First-time home-buyers have some unique challenges when approaching the real estate investment market.
It’s better to come to the table having done your homework and consulted with a lender, a real-estate agent and a financial advisor. Banks are eager to lend money to qualified borrowers, but what makes someone qualified? There are different things that banks look for, and first time home buyers may find themselves woefully unprepared. First of all, evaluate your own finances noting income, savings, and expenses. If currently renting, compare your rental expenses to a potential mortgage payment – don’t forget HOA, Mello-roos, property taxes, maintenance, and other unexpected costs. Expect to save anywhere from 10%-40% as a down payment, and as proof of capital.
A bank will approve you for a loan based on your income, assets, and current interest rates. Expect to pay around 4% interest and understand the difference between 15-year, 30-year, fixed-rate, and adjustable-rate mortgages. A 15-year mortgage will entail larger payments, but your house will be paid off and owned free and clear in less than two decades. A 30-year mortgage is more affordable monthly, but the interest exacted by the bank will take its financial toll over time. A fixed-rate mortgage is more desirable because the interest rate will remain the same unless renegotiated. An adjustable-rate mortgage can be easier to get at first, but can turn into a financial nightmare down the road. When a deal seems “too good to be true,” it generally is. The same goes for properties themselves.
Look for a house in a neighborhood you know or can get a feel for, even if you don’t currently live there. A property may seem perfect when seeing it in the sunshine with a friendly realtor, and then reveal its true nature when the train blasts its horn at 2 A.M. Each night and the streets fill with bums. First-time home-buyers should generally aim low, and keep within their budget and scale back expectations because they lack the experience to know how much they can really afford.
HUD-owned properties or fixer-uppers can be a great fit for first-time home-buyers because they are low-priced and less desirable for experienced home-buyers, but can be easily improved and gain equity if purchased at the right time and in the right location. Keep in mind that in today’s market, you will be competing against other people like you, but also savvy real estate flippers, and even large investment firms searching for lucrative new places to invest capital. Make sensible choices and don’t be afraid to spend some time searching: you will find that perfect new home in no time.