Following up on my recent post on how to sell a house, I wanted to do a post on how to buy a house, especially focused on the first time homebuyer. Buying your first house is a big decision, an involved process and a very emotional journey! However all that work pays off that first time you enter your new home and stand inside and reflect on all you’ve accomplished. Mrs. Money and I became a homeowner for the first time about 7 years ago, and I still remember the feeling of excitement when we were handed the keys to our new house!

When it comes to purchasing your home, most new buyers won’t be fortunate enough to have the whole amount in the bank and will have to borrow money from a bank or other lender in the form of a mortgage. This is a pretty daunting process as well; with lots of new terms, forms to fill out, documents to gather, and lots of signatures to be signed! However, a mortgage is going to be necessary to buy that house you’ve been dreaming about for so long.

Let me share a few tips for buying your first house and getting your first mortgage to hopefully make the process less intimidating!

Rent or buy?

It may seem obvious, but before you begin the process of buying a house, make sure that this is the right decision for you. Purchasing a property isn’t for everyone, so don’t feel you have to do what is expected. You might find that renting gives you more flexibility if your circumstances are likely to change, or a wider range of choices when it comes to deciding where to live. For example, buying a house in the neighborhood of your dreams might take you well out of your price range, but renting there could be affordable. Owning a home also requires a lot of work; whether it’s trips to Home Depot or your local hardware store, and ultimately you’re responsible when the A/C stops working, a tree falls through your roof, there’s a leak, the toilet runs constantly, or the grass needs cutting (all things that have happened to me as a homeowner).

On the other hand, when you buy a house, it truly belongs to you. You can make any changes you like without having to run everything by a landlord, and you have more freedom to start a family or get pets. Monthly rental payments can be considered “wasted money,” not giving you anything back in return, whereas each mortgage payment goes towards your personal property.

It’s wise to weigh up all the financial benefits before deciding on whether or not to buy a house, and also make sure you’re emotionally and physically ready to be a homeowner.

What can you afford?

Simply put, houses are expensive. Once you’re set on buying, it’s time to figure out your price range and find a home that matches it. If you don’t know where to start, it would be a good idea to talk to a mortgage advisor. A mortgage advisor will help you understand how much you can borrow based on your income, outgoings, and other circumstances. Your realtor whom you’re working with will be able to recommend one. There are online calculators and tools as well, but honestly for your first time I’d say talk to a person, they’ll be able to give you good insight. Get a few different opinions to keep your options open. Knowing in advance how much you could borrow will help narrow down your options when it comes to choosing a house that may last you the rest of your life.

You may be very surprised how much the mortgage advisor tells you that you could probably borrow, I know we were. “Wait you’re giving a 25 year old how much money to buy a house???”. Remember that just because you can borrow it doesn’t mean you should! Find a monthly payment that you feel comfortable making each month for the next 30 years (mortgages are typically in 30 year terms), in both good times and bad.

Save for a deposit

When you buy a house, you need to put down an initial down payment The larger the deposit you pay upfront, the less money you will owe the bank, and the more favorable your interest rate will be when it comes to paying back the mortgage. Typically this downpayment can range from 0% to 20%, although you can really put down any amount you want. We put down 5% for our first house.

A down payment will definitely be at least $10,000 or more, which can seem like a lot, especially now are you’re paying rent. So, how can you save up enough money? Creating a budget will enable you to work out how you are spending your money and identify areas where you could make cutbacks and savings. It’ll give you an idea of how much spare income you have as well as a foundation for formulating a plan to set money aside for your deposit. There are myriad ways to start saving money, including smarter spending and selling items online. Start with a reasonable goal and work on putting that aside each month!

If you don’t have a savings account, now might be the time to get one. It will keep your money safe while offering you a higher interest rate than a current account. Might as well have your money work as hard as it can even when it’s just sitting there! There are good online banks that charge low fees and pay higher interest that I would recommend looking into. I keep my savings money mostly there as I’m earning 5x or more interest compared to my local bank.

The Mortgage

Once you’ve saved up enough money for a deposit and settled on your dream house, it’s time to apply for a mortgage. It’s advisable to get the mortgage process rolling before you start viewings. Buying a home is a lengthy process, and you don’t want to fall in love with a house only to have it cruelly snatched away from you by another, more efficient, buyer. (Hint – this definitely happens in a competitive market). A mortgage advisor will have given you an idea of what you can afford and how much you can borrow. Now, subject to a credit check, you will have to choose the right mortgage agreement for you.

There are many different types of mortgage agreement with various benefits. Don’t let all the fancy names confuse you. For simplicity’s sake, you only need to understand two basic types of mortgage – repayment and interest-only.

A repayment mortgage is the most straightforward and most easy to understand. All you need to do is repay the mortgage with a single monthly payment. The first few years may just be paying off the interest, but over time you will see the debt decrease.

Opting for an interest-only mortgage means your monthly repayments only cover the interest on the mortgage. At the same time, you will set up a second monthly payment into an investment fund which, by the time the mortgage term is over, will contain enough to pay off the debt. Going down this route is more of a gamble, and first-time buyers should not enter into it without professional advice.

Once you’ve decided on the type of mortgage, you will then have to think about a mortgage rate. There are so many different options, and it’s worth taking a lot of time to decide. The more common ones are an adjustable or fixed rate. An adjustable will be fixed for a term, like 5 or 7 years, then will adjust to the market rate. Adjustable rates are typically lower at first but then you’re taking a gamble what the interest rates will be after that. I’ve always done a fixed rate – interest rates have been so low as of late, and I’d rather lock in a low rate for the length of the mortgage. Companies like Altrua Financial can help you understand mortgage rates and pick the one that best fits your situation.

Making an offer

All the parts are in place to finalize your offer on your new house. Before making your offer, you should have a mortgage agreement in place. Don’t be afraid to start with a lower offer and haggle your way to the final price. It’s wise to do a bit of research beforehand and find out the prices of similar houses and neighborhoods. Take any flaws into account when settling on an offer.  Your realtor will be of great assistance in getting that offer ready and sent!

Congratulations, you’ve successfully financed your first house. Buying a home should be an exciting and life-changing move, not a terrifying step into the unknown. Hopefully, this guide has helped you understand the steps involved so you can live happily ever after in your dream home.

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