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Our Note to the First-Time Homebuyer

house in the middle of crop field
Photo by Jeffrey Czum on Pexels.com

Home ownership is hard. There’s no doubt about it. For 99% of Americans, it’s the largest purchase you’ll ever make, and there’s undoubtedly a reason that only 47.9% of millennials in America are homeowners. As a potential first-time homebuyer it’s hard, but it doesn’t have to be impossible.

There are some myths to home ownership that I hear quite a bit. I want to break it down to the basics of what it takes to buy a home and how you can get yourself in the right position as a first-time homebuyer.

For the first-time homebuyer, the price can be intimidating

I think the first thing that comes to mind for people, and often what scares them away immediately, is the price of the home. Looking at a property that’s six-figures, or even hundreds of thousands of dollars, is intimidating. Even just the thought of a 20% down payment can seem crippling. But it may not be as unreachable as it sounds.

The truth is that 20% down isn’t the de-facto standard any more. Now, before my older generation slams the newspaper down on the table, hear me out. The higher the down payment means the more favorable loan terms; that is true. With a 20% down payment compared to a 10%, the bank is taking on less risk by lending only 80% of the total asset-secured loan, and you’ll usually see lower interest rates. But, it is possible to purchase a home with lower down payment percentages. 

In fact, for first-time homebuyers that did pursue financing, the median down payment was only 7%, according to a 2020 survey by the National Association of Realtors. Some states or lenders even do programs for first-time home buyers that require even less. The bottom line to remember with down payment percentages is to do your research. Certain payment percentages can come with things like Private Mortgage Insurance (PMI) or higher interest rates, so it’s good to know what options you have and what they may include.

Be aware of the costs

While the down payment can be something people often realize they have some wiggle room with, legal and closing costs are often underestimated. The home buying process is riddled with costs, including legal fees, origination fees, and various inspection costs. Your hand will be in pain on closing day after signing all of the documents you need to sign.

Closing costs certainly sneak up on people, especially if you have a tighter cash budget. 2-4% of the price of the home is usually typical, although some buyers may be able to negotiate that the seller cover closing. As a homebuyer, the best thing to do is plan ahead, do your research, and have an idea of what it may cost. 

Your timing is the only timing that matters

Many people see the costs and ask: is it worth it? This is where it’s good to look inward. It all boils down to understanding what you want in life and what your “why” is for purchasing a home in the first place. Are you feeling pressured because your friends are homeowners? Maybe you’re buying because you’re getting married and it just seems like the right next step. Or you hit an age milestone and feel like you’re somehow behind if you don’t. 

The single most important thing to remember is to do this on your own timeline. There are undoubtedly the costs we discussed with purchasing and selling a home. Repairs do come up, and I see people that didn’t allocate enough extra savings really struggle to make ends meet if an unexpected scenario arises. And loan amortization schedules are structured in a way that you’re paying off mostly interest first, making a quick sale unfavorable, as you haven’t had the chance to build as much equity. Trying to make a home purchase solely for profit can sometimes cause you to fall flat on your face. That’s why I usually say, “the worst place to buy a home is on the clock”. 

However, home ownership can still be the best path to building your future. The equity you build, mixed with some hopeful appreciation, can set you up for lasting financial peace. More importantly is the emotional pride of owning your own home. 

Know your why and prepare diligently

None of this is to say the home buying process is easy. It requires diligent saving and preparation. It’s certainly possible, and the sooner you begin working towards it the better off you’ll be. 

Do your research, write a napkin calculation for how much you’ll need, and start a weekly savings plan for getting there. Pay attention to your credit ahead of time to ensure you can lock in a lower rate. Along the way you can get more granular in your research and preparation while you hit your weekly savings milestones. 

It’s an intentional, long-term process, but it does pay off. Before you know it, it’ll be move-in day!

Check out our Advisory Services page for more info on how we help prepare for a home purchase.

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