Buying a house for personal residence can be one of the most joyous accomplishments, or quickly become a financial and emotional burden.

The difference between the two is in how you mentally and financially prepare for it.

I want you to go into it with the right frame of mind, so I thought I would share 13 tips to consider before putting ink on the signature line.

13 First-Time Home Buyer Tips to Avoid a Financial Mess

#1: Determine why you want to buy

What are your reasons for wanting to buy a house? Is it because you genuinely are ready to stabilize your home situation, or are you just doing it because you feel like you should? If it’s the latter, PAUSE. There’s nothing wrong with being a 30-something without a house. In fact, there’s nothing wrong with being a 60-something without a house. It’s all about what is appropriate for YOUR life.

If buying really aligns with your values, motivations, and makes *financial sense*, then great. Just make sure. Remember, your financial journey doesn’t come with time restrictions. Your friends and family won’t be paying your mortgage, so don’t make decisions based on FOMO.

• Double and Triple Check:
  • Make a list of your honest thoughts for wanting a house.
    • How many of them are based on perceptions?
    • Which ones are based on math?
    • How many based on emotion?
    • What’s motivating your desire?
    • What values does purchasing align with?

Be sure!

#2: Ask yourself: Is this the right time?

Buying a house is a commitment; don’t make it on a whim. You need to ensure you’re ready financially as well as emotionally. A house will cost you money, but it will also cost you time. Time in diagnosing issues, maintaining it, securing it, and protecting it. That’s not to say you don’t care about those things as a renter, but it’s just different when you actually own the property.

• Ensure You Are Ready:
  • Spend time to truly evaluate whether or not this is something you want to deal with.
  • Owning a house is no joke and it will require your time, attention, and you preferably planning to stay in one spot for at least 5 years.

#3: Dump the debt before you buy

I understand it may be quite the hill to climb, but trust me, you’ll want to be as debt-free as possible. For one, you may not get the best interest rates if you are carrying too much debt. Secondly, being debt free can open up your budget a bit in case you need to cough up extra cash to afford what you need. And also, you don’t need the extra financially-driven emotional baggage. Taking on a mortgage will likely be your largest monthly bill, you don’t want to have other debts on your mind as well.

• Quickest Way Out Of Debt:
  • Create a SMART debt goal and attack it.
  • Snowball or avalanche your debt payments.
  • Consider additional part-time income to make extra payments.
  • Ensure you are allocating as much non-discretionary income as possible towards your debt.

#4: Get your credit ready

You absolutely need to know your credit score before entering the home buying process. The reason is because your credit history impacts your interest rate. The higher your score, the lower the rate you’ll qualify for-which is what you want. The difference between “the best” and a “good” interest rate can literally save you tens of thousands of dollars over the life of the loan. To qualify for the best rates and terms, you’ll want a score higher than 740. Check your score early-and often-so you can work on improving it if need be.

• Credit Tips:
  • Improve your score by paying down your debts, keeping credit card utilization below 25%, and ensuring you are paying on time.
  • To check your score for free, check with your bank . For additional methods, check out this post.

#5: Know what you are looking for, and what it will cost

If you don’t identify your requirements, you can be talked into buying anything- at ANY cost. Are you looking for a single-family, condo, or townhome? What do you no-kidding NEED in a house, and what are “nice to haves”? For instance, you may need to consider the school district. Or, maybe it’s having a certain number of bedrooms so you can turn one into an office.

Based on what you are looking for, look at comparable properties to get an idea of prices. Do not shop for a house without understanding your must-haves, price, and trade-offs. Otherwise, you’ll waste time considering properties outside of your scope. Or even worse, ending up with something you aren’t happy with.

• What To Do:
  • Create a CLEAR list of your needs and wants before even looking at houses.
  • Examine trade-offs and what you’d be willing to give up if necessary. Sacrifices are a part of the process unless you are filthy rich.
  • Use Realtor.com, or similar site to get an idea of the price range of what you are looking for.

#6: Decide on and SAVE the appropriate down payment

I say appropriate because it depends on your financial situation. For example, if you can handle it, put down more. I decided to put down 20% so I didn’t have to pay private mortgage insurance, and I wanted to accelerate building home equity.

That said, 20% can be quite the chunk of cash to tie up in a property, so 5% or 10% may make more sense for you. Either way, evaluate YOUR financial situation, run the numbers, and decide for yourself. Consider existing obligations, other investment options, potential future uses of the cash, and the impacts it can have in your overall financial picture.

• How To Save:
  • Set a financial SMART goal for the needed outlay, and break down the monthly steps you’ll need to reach it.
  • Create a budget and insert the goal as a monthly item to be funded. If you focus on it, you’ll have the down payment before you know it.
  • Don’t be afraid to take on a part-time job if you need additional income. It’s likely just temporary until you meet your goal.

#7: Shop around for lenders

When I was shopping for interest rates, I went to four different institutions to include banks and credit unions. The best (lowest) rate came from the fourth lender I spoke with, and it was lower by quite a bit. You want to minimize how much you pay in interest so do not rush past this step by picking the first person you come to. Do your due diligence and shop around. It’s better to be over-informed than to pay more than you need to.

• Credit Impact Tip:
  • Get *all* of your mortgage quotes within a two-week span. By doing this, it will only count as 1 hard inquiry on your credit score. If you space them out beyond two weeks, your score will take multiple hits which could negatively impact your interest rate.

#8: Aim for a total payment of under 30% of take-home pay

Look, house poor is a real thing. House poor is when you are paying so much for your house that you don’t have much money left to do much else. I’m not trying to downplay the importance of a nice house, but you do need to fund the rest of your life. A key to building wealth is keeping expenses as low as possible.

