Nitinkumar Gove

Insights from our journey of buying first home.

home buying first home

Disclaimer - This article captures our personal experience. This is not an legal or financial advise.

First things first !

If you are even remotely thinking of buying a house, you should probably start doing following things to get you setup for the long arduous process that awaits you.

  1. If your spouse does not have a credit score or have a credit score < 700, you should immediately start focusing on getting their credit score up. If they don't have a credit card, then add them on your credit card. If they have a credit card but don't use then, then start using their credit card for small expenses in house. Try to get your credit score above 780.
  2. All your down payment money should come from, ideally , only ONE account. So start saving your money in one account. Ideally the source for this account should be only one or two places e.g. your salary and one other account. If this is not the case then you would have to explain a lot of credit transactions which are bringing data into the account. This is done by lender to make sure that you are not doing money laundering.

House Non-Negotiables

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When we started looking into houses, we began with casual strolls through open houses over weekends. We learned during our first ever open house that we need a REALTOR who would accompany us and help us show / see / evaluate the open house. Obviously we didn't had one, rather we knowingly didn't get one during our first week or so of our house hunt journey.

Eventually we learned that it would be better if we have a list of non negotiable criteria for our house. This would help us in two ways. (1) Have a clear goal with our purchase (2) Have clarity around what exactly we are looking into the house

Here's how our final non negotiable criteria list looked like -

  • High rentability / Eventual cashflow positive investment property /
  • Elementary school 6+
  • Beds 2+ / Bath 2+ , Carpet Area : 1000+ Square feet
  • Lots of sunlight throughout the house.
  • Commute friendly ( close to major freeway, light rail / cal train etc. )

Now obviously you would have a lot of other criteria (e.g. gas stove vs electric stove, storage space, walk in closets etc. ) that you are looking for in your dream home. One mental model that helped us to prioritize through these additional criteria is RENTABILITY VS LIVABILITY.

The mental model is simple. If you are looking for a house which you are eventually (3-5 years) planning to rent , look at it from rentability perspective and ignore all the criteria related to livability. If you are looking for a house from livability perspective ( which means you are going live there forever ) then ignore the rentability criteria and look for all the criteria from long term living perspective.

This mental model gave us lot of clarity.

Affordability

Affordability for you vs bank is different.

I am going to cover affordability from buyers perspective. In my personal opinion, you should try to buy a home which has a monthly payment equal or about the same as your current rent. This way you wouldn't be stretching your pocket too much. It would also help you keep your savings / investment rate intact.

If you are married and both you and your spouse are working, try to keep the monthly payment below single salary. This way you would have much more mental peace.

Realtor

I personally feel, during your initial days, visiting few open houses without your realtor is beneficial. This will help you to build and fine tune your preferences. Get a feel of what you are looking for before you actually connect with realtor.

Find a realtor who has high availability, is quick in communication, highlights both good and bad things about a property, not afraid to walk away from property, not pushy or somehow trying to close and one who is willing to go at your pace.

PRO TIP: If you already find a property and you just need help with the purchase, you can negotiate with your realtor to split their 2.5% commission with you.

Mortgage Broker

We personally didn't had any mortgage broker. But I do feel for someone starting fresh, its a great idea to have a mortgage broker. Mortgage broker can find you a best loan as per your criteria. They are the ones who will do the leg work of comparing different lenders and their loan products and identifying the best loan which suits your needs.

You don't need to pay mortgage brokers as they earn commission from the lender. Learn more about mortgage broker here

Mortgage, Down payment, Mortgage Insurance

Ideally you should aim to put at least 20% down payment when purchasing a house. When you put anything below this, the lender will require you to have a MI ( mortgage insurance ). MI is an additional monthly insurance cost that you need to pay along with your house payments. This is a SUNKEN COST.

Mortgage insurances can be waived off after you payoff about 22% towards your principle. But different lenders might take different time to process this waive off request which means you will have to keep paying the MI payments.

If you end up taking an MI, make sure you confirm with your lender that the MI will be waived off after you meet certain criteria. Ensure that the MI is not for the complete life of the loan.

Of course there are options to buy houses with down payment as low as 3% but its comes with an additional cost.

One more thing to understand about mortgages is how the interests are calculated. There are fixed rates mortgages and then there are adjustable rates mortgages.

PRO TIP: If interest rates are high, just like now in March 2023, going for a 5 or 7 year ARM can give you a lower interest rates upfront and you can always refinance after the first 5/7 year period.

Buying Condos / town homes

If you are looking to buy a condo apartment, here are few things that you should ensure before you put an offer :

  • Check if the condos have any rental restrictions, special assessments or ongoing litigations. Special assessments generally increase the value of the apartment building but costs the owners hefty amount in short term.
  • If the condo apartment building has an elevator the HOA is generally higher as elevators are expensive to maintain.
  • Try to go for a condo which doesn't have anyone living above you. This way you wouldn't be bothered by noise from people walking on upper floor. Townhouse style condos are great deals. Look for those.
  • Few documents reports that you should read through are - home inspection report, termite inspection report, HOA meeting minutes ( look for any complaints which residents are making in meeting ), HOA balance sheets, owner disclosures, bylaws etc.