Looking to Buy a House? Home Hunting Basics

When you are looking to buy a house, thinking about the process rationally will help you make the best financial and lifestyle considerations. A home is a good investment only if it meets your needs in both these areas. 

Set a Budget

For many first time home buyers, determining a budget for a home is a confusing step. Many think of budget in terms of the home's total asking price. In reality, this has little to do with a home's affordability. Buyers should instead consider a budget in terms of monthly payment. Your debts should never exceed one half of your monthly salary. This includes all fixed debts such as mortgage, car payments and student loan bills. With this benchmark in mind, determine how much you can afford to shell out in a mortgage payment. Staying under this 50 percent line should give you enough financial freedom to afford your property insurance, mortgage insurance and taxes with ease. The total cost of the home comes into play in terms of down payment. You should have enough cash on hand to cover, at minimum, 13 percent of the home's cost up front to account for the down payment and closing costs. 

Shop for a Loan First

Pre-approval is essential for first-time home buyers. Many make the mistake of finding homes they love only to find credit hiccups disqualify them from ownership. Shop for a loan you can afford based on your budget, and then use the loan pre-approval as a guideline for a new property. If you wait more than a few months to shop around, you should consider reapplying to make sure your approval is still good under your current financial situation. This is particularly important if you have changed jobs, taken or paid off a new loan.

Make a Priority List

When you buy your first home, you will not likely purchase your dream house. It is important to realize you will have to make sacrifices. A priority list can be divided into two columns. First, there should a column of must haves. For example, if you have a child, you will need at least two bedrooms. You may also know you need a laundry room, garage or other things. A second column should be reserved for your "wish list." This can be items you would love to find but do not need. An updated kitchen or master suite might go in this column.

Capitalize on Short Sales and Foreclosures

Many first-time home buyers need to get the most bang for their buck possible. Shopping in transitional neighborhoods or purchasing a "fixer upper" is just one way to go about this. Particularly in a buyer's market, looking for short sales, bank-owned properties and foreclosure offerings can also be a chance to get more for your money. Be aware these properties may suffer from maintenance issues. They require a more cautious approach, particularly at time of inspection. However, if you are bold enough to take a risk, these properties can provide a very high return on investment in the future.