Buying a house is one of the largest financial decisions that most of us will ever make. I have bought two houses in my life. The first, I made many, many mistakes that I’ll share here for your amusement and general edification. The second, after having more experience in adulting and all things personal finance, I did in a much more planful and intentional way.
Through these two very different experiences, here are my top three tips for buying a:
A Note on the Use of Information in this Article
Here is my disclaimer regarding the content in this article. (We all know there has to be one of these just to set the record straight.) The ideas included are for educational purposes only, and should not be construed as financial advice. Concepts covered here are overly simplified examples of basic finance related information. Please consult a qualified financial professional to learn additional details about each financial concept and to help you figure out what is right for you.
A List of Don'ts: My Life as a Clueless First Time Home Buyer
The first time I bought a house, I did things in a way that hurts my current, better financially educated self. At the time, my then husband and I, were recently married and realized that more adultier adults bought houses. Here are the highlights of the poor decisions we made during this process:
Downright Awful Decisions:
A List of Dos: My Life as a Much Smarter Home Buyer
Years later, after having worked in the financial services industry for a bit, my soon-to-be fancy new husband and I decided to consider buying a place together. This time around, being 10 years older and a ton smarter, we had a more methodical process.
We talked about how we wanted to live our lives and bought a house that would support those wants and needs. We also worked with a realtor, who helped us through the details of being a smart homebuyer. Finally, we had a greater understanding of the financial aspects and what we were getting ourselves into.
Tip 1: Assessing Housing Wants and Needs
Before looking at houses, we talked about what we each wanted, and what was important to us collectively. We took our lifestyle into consideration and turned those abstractions into our list of must haves and nice to haves. Our list of requirements included the following:
Housing: Must Haves
Housing: Nice to Haves
Once we assessed our needs, we knew what we were looking for. We could also then assess if we were in a financial position to purchase a house that met our needs, or if we needed to wait longer.
Tip 2: Working with a Buyer's Realtor
When buying a house, there is no earthly good reason not to work with a realtor. Realtors get paid a percentage of the cost of the house being bought, which is paid by the seller. In short, it costs you no more money to work with a realtor than to work by yourself.
Realtors will also help you save time, money and frustration because this is what they do for a living. They will help you find possible houses that meet your needs. They arrange house showings so you can privately view a given house. They may also know about houses that are going on the market before they are listed to give you a head start on other potential buyers. They also typically have relationships with people who do financing and home repairs, so they can help with recommendations throughout the whole process. They can walk you through the paperwork from start to finish.
Typical realtors represent people who are buying and selling houses. We worked with one who only helps people buy houses—a buyer’s realtor. Part of the reason why we chose a buyer’s realtor is that their only job was to help us buy a house, not to also sell other people’s houses. This means that they do not have a possible conflict of interest (unlike realtors who both buy and sell houses) since there would be no temptation to try to sell us a house that they had listed.
Tip 3: Learn About the Financial Implications
Some people, mostly homeowners, tout the financial benefits of owning a home—and believe me, there are many. However, buying a home is also a multi-pronged financial commitment that goes beyond the desire to stop "throwing money away" on rent. Here are a few financial factors to consider when considering buying a house.
Figure Out How Much House You Can Afford
There are several calculators available online to help you figure out how much house you might be able to afford. If you look at guidelines for how much of your income should be spend on any given thing, typically they recommend spending 25-35% of your income on housing.
Personally, I think a lot of calculators suggest an amount that is higher than it makes sense to spend. (A calculator I ran recently suggested that I could afford to spend more than twice what I currently spend on my house—which is not something I would ever do on purpose). One more conservative recommendation is that you plan to spend 25% of your net income. (As a reminder, your gross income is the amount that your employer says they pay you, and your net income is the amount of money that actually shows up in your paycheck on payday). In the end, you need to figure out what makes sense for you.
Housing Costs: More Than a Mortgage
Financing Your Home Purchase
It’s not just the purchase price of your house, but how that translates into monthly payments for you. Most people obtain a loan to buy a home, which is called a mortgage. The amount you pay on a monthly basis depends on the interest rate, the term (how long you plan to pay it back) and the amount that you borrow.
There are several loan options, but here are two common ones:
House Buying Expenses
Ongoing Housing Costs
So Now What?
After you have a big long cry after realizing there is more to this than you thought there might be, realize that looking at houses is a part of adulting. Get thee a good buyers realtor, who has been through this a bunch of times, and then can help talk you through what you need to do. The more you know about the processes, the better off you’ll be.
What Do You Think?
What advice do you have for people considering buying a home? What missteps did you make that you’d like to help others avoid?
I learn for a living. I distill my research into useful blog entries. Geek, parent, knitter, yogi, writer, educator, businessperson, gluten intolerant & roller derby nerd.