There’s no denying the housing market has been on fire. According to the National Association of Realtors, the median U.S. home price increased 16% to just over $350,000 over the past year. While home price appreciation is great news for current homeowners, it puts first-time home buyers in a difficult position.
With many houses selling for over asking price with multiple offers, how can first-time buyers compete in what seems to be a firmly entrenched seller’s market? While many experts are hopeful that the blistering pace of price increases will slow in the coming year, there are many things home buyers can do now to set expectations and increase their chances of finding a new home.
Here are ten tips for first-time home buyers to help navigate the process of buying a home in 2022.
1. Set Realistic Expectations
In a hot housing market, you may have to compromise on your wish list to secure a home. According to Victoria Cornell, you don’t have to find your forever home right off the bat. “Purchasing your first home is exciting and is a big life goal for so many.”
She goes on to say that in a strong seller’s market, “it’s okay to focus on getting your foot in the door and not purchase your dream house. You can always renovate, build an addition, or move again later. Your first purchase into the housing market is the first step to many other opportunities.”
2. Don’t Fall Into the Trap of Being House Poor
It can be tempting to stretch your budget in an attempt to score your dream home. However, allocating a disproportionate amount of your total income to homeownership is known as being “house poor” and can negatively affect the rest of your budget.
Jeff Cooper, a personal finance blogger, cautions first-time home buyers not to take what the mortgage lender tells you at face value. “Often, first-time home buyers see the amount the banks tell them they can afford and assume it makes sense. Unfortunately, that’s not always the case. Banks and other mortgage lenders base your limits on gross pay before taxes and don’t factor in that you’ll have others expenses besides your mortgage. Other home expenses like property taxes, utilities, home maintenance plus regular everyday expenses like food, clothing, entertainment, and travel should all be taken into account when determining how much home you can afford.”
3. Buy What You Can’t Change
One of the essential rules in real estate is “location, location, location.” While the location isn’t everything, it certainly falls under the category of something you can’t change about a house after you’ve bought it. According to a recent Bankrate survey, 43% of homeowners have at least one regret about buying their current home. While some regrets are fixable, such as paint colors or even a sloping foundation, others are not.
Casandra Karpiak of Kamloops Living, a real estate firm near Vancouver, British Columbia, says to focus on making sure you are happy with the things you can’t change as a first-time home buyer. “Everyone wants to buy that elusive dream property, but in my experience, the most important tip I can give is this: buy what you can’t change. This could be the location, lot size, school zone, or view. Whatever is most important to you, focus on that first. The flooring, paint colors, cabinets, etc., can all be changed over time.”
4. Understand the Hidden Costs of Homeownership
The true cost of homeownership is much higher than just the monthly mortgage payment. You are also responsible for things like property taxes, insurance, HOA dues, utilities, and more. One of the most significant expenses first-time home buyers can forget to account for is maintenance and repairs. Even a brand new house will need minor repairs, and it is a good idea to set aside money every month for surprise expenses.
Andrew Herrig, owner of Emergency Plumbing on Call, a marketing company for plumbers, advises budgeting in advance for home maintenance costs. “As a general rule of thumb, you can expect to spend 1-2% of the purchase price each year on repairs. For a $350,000 house that amounts to $3,500 – $7,000 a year, or up to nearly $600 a month. While that may seem like a lot of money, remember that this includes large, infrequent expenses like replacing your HVAC system, roof, or driveway as they age.”
5. Get Pre-Approved Before Making an Offer
In today’s hot real estate market, being pre-approved for a mortgage is almost a prerequisite for submitting an offer. Speaking with a lender or mortgage broker and providing your financial information will also give you a good idea of how much you can afford so that you can narrow your home search.
John Dealbreuin, a real estate investor in the San Francisco Bay area, highlights the benefits of obtaining a mortgage pre-approval. “In this competitive seller’s market with homes selling over asking price, buyers need to make sure they get their foot in the door with their finances in order. Having a pre-approval letter in hand indicates to the seller that you are serious about the home buying process. The added benefit to you as a buyer is feeling secure about bidding on houses knowing that lenders have validated your borrowing power and are comfortable with the loan amount.”
6. Don’t Rush the Home Buying Process
Mary Elizabeth, a personal finance expert who bought her first house at age 21, recommends separating your must-have features from those that are not as important. “Make a list of your must-haves and nice-to-haves. For example, you may want a three-bedroom, two-bathroom home, but you’re flexible on the age of the home. All-in-all, cost versus value is key. A home with a large front porch may look nice, but you’ll be cold in the winter and hot in the summer.”
She also advises patience in the home buying process. She says, “As a first-time home buyer, it can be hard to wait for the right property to come along. If you are patient, the right home will come along, but be prepared to wait a while, especially in this competitive market.”
