1. Evaluate Current Housing Budget
First-time home buyers should evaluate their current housing budget, their comfort level with it, and how that budget impacts their other life desires and needs, such as travel or starting a family. If the rental budget is comfortable, then it is likely a comfortable budget for a mortgage, factoring in all expenses including a budget for repair savings.
2. Be Realistic
Take the time to research homes online to see what’s out there. Make a list of your "must have" features, and narrow down what neighborhoods you prefer. Be realistic. It’s good to set expectations and know what you want, but you also don’t want to be unrealistic about your expectations. There’s no such thing as a perfect home and you might have to compromise.
3. Document Your Spending
The first step needs to be to document spending habits. One young couple came to me because they felt they were unable to buy a home. We discovered some spending habits that were keeping them in debt. After implementing some changes, they came back six months later with less debt and spending, and they were ultimately able to buy a home.
4. Start With The End In Mind
Don't start your search by picking a purchase price or based on what you are approved for. Instead, focus on what you want your monthly payment to be (including property taxes, insurance, and condo fees). Next, decide on how much cash you have for the transaction. Bring those two numbers to the lender and have them tell YOU what that means for a purchase price. It's typically not what you think!
5. Start With You
Purchasing a home can be a daunting task. Before you do anything, you need to have an honest conversation with yourself. You need to establish some expectations and set some goals. Chances are you're not going to get everything (property, payment, neighborhood, interest rate, etc.) so you need to prioritize and weigh your options. Lenders and real estate professionals are a great place to start.
6. Consult With A Mortgage Lender
I’ve seen a lot of people assume that they can obtain a certain loan amount based on their income and when they receive their pre-qualification letter from their lender, it is a lot less than they had hoped. Consult with a mortgage lender and they will research your financials and determine how high of an approval for a loan you can obtain. You cannot set a budget without this information
7. Start With Knowing Your Price Range
There are a few things to consider when creating a budget for a new home. First, identify your price range. Know how much you need to save for a down payment, if you can afford the mortgage, have enough money left over for closing costs and even for potential home improvements, depending on the type of house you want to buy.
8. Assess Needs Versus Wants
First-time homebuyers need guidance with a professional who can give them a complete short tutorial on the entire purchasing process, with the first step being "needs vs. wants." After a buyer's needs are met with such considerations as a number of bedrooms, commute time to work or desired schools, the agent can move them into the "wants" category — backyard pool, cul-de-sac lot, three-car garage.
9. Determine What You Can Comfortably Afford
Make sure to deduct a reasonable percentage of income for saving and investing, other bills, a social life, and emergencies. Ideally, this number will be 30% or less of your monthly income. That will have to cover your mortgage, insurance, taxes, maintenance, association dues and utilities. Then try to stay under that when house shopping.
10. Save For A Down Payment
Saving for a down payment is often the biggest challenge that first-time buyers need to overcome. Getting pre-qualified is a great way to determine how much you're going to need — and chances are it's more than your current rent. "Budget" your mortgage amount for six months to make sure that you can truly afford it and put the savings into an account to use for your down payment.
11. Think Short-Term Pain And Long-Term Gain
It's always tempting to look at that picture-perfect home, but that's a trap. I recommend looking for properties that have cash flow with rental suites in the basement or on the property. If that isn't an option, go for the ugliest home in the best neighborhood that has the best chance to appreciate with a little lipstick. Investing in real estate is a long-tail game so don't be short-sighted!