So, to ensure you have enough to still cover your other obligations, goals, and oh yea, eat, aim to keep your total monthly payment under 30% of take-home pay. That total payment includes insurance and property taxes. By keeping your housing expenses manageable, you can maximize spending in areas that enhance wealth potential and happiness. Having extra money to play with also allows you to pay extra towards the mortgage, if you choose.

• Next Steps:
  • Review your income and calculate a 30% target. Be sure to include this in your budget so you can see how the spending relates to the other areas of your life. Do not short change funding your other goals.

• For Dual-Income Couples:
  • Consider budgeting and buying the house based on ONE of your incomes. That way, you have comfort in knowing that if a job loss, or other unexpected situation hits one of you, you won’t be facing a financial crisis of wondering how the mortgage will get paid.

#9: Don’t confuse loan approval amount with what you should spend

Your lender will calculate and pre-approve you for a loan amount based on your income sources and debt. When you see this number, it just may surprise you (in a good way). Don’t get fooled by this. This number does NOT consider your entire personal financial situation.

If you spend all the way up to your capacity, you haven’t left money in your budget for your groceries, utilities, cell phone, other financial goals, or whatever else you should be paying for. If you spend anywhere close to that max, you are asking for issues down the road.

• Don’t Be Swayed:
  • Go to your loan appointment with a monthly payment in mind that fits within your budget. That way, you won’t fall in love with that maximum loan approval figure. Keep what you can actually afford in mind at all times.

#10: Consider all loan term options

The 30-year loan is the “standard”. That said, it’s a significant reason why so many are stuck in mortgage debt for seemingly forever. You don’t have to get a 30-year loan just because that’s the “norm”. Considering a 15 or 20-year loan will save you tremendously in total interest, and will also accelerate your debt payoff. I did a 20-year loan and it only increased my payment an extra $200/month. For me, it was worth it to cut the loan by 10 years while saving close to $50K in interest.

Can you just get a 30-year loan and make extra payments each year to pay the loan off quicker? Yes, but will you? In theory, you can shed much of your mortgage by making extra payments, but you have to remain disciplined. Life has a funny way of tempting you to spend that money in other areas, so be prepared for that reality.

• Do The Math:
  • Use a loan calculator to compare the total interest between loan terms. Either way, do NOT purchase more total house than you can afford by stretching out the payments. That’s a good way to turn a house from being a blessing, into a financial burden.

#11: Weigh the opportunity costs

On one hand, down payments and additional principle payments can drastically lower your debt. On the other hand, that comes at an opportunity cost. An opportunity cost is the missed benefit of an alternative. For example, instead of paying extra towards your house, you could potentially earn a higher return by investing the money.

Say you had an extra $300 each month. If invested in a S&P 500 index fund, you could potentially yield 7-8% annually. Meanwhile, your mortgage rate may be around 4.5%, or lower. So, could you be better off by not putting the money towards your house? Potentially, assuming you actually invest the money in this scenario. Disciplined action is the difference between a theoretical and actual result.

• No Wrong Answer:
  • It’s for you to decide which is more important to you: alternative gains, or freedom from debt ASAP. While the math might tell you one answer, it’s your values that you truly have to listen to.

#12: Build a home emergency fund

You should have an emergency fund whether or not you buy a house, tbh. But, if you buy a house, you will DEFINITELY need one. Things are going to break, and likely when you least expect it. I was 1.5 years into owning my home when I realized the mortar in my chimney was breaking off. Upon further inspection, there were other necessary repairs that were needed. I was not expecting that four-digit repair, but having an emergency fund was crucial. What could have been a financial mess without an emergency fund turned into an inconvenience, and nothing more.

• #ThankMeLater (Drake Voice):
  • Establish a home emergency savings in addition to your personal emergency fund. Achieving financial well-being is about not being stressed out about money. You can sleep great when you know worst-case, you could absorb a job loss and a major home repair.
  • Make a list of common repair/replacements to estimate how much to put towards that emergency fund. Think HVAC, roof, hot water tanks, and major appliances. They love to betray you when you least expect it.

#13: Understand a home is not the investment you think it is

Lastly, some hard truth. I cringe whenever I hear people mention a home being a “good investment”. Don’t get me wrong, I LOVE being a homeowner, but it’s not the financial investment you think it is. Yes, it’s an asset we expect to rise in value (due to the land), but there’s so much more to it than that.

When you calculate in what you will spend in interest, property taxes, insurance, warranties, security, maintenance, additional furnishings, increased utility bills, closing costs, lawn-care, upgrades, HOA fees, and other random bullsh*t that pops up over 10-20 years, it paints a different picture. That’s money that eats into your “profit” when you sell, so choose wisely.

Manage your expectations so you make the best emotionally and financially-based decision.

It feels good to be a home owner, but you have to make the numbers as favorable as possible. You do that by dialing in on mindset, choosing wisely, managing expectations, not overspending, making effective trade-offs, and keeping overall costs (to include interest) minimized.

• Be Smart:
  • You are human so emotions will be involved, but remember, it’s still a transaction.

Final Thoughts

This is by no means an all-inclusive list!

I am wayyy too long-winded to touch on every single aspect that you should consider.

But, my goal was to touch on what you need to put serious thought into before buying.

You should strive to buy a home if it aligns with your values. The key is to understand the reality you are stepping into, and develop the right mindset.

Personally, I look at homeownership as a way to stabilize my life. I have a consistent pillow to lay my head on, and I can do what I want.

Of course my emotions were present during buying, but I made decisions based on enhancing my overall financial well-being.

Don’t forget, financial decisions are a result of our thoughts and feelings. Control those, and you will make decisions that best serve you.

Your objective is to eliminate financial stress, enhance your wealth potential, and increase life options.

Treat your home purchase right and you’ll be on your way to living on your terms, not ones set by your lender!

Good Luck!

-Ambus-