Talk Money Guide

A Guide to Buying Your First Home

Should you buy a home?

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About the Author

Mesh Lakhani
Founder of The Talk Money

Hi! I'm Mesh 👋

I'm an investor and entrepreneur with a passion for making business education straightforward and entertaining.

I believe everyone should have the tools and knowledge necessary to understand their money. I started Talk Money to help educate others, demystify the world of finance, and break down complex business concepts. There’s a lot of noise and complicated information out there: let’s make it simple!

About the Guide

“This is the tenth house we've put an offer in on. Each time we’ve offered over asking price and we're still not even getting close. What gives?”

Sound familiar?

Buying your first home can be an exhausting process.

According to the Wall Street Journal, home prices have risen by about 50 percent in the last decade. Many markets that used to be affordable have shot up even faster. Time will tell if this is the case post-COVID. Many people are leaving big cities like New York and San Francisco and moving to smaller cities like Austin, Portland & Fort Lauderdale. 

I once helped my mom buy a home. It was stressful. There were so many little painful twists and unexpected obstacles that we weren’t prepared for. Even something as standard as getting a mortgage seemed surprisingly complicated and out of reach

I’ve learned my lesson and I’m well prepared for the next go around, but I wish I knew what to look out for when I was doing it the first time.

What will you get from this guide?

  • The mentality you should bring to home buying, and whether it’s even right for you
  • How to find a realtor
  • How to find value in a real estate transaction
  • How to make an offer and be competitive (to buy real estate, you have to be)
  • How the mortgage process works

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“This is the tenth house we've put an offer in on. Each time we’ve offered over asking price and we're still not even getting close. What gives?”

Sound familiar?

Buying your first home can be an exhausting process.

According to the Wall Street Journal, home prices have risen by about 50 percent in the last decade. Many markets that used to be affordable have shot up even faster. Time will tell if this is the case post-COVID. Many people are leaving big cities like New York and San Francisco and moving to smaller cities like Austin, Portland & Fort Lauderdale. 

I once helped my mom buy a home. It was stressful. There were so many little painful twists and unexpected obstacles that we weren’t prepared for. Even something as standard as getting a mortgage seemed surprisingly complicated and out of reach

I’ve learned my lesson and I’m well prepared for the next go around, but I wish I knew what to look out for when I was doing it the first time.

Today we’re going to help you do just that. We’ll go over:

  • The mentality you should bring to home buying, and whether it’s even right for you
  • How to find a realtor
  • How to find value in a real estate transaction
  • How to make an offer and be competitive (to buy real estate, you have to be)
  • How the mortgage process works

Should you buy a home? 

Some good questions to ask yourself might be:

  • Where are you in life?
  • Are you ready to settle down?
  • Do you have capital saved up and a steady income stream?
  • Or are you still figuring out your financial situation (and your life) out?

Homeownership is a very personal question, and there are so many different variables to consider when deciding whether it’s right for you.

Option #1: Renting

Most people looking to buy their first home are currently renters

Renting has its benefits: 

  • It gives you flexibility
  • Has no real financial commitment beyond the money you spend on rent
  • And it’s low risk
  • If you have savings, you can invest it elsewhere

But renting also has its downsides, especially if you’re making enough to consider buying a home. The money you spend on rent is gone forever: it isn’t helping you work towards anything.

Option #2: Homebuying

One reason why homebuying is attractive to so many people is that it gives you equity. It actually forces you to save money and put it in the home, as opposed to spending it. 

The capital (i.e. up front investment you make) spent on your home is held in the value of your home, and it has the potential to increase.

The upside to buying a home is that there is a potential upside. Once you pay off your mortgage, you’re sitting on something that is yours.

That said, homebuying is by no means a guaranteed home run. You need to make sure you’re finding something that has value

Developer Jordan Ghrist discussing the myths of homeownership. It’s not always a good investment.


But isn’t home buying a surefire investment? 

The idea that any home you buy is a good investment just isn’t true.

That’s an especially dangerous myth in an age when so many young people are moving into big cities where the housing stock is scarce and the market is volatile. 

If you aren’t careful, you could find yourself buying at the top of the market and seeing your equity crater during a downturn.

What should I look for in a home?

Ask any real estate professional what the first thing you should look for in a home is, and they’ll tell you it’s the comparables, otherwise known as comps.

A comparable is just a home that is similar—in size, price and features—to the home you’re looking for. 

Developer Jordan Ghrist discussing the “comps” or comparable of homes. This is a key metric that’s used to find value in a home.


A good real estate agent should be able to take a description of your ideal home—say, a four bedroom, three bathroom home in a walkable neighbourhood—and come back to you with a list of comparables for that home profile.

Real estate is all about looking around and seeing what everybody else is charging for those comparables, and then developing baseline expectations around price and what you can get for that price.

Once you think you can match or exceed the prices that other buyers are offering for those comparables, then this market is for you, and it’s time to act.

What’s your budget?

Your agent can’t come up with comparables until you come up with a budget, which should answer one simple question: what’s a comfortable amount for you to spend on a home?

