How to Buy Your First Home

the millennial money woman blog post "how to buy your first home"

Wondering how to buy your first home? Here's everything you need to know to make sure you're financially prepared and emerge as a winner at the end of the deal.

In this article

For those of you who are set on homeownership, I thought I would share this story of what I did to purchase my first home at 23. 

Honestly, it was not as hard or confusing as I thought it would be… and I think that was mainly because I knew exactly what I wanted in a house and I had done my proper research starting about 1 year before I purchased my home.

And honestly, if I had ended up in a different part of the world, I may not have found it appropriate to purchase a home.

Given my specific circumstances in life, I decided that it was time to make the purchase early because based on my situation it would likely pay off for me to buy now.

Two things that drove me to make my home purchase decision were:

  • I was paying just under $2,000 per month for a 450 square foot apartment in the city center.
  • I loved my job and could not see myself moving from the city and state I was living in. 

Even though it was great living downtown, don’t get me wrong, it got pretty old pretty fast living in a 1-bedroom apartment where my bathroom was practically in my kitchen. 

To top it off, I was paying MORE for my 450 square foot apartment than what some of my colleagues were paying for their monthly mortgage for a 2,000 plus square foot HOME. 

That’s right. Something didn’t add up. 

And that’s when I knew I had to pivot my life and move toward homeownership (no pun intended).

While I sifted through hundreds of homes that were viable options, I made sure I understood the basic transactional process as it relates to homeownership as well. 

For example, I researched which mortgage option would be the best for me, which lender I should use (this generally depends on your location as well as the interest rate you are looking to obtain from the lender for your mortgage), and of course, I had to make sure I kept my budget in mind so that I would not overspend on a possible house.

However, the No. 1 lesson I learned while I was searching for a home was to make sure you have a trustworthy and reliable realtor. 

Unfortunately, I had the opposite experience – my realtor was nice but she did not seem to rally on my behalf. 

She tried to dissuade me from offering a lower purchase price (and thankfully I did not listen)! 

Why would my realtor try to convince me to pay the selling price rather than opt for negotiating for a lower sale price?

Pro-tip: If you purchase a home and have a realtor working on your behalf – they are not being paid by you. 

They are being paid through a commissions structure (typically around 3%) based on the sale price of the home you plan to purchase. 

The sellers will be paying your realtor based on what you agree to purchase your home. 

I’m not saying all realtors will try to have you pay the purchase price so that they are paid more, but what I am saying is that there are plenty of bad-apple realtors out there, so be sure that you properly vet the one you decide to use.

I’ve been happily living in my house for several years now and couldn’t be happier. 

In fact, with the recent market volatility, I’ve refinanced my mortgage as well (click this link to read my refinance journey). 

To let you in on some of my secrets on how I bought my first house at 23 and more first time home buyer tips, keep reading below.

save every penny

Step #1: Save Every Penny to Make that 20% Downpayment


What I realized when I went through the home purchase process was that it’s about commitment.

The second I realized I wanted to move out of my tiny 450 square foot apartment and into an actual house, I knew I had to put every effort toward accomplishing my primary goal: being able to afford a 20% downpayment. 

Why was that 20% downpayment number so important to me? 

Because of a thing called PMI.

What is PMI?


PMI is industry slang for Private Mortgage Insurance. 

To be precise, this means more money out of your pocket and generally for the rest of your mortgage term (which could span for up to 30 years, depending on the mortgage term you elect). 

PMI will cost you typically between 0.5% and 1% of your overall mortgage and will likely be included in your monthly mortgage payment. 

Does everyone have to pay PMI? 


NO! But one of the very few exceptions to avoid paying PMI is if you can bring a 20% down payment to the table. 

Even though a 0.5% to 1% PMI rate may not sound overwhelming – remember that the numbers will add up over time. So if you can hustle, save and/or cut costs now to make that 20% downpayment, your bank accounts will thank me later. 

Moral of the Story: Once you know you want to become a homeowner, save everything you can, cut costs, and earn more money if possible. 

