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By Hermond Palmer: 09/21/2020
Buying your first home provides an incredibly unique combination of feelings: the excitement of starting a new chapter, the adventure of tackling home improvement projects, the stress and uncertainty of picking the right neighborhood and submitting a competitive offer, plus the dread that you might overpay, and the joy of having a new place to call your own. Whew! How is that for a range of emotions? The process is both thrilling and challenging, and not for the faint of heart.
Before you even get into the housing market, you will probably spend quite a bit of time thinking about your goals and preparing your finances. One of the trickiest decisions can be figuring out when you are ready to enter the market and to start placing offers on homes. As it turns out, this process looks different for everyone, and there is not a single right time to buy a house. Here are some tips for how you can determine the ideal time to buy your first home.
Three Major Considerations
Because this is such a major decision, you need to think about it through multiple lenses. If you let emotion take over, you will be much more likely to make a mistake. Even if you keep emotion out of it, you could make a mistake by failing to take a very broad view and failing to consider multiple aspects of your decision. Here are the three different ways you should think about the decision to enter the housing market for the first time.
There are two ways to think about your local real estate market. First, you want to think about how the market will perform in the long-term. Secondly, you want to make decisions about the market as it exists today, especially if you are seeking a competitive advantage in a hot seller’s market.
The long-term view is all about maximizing the odds that your home will be a good investment. In any market, the goal is to “buy low and sell high,” but this is much easier said than done. Why? Because an equally common quip is that “you can’t time the market.” Many people today still recall the housing bubble, and subsequent crisis that was associated with Great Recession. It is tempting to look back to that period of history and to look for parallel circumstances now. Back then, the housing bubble popped, and prices dropped significantly over the course of several years.
The present moment in time may look very similar to the peak of the housing market in the early 2000s. But, the timing of a future crash is nearly impossible to predict, and even economists disagree about the subject.
Another thing to consider is that home prices have historically always gone up over time. Even most people who bought at the peak of the market in 2006 or 2007 and still own the same home have probably recovered their losses or even seen their home values increase in recent years.
As for the short-term market, there are many considerations that go into thinking about buying a home. You will want to research potential neighborhoods. Conduct research about neighborhood popularity, crime, commute times, school ratings, and any major developments planned in the area.
You will also want to get a sense of when the local market is most competitive. In many places, competition peaks in the spring. In a seller’s market (many major metro areas are currently seller’s markets) this competition can make buying a home much more expensive. Getting your offer accepted may require measures like:
- Increasing the earnest money deposit
- Waiving part or all of your home inspection (meaning you will be solely responsible for repairs)
- Waiving the appraisal contingency (meaning that you will pay the full asking price even if the home appraises for less than that)
Buyers should think very carefully before making these potentially costly concessions!
Depending on your current living situation and the level of urgency involved in buying a new house, you may be better off waiting until later in the year and avoiding the peak buying season. That may mean you will have fewer homes to choose from, but it should also mean that there will be fewer buyers to compete with. This would decrease the chance that you have to make as many concessions in order to get your offer accepted.
Taking time to think through your “lifestyle” can make a huge difference in ensuring that you purchase the right home and that you time the purchase appropriately. First, think about how long you want to live in your next house. Some people hope to buy a “forever home,” while others work toward their ideal home by moving “up” over multiple moves.
There are some basic pros and cons to both ways of thinking. A “forever home” is likely to be more expensive because it probably has more highly desired amenities and features. A forever home can also become a problem if you stretch your budget for it only to realize later that it was not really “forever home” material. As for making multiple moves, that can be problematic too. Each time you move is like rolling the dice with the housing market, especially if you do not put a significant amount of money down and do not build up equity. There are also transaction costs, like fees to realtors, that can make moving much more expensive.
Those are two general approaches to thinking about a home purchase. Regardless of whether you are thinking of a long-term, forever home or a shorter-term house, you still need to make sure your purchase aligns with your current lifestyle and the lifestyle you plan to have in the near future.
If you and your spouse are planning to grow your family, you will probably only want to consider homes with an adequate number of bedrooms to support a larger family. You may also prioritize school districts. Commute times are also important to consider. How far are you willing to drive to work? Which neighborhoods fall within that time requirement? How much money would you save by picking a neighborhood on the outside fringe of that area versus a neighborhood that is closer in?
You get the idea. The point is that you need to make sure the purchase matches your lifestyle and goals. Doing this research will help identify if the timing is right. Maybe there are a few ideal neighborhoods that are just out of financial reach right now because they are too expensive. You may be better off saving for a year or two and then targeting those neighborhoods instead of settling for a different neighborhood now that is not as good of a lifestyle fit.
Wherever you purchase a home, and no matter how many beds, baths, or square feet it has, you will want to be sure that it is affordable. Not just today, not just next year, but for the long-term. This is the category where you should be most careful, because you do not want your home to become a financial burden. That said, remember that you should not consider the financial implications in isolation. They are part of the bigger picture. Just because your finances may not be in perfect order does not mean you cannot by a home. You simply have to consider all of the factors and make the decision that is right for you. The main financial factors to consider are your credit, the purchase price, and your down payment.
Your credit will determine the terms of your mortgage. Having a high credit score is associated with favorable lending terms, such as low interest rates. At a minimum, you probably need a credit score of 620 to be considered for a conventional mortgage. If you can get that score above 760, you should qualify for the best mortgage rates.
As for timing, you may not want to purchase a home until you can get a conventional mortgage, because it is the most favorable type. This may mean that you work on improving your credit report and score for a year or so until you are ready to apply for a mortgage. Or, you may elect to move forward with a lower score and get an FHA loan. However, if your credit score is between 500 and 579, even an FHA loan will require a 10 percent down payment.
The purchase price is a major financial consideration. Your lender will be able to provide a maximum loan amount, which is essentially your maximum purchase price minus your down payment. However, you should not approach your maximum borrowing power in most cases. It is probably best to buy a house with a price that is no more than four times your annual income. And remember, that is a maximum guideline—there is nothing wrong with buying a house that is priced only at twice your annual income, for example. Part of this decision will also involve taking inventory of your other debts. Having other debts means your home should be cheaper. If you are debt free, on the other hand, then you will have more buying power.
Lastly, your down payment is very important. Making a larger down payment can create more equity in your home on day one. Not only that, but it can make your mortgage cheaper by reducing or eliminating private mortgage insurance (PMI) on a conventional loan. If you qualify for a conventional loan, paying 20 percent or more of the purchase price as a down payment will allow you to avoid PMI. Therefore, saving for a large down payment would be a great reason to postpone your home purchase. Even if you cannot put 20 percent down, you will need at least three to five percent in order to get a conventional mortgage at all (most conventional lenders will require 5 percent). FHA loans require a minimum of 3.5 percent down, and mortgage insurance remains for the life of the loan.
A Lot to Think About!
We have just scratched the surface on a number of topics. However, all of these are important in your decision of when you should buy your first home. Remember that the market, your lifestyle, and your finances are the three important areas to think about critically. Don’t fall for the trap of thinking about just one of these areas in isolation. Buying a house is never just about lifestyle, just about money, or just about the market. It is always about the intersection of those three things.
If you think a home purchase may be on the horizon for you, start taking an inventory of your finances, evaluating your local market, and thinking about how a home fits with your lifestyle. If you want more help thinking through and planning this large purchase, be sure to also consider homeownership and mortgage counseling, which can help you complete the process smoothly and set yourself up for future success.