Make sure to leave yourself lots of room when coming up with this number, by the way. 

Consider that you’ll probably have to pay around 10-20% of the total price on a downpayment, and that you’ll need enough income left over to pay monthly mortgage, insurance, HOA, property tax, and maintenance fees as well.

Example:

  • House = $100,000
  • 20% Down Payment = $20,000 cash
  • Monthly Payment = $730

Do you want to buy new or renovate?

Another important thing to think about when coming up with a budget is whether you want to buy new or do some of the home building yourself.

Buying new

Want to buy something that’s completely new? Then get ready to pay for the builder’s profit, which is usually around 15-30% of the total price the developer paid for the purchase and renovation of the property.

Ask yourself if you want to pay that premium when buying something already renovated. If it cost the developer $700,000 to buy and renovate a home, do you really want to pay an additional $140,000 on top of their costs?

Developer Jordan Ghrist talks about why you pay a premium for a new home. How is it priced?


Renovation

If you think you want to do it yourself, come to terms with the fact that the home you’re buying might not be perfect right away. 

Maybe you'll do your kitchen first, but then when you have enough money later you can finally build that sick bathroom you've always wanted, the one with the infrared sauna.

If you know any builders or contractors, have them look at a property before deciding to renovate it yourself. They’ll be able to give you a pretty good idea of what it will cost to renovate per square foot, and any potential pitfalls to look out for when you do.

What do you want in a home?

Once you’ve got a budget, stick to it, and think about what’s most important to you in your living space.

Factors to consider when thinking about your ideal home include:

  • Are you focused on finding a home in a particular neighbourhood, or a particular kind of neighbourhood?
  • Do you want to live in the city, or the suburbs?
  • Is access to public transportation important to you?
  • What about schools, parks, and other public amenities?
  • Do you want to raise a family?
  • Can you live here for extended period of time?

My advice is to narrow your search down to a few different neighborhoods, and then start looking at the comparables.

Getting pre-approved, and other costs you should think about

One of the most painful parts of home buying is all the unexpected fees that come with it. 

Homeownership is about a lot more than just paying off a mortgage—there are a whole bunch of extra fees you end up paying that could cause you trouble down the road if you aren’t prepared for them.

Before getting a realtor and starting to put in offers, get clear on what these fees are.

Pre-approval

Being pre-approved means you’ve been vetted for a mortgage by a bank or lender, that you've submitted all your financial information and that the mortgage bank has said, ‘yes we are going to loan you X number of dollars for you to purchase your home.’

This is essential when you want to put an offer on your home, because most real estate transactions are going to come down to which buyer is able to move quickest in the process. 

Mortgage expert John Teweles discusses what documentation you need to be approved for a mortgage by a bank.


What You Need:

  • Bank Statements
  • Investment Statements
  • W-2
  • Proof of Assets
  • Proof of other Income

Transfer and title fees

When you buy a home, you want to make sure you’re being provided a clean title, which basically indicates whether or not the ownership of the home can be disputed. 

Example:

  • Family owns a home, the owner has children, and the owner dies and the children inherit a portion of the house.
  • There could be disagreement about who actually owns the house and who's able to make those decisions, and the title to that home could be disputed.
  • This can cost you time, legal fees, and you may not even end up with a house.

Having someone look over the title and make sure there aren’t any legal issues can cost you money—but it’s well worth the legal headache it could help you avoid down the line, which may cost significantly more. Make sure to factor those into your budget as well.

Developer Jordan Ghrist lists all the additional costs that go into buying a home that we may not have foreseen.


Closing costs

This is the cut that your real estate agent is going to take once the sale is complete (remember that they will have to split that cut with the seller’s agent as well).

Property Tax

This is a tax local governments leverage on your home to fund things like schools, the fire department, police, sewage treatment, etc. 

They can vary quite a bit from city to city, so make sure you know what you’re getting into when looking at a neighbourhood you’ve never lived in before.

HOA or “condo fees”

Homeowners association fees (or HOA) are fees that pay for the upkeep of your building if you’re buying a condo (sometimes these fees will also pay for land upkeep/landscaping fees if you're buying a single family home in a neighborhood).

Also known as condo fees, these can be really expensive and can decimate your take home pay—making you “house poor”—if you don’t factor them into your home buying budget. 

“Other”

Are you factoring in all of the utilities you maybe didn’t have to pay for as a renter, but might now have to? 

What about maintenance fees—taking care of your lawn, cleaning the gutters, maintaining your roof, keeping sidewalks clear, etc.? 

Making the offer, and making it competitive 

Let’s say you've done your research: you found the home, it works within your budget, you like the developer, you know everything about the property, and you're ready to make an offer. How does that process work?

If you like the house, chances are somebody else is going to like the house too, and you’re probably going to have to outbid someone to get it. How can you make your offer more attractive, aside from the sheer dollar amount? 

An escalation clause

If you put an offer in on a home, you can insert an escalation clause, which means your price that you would offer on the home automatically goes up to try to beat the next highest offer.