Use this saved money to move toward the 20% downpayment of the home to avoid PMI costs for the future.

dont buy to much house

Step #2: Keep your Budget in Mind: Don’t buy too much House


When I started searching for a house, I had to keep one thing in mind when determining my price range: My budget and monthly cash flows.

In other words, I didn’t want to go overboard and spend money on “too much house.” 

What does the phrase “too much house” actually mean? 


In my opinion, this means spending money on a home that’s too big for your current needs.

I was single at the time I bought my house and did not yet meet my future husband. 

I didn’t have a large family, I didn’t even have any pets, so I didn’t need a large home for myself. 

But, I did have a rough idea in mind of how I would like my future to look: Married at some point and possibly kids down the road (in my 30’s). 

In other words, I knew I was looking for a 2 bedroom or 3 bedrooms that ranged somewhere between 1,500 and 2,000 square feet in a safe neighborhood, relatively close to my work. 

Even though I would have liked to purchase a house with more square feet, I didn’t need it – and frankly, I didn’t want to spend the extra money that typically comes with purchasing a larger home. 

By carefully maintaining an eye on my budget: my monthly income and monthly expenses, I was able to know exactly how much cash flow I could afford to spend on my future mortgage, and with that, I could roughly calculate the price range of my future home. 

Here’s a rule of thumb that I knew before getting into homeownership and lived by – and so should you: Your Monthly PITI Expenses < 28% of your gross monthly income.

Ok – let’s break this formula down: PITI (Principal, Interest, Taxes, Insurance).

This is the TOTAL monthly cost of your home, which includes: 

  • Mortgage payment (Principal)
  • Mortgage payment (Interest
  • Taxes (Property) 
  • Insurance (Homeowner’s Insurance)

Furthermore, this formula is stating that these expenses (also abbreviated as PITI) should be LESS than 28% of your gross monthly income. 

Gross just means everything you make in 1 month BEFORE you subtract out taxes, 401k contributions, health insurance deductions, you get the idea.  

Recommended reading: How does a 401k work

For example, if you earn $5,000 each month as your gross income, then based on this formula, ideally you should be looking to obtain a home where your all-in (PITI) expenses should bless than $1,400 per month (which is equal to less than 28% of gross monthly income). 

Moral of the Story: Don’t fall for the common trap of buying too much house just to show-off to your friends or to “feel good.”

Buy a house that you like – but make sure that you always keep your budget and cash flow in mind.

research early 1

Step #3: Start Your Research Early


Simply put: The second you know you want to purchase a home – start your research. 

By research, I mean the following:

  • Review the safety of the possible neighborhoods you are considering moving to.
  • Review the crime rate in the surrounding area.
  • See how school districts are ranked.
  • Attend multiple open houses (I attended north of 30 before I settled on my current home).
  • Research homes for sale on platforms like Zillow to see comparable prices, years built, etc..

However, the biggest lesson I learned from my home purchase was to research and interview realtors.

It’s so important to find a realtor that is on your side – someone who will work in your best interest. 

I sadly did not have that experience, but that’s ok. 

That’s why I’m here today telling you about it and what to do to have the best possible home purchase experience.

Moral of the Story: Start researching your future as soon as possible… more importantly, start researching and interviewing a possible realtor who will help you. 

walk away

Step #4: Be Willing to Walk Away


So let’s say you just found your dream home. 

You fell in love with it and you put down an offer. 

Now let’s say that you find several things that are wrong with the home (plumbing, moldy bathrooms, kitchen needs a remodel – just to name a few examples). 

With these fixtures in mind, you request the seller to lower the price as you would be looking at spending roughly $15,000 to make those reparations. 

Let’s also say the seller refuses to budget. What do you do?


Even though it’s important to look for a house that you like and that fits your criteria (obviously), it’s also important to realize that if you found 1 house that satisfied your needs, the likelihood of finding another home that will equally or more satisfy your needs is fairly high. 

What I’m saying is – don’t set your heart on 1 house. 

