affordability Calculator
One of the smartest tools in your home-buying toolkit is a mortgage affordability calculator. By plugging in your income, debt, and potential down payment, this tool can give you a realistic mortgage range. Check out the SoFi mortgage affordability calculator if you want a good one.
I used to work with the SoFi CEO, Anthony Noto, at Goldman Sachs in New York City from 1999-2001. He was a tech research analyst and I was an international equities sales person on the 49th floor of One New York Plaza.
The results from the calculator will help set expectations and save you from wasting time on homes outside your budget. Remember, it's not just about what the bank says you can afford—it's about what you can comfortably manage month to month.
3. Get Pre-Approved for a Loan
Once you have a solid understanding of your budget, the next step is getting pre-approved for a mortgage. Pre-approval means a lender has reviewed your financial situation and is willing to offer you a loan up to a certain amount.
Getting pre-approved is a much more stringent process than just getting prequalified. Getting pre-approved not only gives you a clear budget but also makes you more attractive to sellers, especially in competitive markets.
As a homebuyer, you should submit your preapproval letter with your offer to give the seller confidence. In a competitive home buying market, an offer without a preapproval letter will likely result in a rejection.
4. Know the Housing Market
Real estate markets vary widely depending on location. In some areas, you might have plenty of options and favorable prices, while in others, high demand could drive prices up. Research your local market to understand whether it’s a buyer’s or a seller’s market.
Keep an eye on how long homes in your desired area stay on the market and their selling prices. Follow the closest comparable homes on Zillow and Redfin. This information will help you make a more informed decision on when to buy.
For example, properties in the downtown area of many big cities aren't doing as well given the work from home policies instituted during the pandemic. However, farther away from downtown, such as the west side of San Francisco, the demand is high due to more space and better affordability.
5. Don't Skip the Home Inspection
A home inspection is crucial. Even if a house seems perfect, hidden issues like faulty wiring, foundation cracks, or plumbing problems can surface later. Hiring a qualified inspector gives you peace of mind and leverage to negotiate repairs before closing the deal.
Here are some warning signs to look for when buying a house. You should put your home inspector's hat on every time you tour the house. Bring as many people you trust as you can to inspect the house with you. Then thoroughly read all the disclosure documents and ask all the questions you can.
A home inspection contingency gives you an out after you sign the contract and put down the earnest money deposit. If, for whatever reason, you find something during the home inspection you don't like, you can nullify the contract and walk away with your earnest money deposit back.
6. Be Prepared for Extra Costs
Don’t forget about the extra costs beyond the purchase price. Closing costs, home insurance, property taxes, and HOA fees can add up quickly. Plus, you’ll likely need a budget for minor repairs or upgrades once you move in. Planning for these costs upfront will help you avoid financial surprises.
Just like how the cost of the car is not the only cost, the cost of a house is also not the only cost. Home insurance premiums have gone up a lot around the country, especially in flood and fire prone areas. I highly suggest you get some real home insurance quotes first before getting into contract.
7. Don’t Rush the Home-Buying Process
Buying a home is a marathon, not a sprint. It’s easy to get caught up in the excitement and make hasty decisions. Take your time to research, ask questions, and carefully evaluate your options. This way, you’ll find a home you love and make a sound financial decision.
If possible, delay the close of escrow for as long as possible so you can be thorough with your inspections and contingencies. There is almost always some problem, big or small, with every house. Your goal is to find as many of these issues as possible and have the seller fix them if they've accepted your offer with an inspection contingency.
8. Work with an Experienced Real Estate Agent
An experienced real estate agent can be a game-changer in the home-buying process. They’ll guide you through negotiations, contracts, and market trends, helping you find properties that fit both your criteria and budget. A knowledgeable agent makes the process smoother and less stressful.
Do know that after the lawsuit settlement with the National Association Of Realtors for price fixing, there is downward pressure on commission rates. Therefore, I highly recommend you negotiate down your overall selling coming to 4% or less, from 5% – 6% in the past. In fact, I got proof from a Sotheby's agent that they are recommending a 4% commission – 2% on each side.
Here's my conversation with Mike Ketchmark, the trial attorney who won the price-fixing lawsuit against NAR and other real estate brokerages.
The Home-Buying Process Must Be Thorough
Buying a home can be overwhelming, but with the right strategies, you can simplify the process and avoid costly mistakes. Know your budget, use a mortgage affordability calculator, and take your time to understand the market. Most importantly, work with professionals who can guide you through each step. By following these tips, you’ll be well on your way to unlocking the door to your new home.
Owning a home is one of the best ways to build long-term wealth. With rising rents and home prices, locking in a fixed-rate mortgage that steadily gets paid down over time is hard to beat. Chances are, 10 years from now, you’ll be glad you made the decision to buy. Just be sure to purchase responsibly and within your means.
Regards,
Sam
Tips to Make the Home-Buying Process as Smooth as Possible is a Financial Samurai original post. All rights reserved. Financial Samurai, founded in 2009, is the #1 independently owned personal finance on the web. Join 70,000 others and sign up for my free weekly newsletter here.