Advice for a first-time homebuyer in 2023

A: Thanks for your question. It’s terrific that in this day of elevated interest rates, first-time homebuyers are eager to get out there and claim their share of the American dream. In Ilyce’s book, “100 Questions Every First-Time Home Buyer Should Ask” (4th Ed.), she offers nine immediate questions you should be able to answer before starting your search. Here are the four most important most important for your daughter to consider:

Should you rent or should you buy?

Just because you can afford to buy a home, that doesn’t mean you should. One of the big mistakes home buyers often make is buying when they should be renting.

How do you know if you should rent? Consider whether you’re happy in your job and can envision yourself staying put for the next five to seven years, or at least staying in the same general location. If you’re working from home, and can easily find other jobs where you can continue as a remote worker, the commuting to work issue becomes moot.

Beyond that though, first-time homebuyers often make the mistake of buying a property that’s too small for their growing lifestyle. So, aim to buy at least a two-bedroom, two-bath condo, townhouse, or single family house. That way, you’ll be able to accommodate a partner and perhaps even a child down the road.

Of course, the biggest issue is whether you can afford to buy. In today’s interest rate environment, you’ll need to have a substantial down payment and afford the monthly payments with a higher interest rate.

Should you buy with someone or on your own?

There’s nothing wrong with buying a home with a partner, spouse, or non-romantic friend. You just need to plan out how the ownership structure will work, who will contribute what in terms of cash or sweat equity, and how ongoing improvements, renovations, maintenance, upkeep, and payment of other joint bills will be made.

The best thing you can do if you’re thinking of buying with someone else is to sit down and work out all these details ahead of time. One thing to think about before you go shopping for a house is what will happen if one of you wants to sell but the other doesn’t. While that seems simple, you have to plan for the possibility that the person who wants to stay in the property can’t afford to buy out the partners. How you’ll handle that is key to a successful home-buying experience.

How should you think about your home-buying time horizon so you avoid making a big mistake?

We find that first-time buyers often make timing mistakes. Typically, they sign a lease to rent their current home for another year and then decide they want to buy something. They go shopping for a place, and wind up paying rent in mortgage for six months or longer. That’s not affordable in most cases, especially today.

So, think about when you would like to be in your first home, and reverse engineer the process. It will take you six to eight weeks to close in the home once your offer is accepted. It may take you three to five months to find a property that will work for you that’s in your price range. You also need to hire an agent, make sure you are pre-approved for your mortgage, find a professional home inspector, and understand what it will take to get you packed up and moved.

Working all these details out ahead of time is ideal, but doesn’t always happen. Still, if you plan, the whole purchase process will go more smoothly.

How much should you spend on your purchase and how will your credit affect what you can spend?

This question is actually a combination of two questions in Ilyce’s book, but they dovetail nicely.

How much you can afford to spend on a house may change several times during the course of the day, depending on what interest rates do. Where your credit score is at any point in time will also directly affect how big a loan your lender will approve.

The higher your credit score, the lower the interest rate you’ll pay on your loan. You’ll also get a better deal in terms of points (a point is one percent of the loan amount) and other fees.

Right now, the average credit score is around 700, which means the interest rate you carry on your mortgage could be close to 7%. Depending on how much cash you have for your down payment, you might be able to spend two to three and a half times your gross monthly income on your mortgage, taxes, and insurance premium. If you are buying a condo, or if you have a large amount of debt, the lender will subtract the monthly payments on those two items from the total amount you can spend on the property. It gets pretty complex, and your daughter should work with a trusted mortgage lender to figure out exactly how much she can afford to buy before she starts looking.

Because of course, another of the biggest mistakes first-time buyers make is falling in love with homes that are way outside their price range. For some reason, they also often believe that the houses they buy should look exactly like featured homes on cable TV.

The best thing you can do is help your daughter understand the realities of what she can’t afford, what types of properties her neighborhood of choice offers, and how she can make the most of her hard-earned dollars.

(Ilyce Glink is the author of “100 Questions Every First-Time Home Buyer Should Ask” (4th Edition). She is also the CEO of Best Money Moves, a financial wellness technology company. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact Ilyce and Sam through her website, ThinkGlink.com.)