Setting your heart on something involves emotions – and emotions generally don’t allow you to think rationally (such as questioning whether a purchase makes financial sense, or questioning if you can afford a home).

Moral of the Story: If possible, think rationally about a home purchase as it relates to your finances, and be willing to walk away from the deal if the potential home purchase may harm your financial picture. 

There is always another home out there for you.

offer

Step #5: Make an Offer that’s 20% to 30% Below the Sale Price


Ok, I learned this myself and I think it helped me lower my purchase price by almost $20,000! 

I know that some of you may be doing a double-take at this point – wondering if it is possible to come to the table with an offer that’s below 20% to 30% the actual sale price.

But you know what? 

It actually works (and to add on top of that: I have a friend who offered 60% below the purchase price, and the sellers came back with a counter-offer of 45% below the purchase price! That’s a win!). 

I’m not saying that the sellers will immediately settle for your “low-ball” offer. 

However, what I am saying is that you are using a psychological strategy in this situation: you are utilizing the anchoring technique

In other words, by giving the seller a substantially low offer relative to the actual sale price, you have just caused the seller (and you) to depend on the initial offer (considered the anchor) to make subsequent offers and/or counter-offers during the negotiation process. 

Typically, when you set this anchor (or in this case, your purchase offer), all future home sale negotiations and counter-offers are based in relativity to this anchor — and ultimately you may settle for a much lower home purchase price than if your first offer was only 10% lower than the sale price.

Here’s an example to illustrate the above scenario:

Let’s say you’re considering purchasing a home listed at $100,000 (I know that’s a low price, but for mathematical purposes, let’s stick to this number for now). 

Now let’s use 2 different scenarios:

  • Scenario 1: You offer 10% below the sale price, so you offer to pay $90,000 for the home.
  • Scenario 2: You offer 30% below the sale price, so you offer to pay $70,000 for the home.

In both scenarios, you show interest and the seller will likely engage with you. 

However, note that the seller will likely only counter-offer a higher sale price from your initial offer. 

They will [almost] never present a counter-offer with a lower number from your original offer. 

In other words, if you initially offered $90,000 the likelihood for the seller to counter-offer with a number higher than $90,000 is practically guaranteed. 

Your anchor in this situation is $90,000. 

However, if you set your initial offer at $70,000 (so that’s your anchor), then the seller will likely counter-offer at a number higher than $70,000 but very unlikely approach you with a counter-offer in the $90,000 range (since some may consider this as too much of a drastic counteroffer from the original $70,000 offer). 

Moral of the Story: Make your first offer lower than usual and see how the seller reacts. 

If luck is on your side, you may be able to reduce the sale price drastically using this technique.

negotiate

Step #6: Negotiate, Negotiate, Negotiate


In other words, don’t just settle. Negotiate for a lower price, or if you don’t feel comfortable negotiating for a lower price, then negotiate to have the sellers fix or repair things in the home that otherwise you would be responsible for.

For example, even though I received a nice price drop when I purchased my home, I also negotiated with the sellers to install some additional piping that leads to my dryer and washer. 

I also negotiated with them to pay for some of my home assessment surveys. 

Even though I did not request the seller to directly reduce the price of the home, I was still able to negotiate with them to add value to my future home purchase by paying for items that normally I would have had to do.

Moral of the Story: Be comfortable negotiating with the sellers. 

If you don’t want to negotiate for a lower price, then consider negotiating using out-of-the-box techniques.

Final Thoughts


Purchasing a home can be a daunting and scary journey.

However – it’s only scary if you don’t prepare before and if you don’t do your research. 

Make sure you have a good idea of your budget, how much you can afford to spend on a home before you make this financial commitment. 

Moreover, research your realtor and make sure you find someone who has your best interest at heart. 

Lastly, negotiate as much as possible. And if the seller doesn’t want to budge? 

Then be willing to walk away. 

There are always other houses out there.

What was your experience when you bought your first home?

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fiona smith the millennial money woman

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