Derwin Dubose

Balling on a Budget: The challenges of buying your first home

// May 15th, 2008 // Balling on a Budget, Blog

Yesterday, I ran into two very cool twenty-somethings, legal employees who are looking to buy their first homes in my neighborhood. We spent over an hour talking about the home-buying process, the rewards of home ownership, and the unique challenges of home ownership that most renters may not be prepared for.

I spent a blog post explaining why twenty-somethings should buy homes now, but there are a few challenges that you must take care of during the process:

You need to understand the home buying process. Purchasing your first home can be a confusing, intimidating process. Before getting started, make sure you understand the real estate process, lest you fall prey to rogue real estate agents, predatory lenders, and botched deals.

Although there are many helpful vendors out there, don’t depend completely on the people who are selling you a product to give you objective information. I know several people who lost thousands because they didn’t fully understand the process.

There’s plenty of information out there to give you a good overview of the process and some tips. Check out HUD, About.com, Kiplinger, and Smart Money to get started.

You need good credit. Each twenty-something should check his or her credit report three times each year using the free credit reporting systems online. You get one free report per year from the three reporting bureaus, and your credit score — aka FICO score — is the key to getting a good interest rate. Not only will you have a better picture of your financial health, but you will also catch identity theft.

If you have credit problems — such as late payments, credit limits to the max, or even lack of credit — you can talk to credit counselors and loan officers to get input on strategies that will improve your credit score and make you more attractive to lenders. Having a few problems on your credit doesn’t automatically disqualify you, though. I was a little irresponsible with a department store credit card I got when I was a freshman in college, but using strategies from credit counselors made everything even out.

You need savings. I encourage everyone to look for those home ownership programs that will help you with a down payment and closing costs. I got over $40,000 from state and federal sources that are often overlooked.

However, there is a significant investment required. I put a little over $1000 down to qualify for the home ownership programs, and as part of your initial offer to purchase a home, you need to put some money down as “earnest money.” Also, I had to purchase a refrigerator, washer, dryer, kitchen items, and furniture, which are important but should not be the source of more credit card debt. I saved and saved beforehand until I could pay cash for most of these items.

You need to continue saving. If there’s a problem at your house, it’s your responsibility to fix it. Pipes burst? You call the plumber. AC or heat not working? You call the technician. I think you get the idea: there’s no more landlord to call in order to take care of household repairs.

If you purchase a home, you need to save at least 1% of the home’s value each year and devote it solely to a home maintenance fund for emergencies. Purchase a home warranty that will cover repairs during your first year or more — my contractor has fixed small things for me at no charge because of my warranty.

And if you have a homeowners association (HOA), figure out what repairs they cover. My HOA costs a pretty penny (over $100 each month), but they take complete care of my lawn and garden area, exterior water and sewage problems, and exterior painting.

You need to stay on top of things. The home buying process takes a lot of paperwork and people management. Make multiple copies of your tax returns, pay stubs, and loan applications, and keep them in a safe place. Turn in applications and forms in person, if possible. Follow up with all of the people you meet in the process and make sure your real estate agent, loan officer, and attorney keep their promises.

Finally, you need patience. Finding the right home, real estate agent, and loan package can be an arduous journey. Doing it right means conducting careful research, talking with many people, taking time from work, filling out countless forms, and waiting on things to be approved. In fact, it took me a few weeks shy of a year from thinking “Hey, I want to buy a house!” to my closing date. Many people give up because of the time involved, but patience will definitely pay off.

Again, I recommend that twenty-somethings purchase homes if they’re planning on staying put for the next 3-5 years. The time is now to take advantage of the nation’s housing situation. Home ownership is deeply rewarding, but be ready for the challenges that lie ahead.