Buying a Home: Exploring Your Options

Thinking about buying a place to call home? Then it’s time to think through the home buying process. It can be tempting to start by cruising through your dream neighborhood or checking out house plans, but the most realistic place to start is with the costs.

For many, the journey of buying a home begins as a first-time home buyer. There are several unique benefits of being a first time home buyer that can make this process more accessible and affordable. These can include special loan programs with lower down payment requirements, tax credits, and educational resources designed to guide you through your initial purchase. Keep an eye out for programs specifically designed to assist those entering the housing market for the first time.

The cost of buying a home depends largely on where you live and what you’re buying. No matter your budget, you’ll need to keep certain costs in mind that apply to any purchase. First, you’ll need cash for a down payment, usually a percentage of the total cost of the home. First-time home buyers may be able to put as little as 3-5% down in cash—on a $300,000 home, 3% is $9,000, so that’s still a good chunk of change. Some programs require less of a down payment—ask your lender what is available for you.

Traditionally, buyers are encouraged to put down 20% to avoid paying for private mortgage insurance, or PMI. PMI is a protection for the lender against you defaulting on the loan. If you put down 20% or more, you won’t need mortgage insurance. Otherwise, plan on that additional cost, which could be as much as a few hundred dollars a month on top of your regular mortgage payment.

Speaking of your mortgage payment, you’ll want to get preapproved for a mortgage so you know what you can afford. Preapproval is not a guarantee that you’ll qualify for a mortgage, but it’s as close as you can get. A lender looks at your income, assets, and credit score, then gives you an idea of the types of loans you qualify for, how much you can borrow, and potential interest rates.

Your mortgage payment depends on the principal amount borrowed, the interest rate for borrowing the money, and the term or length of the mortgage.

Typically, lenders want your mortgage payment (including PMI, property taxes, and homeowners’ insurance) to stay below 28% of your gross monthly income (that’s the amount before taxes are taken out). For example, if your gross pay is $50,000 a year, or roughly $4,100 a month, that gives you a max payment of $1,148 a month. As part of this process, lenders assess your other debts, like car and credit card payments.

Just because you qualify for a specific payment doesn’t mean it’s a wise idea for you. Your mortgage lender has no idea how much you spend on other bills and costs, like groceries, savings, and vacations. It’s up to you to decide how much of a margin you need to keep in your budget to feel financially secure. As a first-time buyer, especially, it may be a good idea to look for a home on the lower end of what you can afford.

There's no single answer to the question of the best age to buy a home. It often depends on individual financial readiness, career stability, and personal circumstances. While some may feel ready in their early to mid-twenties, others might find their stride later in their thirties or forties. Factors to consider include having a stable income, manageable debt, and sufficient savings for a down payment and closing costs. The ideal time aligns with your personal and financial goals.

Many homebuyers—especially first-time ones—use a real estate agent to purchase a home. Real estate agents know the market and price trends, know which neighborhoods and features are most desirable, and can help you with price and contract negotiations.

These services come with a cost, though. Real estate agents are typically paid a commission of 5-6% of the purchase price. On a $250,000 property, that’s $12,500 split 50/50 between the buyer’s agent and seller’s agent. Good news though: if you’re buying a home, typically the seller pays the real estate commissions.

Before a home is truly yours, you’ll need to finalize the sale and sign the documents (many, many documents!). At this time, closing costs are due, too. These are one-time costs that you can either pay upfront or possibly roll into the mortgage. Closing costs cover all of the expenses of applying for the loan and finalizing the sale, and typically run between 2-5% of the overall purchase price. Your closing costs may include fees for services required by your mortgage lender, including:

• Property appraisals
• Title search
• Title insurance
• Origination fee
• Underwriting fee
• Points

Another consideration for prospective homeowners is the choice between building a home vs. buying an existing one. Building allows for complete customization and the opportunity to have a brand-new property built to your exact specifications. However, it can often be a more complex and time-consuming process, with potential for unexpected costs and delays. Buying an existing home typically offers a quicker move-in timeline and established neighborhoods, but may require renovations to meet your preferences.

For some, the path to homeownership involves exploring alternative avenues such as buying a home at a foreclosure auction. This can potentially offer the opportunity to purchase a property at a lower price point. However, it's crucial to understand the risks involved. Properties at auction are often sold "as-is," without the opportunity for thorough inspections, and the buying process can be faster and require significant upfront cash.

In today's housing market, particularly for younger individuals, buying a home with parents is becoming an increasingly common strategy. This arrangement can help pool financial resources for a down payment and mortgage, making homeownership more attainable. However, it's essential to have clear agreements in place regarding ownership, responsibilities, and future plans to ensure a smooth co-ownership experience.

Another less traditional route to consider is buying a home with owner financing, also known as seller financing. In this scenario, the seller acts as the lender, providing the mortgage directly to the buyer. This can be an option when traditional financing is difficult to obtain. However, the terms and conditions of owner financing can vary significantly, so it's crucial to have legal expertise involved to protect your interests.

The costs associated with buying a home can be overwhelming, but that doesn’t mean it’s the wrong choice. It’s up to you to weigh the benefits of ownership vs. renting.

There is no specific home buying timeline that works for everyone, so make sure you don’t rush the process. Consider the costs, pros, and cons before you make this life-changing decision.