How to Get a Great Deal on Your First Home (Don't Tell Your Broker)

Once you've decided to bite the bullet and decide to buy your first home, being prepared will help you avoid many of the pitfalls.

The expenses related to purchasing a first home can be daunting, especially when consumers are used to paying rent or sharing expenses with roommates.

In some cities where the market is more competitive because demand is outstripping the number of homes available on the market, it helps to know some of the tricks of the industry.

Houses in the suburbs, options in the city that are have just started regentrifying, homes that have been foreclosed on by a bank and fixer uppers are often less expensive, but homeowners must consider the longer commute and need to own a car, saving more money for remodeling projects and living with bathrooms and kitchens that may not be fully functional for several months.

As you look to land that perfect and affordable house, here are ten tips to consider before you make an offer.

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Check your credit score first
Check your credit score first

Potential homeowners must be proactive before they obtain a mortgage and should start by examining their credit report first, said Jeff Golding, chief growth officer at IRH Capital, a Northbrook, Ill.-based financial company. Credit scores play a large factor in the interest rate homeowners receive for their mortgage and can save them thousands of dollars. 

A credit report will show if there are any mistakes about late or missed payments. All three major credit bureaus provide a free report at www.annualcreditreport.com.

Don't apply for new credit cards or loanscred
Don't apply for new credit cards or loanscred

Consumers must refrain from applying for new credit such as auto loans, credit cards or personal loans before they are approved for a mortgage since taking those actions can lower their credit score.

"It may make a lender wary of giving you a mortgage," he said.

Create a budget for all costs
Create a budget for all costs

Before consumers decide to purchase a house, they need to budget in other costs such as higher utility fees, property taxes and a homeowners association fee.

"Too often new homeowners compare their monthly rent payment to what they can afford for a mortgage, but forget about the other costs," Golding said.

Read More: How to Slash Your Energy Costs

Consider your salary and location
Consider your salary and location

Instead of only examining the cost of a home, homeowners need to consider how much money they will be earning in the city or town they want to live in for several years, said Bruce McClary, spokesman for the National Foundation for Credit Counseling, a Washington, D.C.-based non-profit organization.

The job markets in some urban areas often provide higher salaries, but housing costs often rise also.

"What people need to examine closely is the housing to income ratio, which would indicate how much percentage of income would be committed to housing expenses," he said. "A more favorable ratio may be possible in a city where home ownership is costlier, but salaries are more generous."

Timing is an important factor
Timing is an important factor

Determining whether purchasing a home on your current salary is the right choice depends on a variety of other factors.

"The lure of getting more house for your dollar may be strong, but many other factors will determine if home ownership is sustainable," McClary said. "The local economy is a significant indicator, especially the local employment rates for your profession."

Figure out down payment amount
Figure out down payment amount

Research the amount of money you need to save for a down payment, which might be considerably less than what many consumers believe. Redfin said one in four of its real estate agents found that homeowners were able to purchase a house with a down payment of only 3% to 5%.

Determine the type of mortgage you are seeking
Determine the type of mortgage you are seeking

Homeowners who might move for their jobs or want a larger or different style of architecture in a few years should opt for a 5-year adjustable rate mortgage (ARM) or 7-year ARM, which offer lower payments in the initial years. 

Improve credit score before getting a mortgage
Improve credit score before getting a mortgage

Improving your credit score is essential, because even though consumers can receive a mortgage with a credit score as low as 580, your interest rate will be lower the higher your credit score is. 

Consumers who have a score which is lower than 750 should seek to increase it by 25 basis points since it could mean paying about 1% less each month.

Buy the home you can afford today
Buy the home you can afford today

Stick to buying the house you can afford now, even if you think you will get a large raise or receive a promotion in the future.

"Don't buy more house than you really need and certainly don't take the maximum mortgage amount you qualify for," said Robert Johnson, president of The American College of Financial Services in Bryn Mawr, Pa.

While buying a home is a good investment decision for some people, potential homeowners should recognize that purchasing a home is often a very poor financial decision.

"People fall prey to the stories of individuals realizing substantial gains by buying a home and selling it at a much higher price years down the road," he said. "A large percentage of an individual's net worth is in home equity and some studies have found that one-quarter of the net wealth of all homeowners was in housing."

Noble laureate economist and Yale Professor Robert Shiller makes a compelling case that real estate, particularly residential homes, are a much inferior investment when compared to stocks.

He found that on an inflation-adjusted basis, the average home price has increased only 0.6% annually over the past 100 years compared to the average return on a large stock index like the S&P 500 is about 7%.

Ask for a rapid re-score
Ask for a rapid re-score

Ask the lender for a rapid re-score, said Greg McBride, chief financial analyst for Bankrate, a New York-based financial data and content company. Borrowers who are in the loan approval process for a mortgage have "gotten incorrect items fixed on their credit report or made a large payment against a revolving line of credit, should ask the lender for a 'rapid re-score' that takes those actions into account," he said.

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