Similarly, Amanda Kay, an employment specialist in Ontario, Canada, says she tells those moving into a new job not to rush into a life-changing decision such as buying a house. “It’s exciting to have everything in order finally and get approved for a mortgage but don’t let that excitement get the better of you. Just because you’re ready to buy your first home doesn’t mean you should rush out and buy whatever is currently available. For most people, buying a house is a long-term investment. You might live there for the rest of your life! So take your time and be sure it’s the right house for you, and not just the best home on the market this week.”
7. Inflation Can Be Your Friend
Many first-time home buyers are understandably worried about rising home prices. With inflation surging over 7% to levels not seen since 1982, almost everything is more expensive than a year ago. However, with interest rates still near historic lows, you can borrow money now and effectively pay it back with cheaper dollars in the future.
Max, a certified credit counselor and money coach, breaks down the math on calculating the real interest rate on your loan. ” If the nominal interest rate on your loan is 3% and inflation is 7%, your real interest rate on the mortgage is negative 4%. Instead of paying interest to the bank, you are, in real terms, earning a 4% return. It is a sweet feeling knowing the bank is paying you to borrow money from them. Debt is now the asset when it comes to real estate.”
8. Hire a Good Home Inspector
Buying your first home is likely the biggest purchase of your life, and most people are not experts on home maintenance, repairs, and code compliance. There are many things to know before buying a house, and it can pay dividends to hire a professional to see what problems may be lurking behind the walls of your soon-to-be home. A home inspector will look at some big-ticket items such as the electrical and plumbing systems, roof, foundation, and much more.
Jerry Graham, a personal finance blogger and homeowner, makes a case for the importance of hiring a good home inspector. “A professional home inspection is a must before buying your first home. If the inspection turns up problems, you can negotiate a price cut, ask the seller to make repairs, or walk away if the sale is contingent upon a satisfactory inspection.”
He goes on to say it’s crucial to get an objective third-party opinion. “Your real estate agent might recommend a home inspector, but you’re better off finding your own. Agents want to close deals, and inspectors want to maintain good relationships with people who refer business. The potential for conflicts of interest is too great. Instead, ask for referrals from friends who recently purchased a home.”
9. Consider the Monthly Costs Rather Than the Purchase Price
It can be understandable to assume that one $300,000 house is the same as the next $300,000 house from a purely financial perspective. But many variable factors affect the long-term costs, such as the age of the house, city and school district boundaries, and HOA dues.
Tawnya Redding recommends setting a monthly budget rather than a purchase price budget to account for these differences. “Every home buyer has a general idea of what purchase price they’d like to stay within. You’ve also likely obtained a pre-approval up to a certain purchase amount. However, one thing you’ll find as you begin to look at homes is that houses with a similar purchase price could result in very different monthly payments.”
She goes on to list some examples. “For instance, property taxes could be higher or lower depending on the city you purchase in. Another factor that could impact your monthly payment is if your home has a Home Owners Association fee (HOA). These factors could swing your monthly payment a few hundred dollars higher or lower, depending on the home you purchase. Therefore, while you want to have a purchase price range, you’ll also want to make sure you set a max monthly payment amount that you’re comfortable with so that you don’t end up house-poor.”
10. House Hack to Subsidize Your Mortgage Payment
With house hacking, first-time home buyers who are willing to take on a little extra work can dip their toes into real estate investing. House hacking has become a popular way to increase affordability and potentially buy a home that was previously out of your price range.
Tyler Weaver explains the basics of the house hacking strategy. “House hacking can be a great way for a first-time home buyer to build wealth while saving money on their housing expenses. The basic idea of house hacking is to buy a multifamily, perhaps a duplex or quadplex, with the intent of renting out the other units you do not live in. The beauty of the house hacking strategy is that you can take advantage of low down-payment options to get into an investment property that otherwise could take years to save up for. By having a tenant in your property, you gain experience in real estate investing and property management at an easy to manage scale.”
While house hacking may not be right for everyone, if you are willing to take on the responsibility of a tenant, it can open up many options by giving you the benefits of owning your home while someone else helps you pay down the mortgage.
Buying Your First Home
While house shopping can be overwhelming for first-time home buyers, setting realistic goals can be an important first step. It can be tempting to let the frantic pace of the market convince you to stretch your budget past your comfort level. Still, by following these tips and keeping the bigger picture of your financial health in mind, you can start your home-buying journey armed with the information you need to succeed.
Andrew Herrig is a finance expert and money nerd and the founder of Wealthy Nickel, where he writes about personal finance, side hustles, and entrepreneurship. As an avid real estate investor and owner of multiple businesses, he has a passion for helping others build wealth and shares his own family’s journey on his blog.
Andrew holds a Masters of Science in Economics from the University of Texas at Dallas and a Bachelors of Science in Electrical Engineering from Texas A&M University. He has worked as a financial analyst and accountant in many aspects of the financial world.
Andrew’s expert financial advice has been featured on CNBC, Entrepreneur, Fox News, GOBankingRates, MSN, and more.
