You may even find yourself thinking about houses at night when you’re trying to fall asleep, and during the day when you’re trying to work. I know I did!
It gets overwhelming quickly, but it’s important not to forget about important tasks such as home inspections, insurance, and warranties.
Those tasks may not be as fun as say, choosing paint colors, but they’re absolutely necessary to protect yourself and your new investment.
Whether it’s your first time house hunting or your fifth, there are a lot of steps to take, so consider this a crash course in real estate: let this guide act as a comprehensive resource for your home buying process.
Here’s what you need to know before buying a house (and then you can get back to the fun part!).
Save an Emergency Fund
Before you jump into home ownership, make sure to save up a sizable emergency fund in case something important breaks. It may be hard to save for an emergency fund while you’re also trying to save for a down payment, but you don’t have to save much to keep yourself from putting a home repair on credit.
Repairs are going to happen — it’s part of being a home owner. You won’t have a landlord to call when something goes wrong. It’s all on you unless it’s a major repair that your insurance company might fix.
You don’t want to be forced to charge up your credit cards to take care of the problem for the items your homeowner’s policy won’t cover (the AC or heat going out, a broken water heater). Avoid this frustration with an emergency home fund.
Try to save at least $500-$2,000 for unforeseen repairs that will arise. When something does come up, you’ll be relieved that you have the extra money to fall back on.
Get a Home Inspection
Before buying any property, get a home inspection! This is the number one thing recommended houston home inspectors tell first time buyers. It may cost you a few hundred dollars, but that amount pales in comparison to the amount you’re spending on a home.
A home is likely to be the biggest expense in your life — it makes sense to protect your biggest investment by having a professional inspect it before you sign the closing papers.
You don’t want to pay a couple hundred thousand dollars for your dream house only to find out it has foundation or mold issues. (It won’t look so dreamy after that.)
Have the Seller Include a Home Buyer’s Warranty
When you sign the sales contract for your new home, ask if the sellers are including a home buyer’s warranty at their expense. Many times it’s part of the deal, but if it isn’t, ask if they will include it.
A home buyer’s warranty covers you for a year or more for anything that may break after you move in. It’s basically an insurance policy, but it covers things that your homeowner’s insurance won’t, like most small appliances — anything from a broken dishwasher to an air conditioning unit.
When you buy a home, a property disclosure should also be included with your sales contract. This is a document from the seller that details any repairs or problems that are current with the property or that have happened in the past.A home buyer's warranty protects you in the event any appliances break. Be sure to get one! Click To Tweet
However, if the property was an investment property or a foreclosure, the seller isn’t required to provide this information since they haven’t personally lived in the home. That means that if you’re buying an investment property or foreclosure, a home buyer’s warranty is even more important to cover you for unanticipated repairs.
When I bought my foreclosure a few years ago, the air conditioning unit, the hot water heater and the garage heater all broke within weeks of us moving in. That would have set us back $5,000 in a hurry, but luckily we had our home buyer’s warranty to fall back on, so we were very thankful!
Nothing is worse than buying a new property and having to replace several appliances right when you move in. A cheap home buyer’s warranty will have you covered for those kinds of problems.
Insurance Doesn’t Cover Everything
Hopefully you won’t ever have to use your homeowner’s insurance, but if you do, you may be surprised to find out what it does and doesn’t cover. You pay a lot for homeowner’s insurance, so you would think it would cover everything, but it doesn’t.
Even if you have an all perils policy, you aren’t covered for everything, despite the misleading insinuation. Insurance companies are notorious for not covering everything, and homeowner’s insurance is no exception.
Disasters such as floods, rot, wear and tear, and sink holes are typically not covered under most insurance policies. Your policy may need an endorsement for perils like earthquakes and sink holes to be covered.
For flood coverage in particular, you must obtain a separate flood insurance policy that only covers floods and can be quite expensive depending on the property location. FEMA mandates that certain properties, depending on where they fall on a flood map, be covered with flood insurance. If a property requires flood insurance, that will be in addition to homeowner’s insurance and will be an added expense.Review your homeowner's insurance policy carefully - it might not be as comprehensive as you think! Click To Tweet
Termite damage may also not be covered, so make sure to request a termite inspection from the seller with your contract. Old termite damage is not necessarily a deal breaker, but if the property has active termites, buyer beware.
Check with your insurance agent to make sure you are covered for what you may need.
The Difference Between Mortgage Insurance and Homeowner’s Insurance
Mortgage insurance and homeowner’s insurance aren’t the same thing, and it’s important to know the differences.
Mortgage insurance must be purchased if you don’t have a 20% down payment, and is used to cover your lender in case you default on your mortgage. It’s not there to help you — it helps lenders ensure themselves against risk.
Homeowner’s insurance is there to protect you and your mortgage company in case of a loss, such as a fire or fallen tree. You have more control over your homeowner’s insurance policy because you can shop around to find the best rates. You might have to keep a certain coverage limit depending on your mortgage company’s restrictions.
Consider Resale Value
Selling a property you haven’t even purchased yet may be far from your mind, but even though you’re currently shopping for your new home, you need to consider the resale value of any property you purchase.
You may be purchasing what you think will be your forever home, but you never know what life is going to throw at you, and you never know when you may be forced to move (such as a job relocation or the desire to be closer to family).
For this reason, you need to be concerned about the resale value of the home you consider purchasing. It’s not ideal to be stuck in a house you can’t sell when your job is being relocated across the country. Being an out of state landlord doesn’t entice most people, either.
Additionally, mortgage companies don’t like to finance anything considered a “unique property,” because if the property forecloses, it’s much harder for them to sell it.
You should think along these lines if you view any unique properties. They don’t typically attract a lot of buyers, so they’re harder to sell if you need to get out from under them quickly. And even if you do find a potential buyer, they may have trouble obtaining financing.
Look for Instant Equity Instead
The most desirable properties are those that come with instant equity. This means that the properties are under-priced compared to the local market or neighborhood, and the appraised value is higher than the list price.
If you can land a sales contract on one of those, you can gain instant equity on the day of closing. For example, if the property appraises for $200,000 and you pay $175,000 for it, you have $25,000 in instant equity.Consider resale value and getting instant equity when buying a home: Click To Tweet
Foreclosures very often come with instant equity, and that’s why they’re snapped up quickly. They can be harder to view if they’re in need of repairs or cosmetic updates, but great deals can be found on foreclosures, so don’t be afraid of them. (Just make sure to get that home buyer’s warranty that we discussed.)
You can build even more equity with a little sweat equity and DIY work if you are up for the task.
Look at Surrounding Properties
If you find a property that meets all your criteria, look at all the properties around it as well. You can choose your house and you can choose the location, but you can’t choose your neighbors. If you don’t have the opportunity to meet them in person, make sure the neighbors keep clean, well-kept homes.
Ask yourself these questions as you survey the neighborhood:
- Are the lawns well kept?
- Are there junk cars in the yard?
- Are there noisy dogs in the backyard?
Make sure you can tolerate your closest neighbors, because they are there to stay.
You May Not Need a Down Payment
Lastly, if you qualify, you may be eligible for a 100% mortgage loan, such as a VA or USDA loan. If not, you may qualify for as little as 3.5% down with an FHA loan. It’s worth checking into with your mortgage broker if you don’t have much of a down payment to buy your home.
For those that have been through the home buying process, what did you wish you had known, or what would you do differently?