It’s like eBay: you set the highest amount you’re willing to spend on an item, but you hope to get it cheaper. If there’s a lot of competition, you’ll automatically stay in the game by upping your bid, but you’ll never go above the amount you’ve set as your maximum price.

Escalation clauses make you much more strategic, and they can give you a decisive upper hand in a competitive market.

Just remember to be responsible. Know your limit and play within it. Your goal should be to pay as little above the next highest offer as possible.

Finding a great realtor 

Normally the first thing people do when considering their first home purchase is hire a realtor. 

But hiring someone right off the bat without first doing a bit of research on your own might not be the best idea. Doing some homework beforehand can help you make that decision with confidence.

Why get a relator in the first place

A huge mistake that people make in home buying is that they go after a property simply because they're tired of the process. Finding a real estate agent that you trust can help you avoid that.

You want someone who can quarterback this whole process for you. A really good real estate agent might cost you a sizable commission, but they’re worth the cost if you have the right one.

  • You’re always going to read about or hear about that hero that says you can do this on your own. But if you value your time and sanity, get a realtor.
  • Make sure to interview at least three different realtors before picking one. Tap into your network when looking for potential realtors and see who your friends recommend.

Grab a coffee with them and see if they’re the right fit for you, experience wise, communication wise, and just temperament-wise. You're going to be spending a ton of time with this person, so you're going to need to trust them.

  • Do they have the right amount of experience?
  • Do they know your budget and neighborhood needs? 
  • What is their annual volume?
  • Don’t be your friend’s cousin’s first attempt at selling a home. You want EXPERIENCE. 

What a good realtor should be able to do for you

You want a realtor who understands your needs and knows how to find a home that satisfies them.

Realtor Marian Roussan gives tips on how to choose the right real estate agent.


  • Maybe you're sensitive about the school district your kids will have access to.
  • Maybe you want a neighborhood that's a little rough around the edges
  • Maybe you want access to public transportation, or space for your dog to run around in. 

Your realtor will listen to those needs and then help you find a neighborhood and home that balances them with your budget.

Find you space to grow

One way to increase your chances of a successful real estate investment is to pick a property that you can grow into

Buying a home and staying there—rather than immediately selling and moving on—can help you weather market fluctuations and help you realize the full value of your home. It also gives you time to make renovations and grow into the space.

That’s one of the most valuable things an agent can do for you: find a place that you can stay put in and grow into. 

Metrics they can provide you with

In addition to developing a good objective and subjective understanding of your needs, a real estate agent is going to be able to provide you with a raft of variables and data points that make shopping comparables a whole lot easier.

  • Price per square foot: It equals Total home price/Total Square Footage, and it’s the main variable you should be using to compare comparables.
  • Original list price to sold price ratio: Are the homes in that neighborhood going up and over ask price, or are we seeing a softening in the market?
  • Historical sold prices: Are you getting a good deal, in the grand scheme of things? 
  • Under contract prices: what are current sale prices at? What are the current offers that are being put in around the neighborhood?

Talking to other realtors

In addition to these metrics, realtors can also provide you with a bunch of subjective information about the local housing market that you can only get by talking to other realtors.

Risks & Contingencies 

Contingencies are the “ifs” in a contract. I will do this, if I get this. They’re protections you build into a real estate deal in case something doesn’t go right with the house. 

Writing the right contingencies into a real estate contract is another thing a good real estate agent is going to be able to help you with.

Home inspection contingency

This one’s all about making sure the home you’re buying is in good working order.

  •  If a home inspection comes back with some red flags, it allows you to either negotiate or get out of a contract.
  • If you are in a competitive situation, make sure to have a home inspector go in before you put in an offer—with the permission of the seller, of course—and make sure the property you’re bidding on is in good condition. 
  • If you’re planning on gutting the entire place and redoing everything from the foundation to the plumbing, on the other hand, you probably don’t need a home inspection contingency. 

Appraisal contingency

This is to protect you if you make an offer on a house above the appraised value of the home, which is the value that the bank puts on your home when they give you a mortgage.

  • If a property has an appraisal value of $450,000, say, but you put in an offer for $500,000, you’re then entirely responsible for the $50,000 difference between those two prices.

Financing contingency

This is language you put in the contract that says you’ll move forward on the purchase of the home only if the financing or the mortgage is approved from the bank.

Having contingencies in place protect you. That said, you can take out contingencies to make your offer more competitive. 

  • If you know you’re going to gut the entire home and don’t need a home inspection, you can offer to take the “home inspection contingency” out of the contract so that your offer is more appealing and moves faster for the seller. 

Paying for your home

So you’ve found your ideal home, you’ve had an inspector look through it and give it the okay, you’re real estate agent is happy with it, and you’ve negotiated a good price and written up a contract. All that’s left to do now is pay for the thing. How should you do it?

Option #1: cash 

It certainly doesn’t hurt if you can pay all cash, if you can afford it.

An all-cash offer can move things along quickly, and might even get you a reduced purchase price.

At the same time, even if you can afford to pay for the whole thing with cash from your bank account, what's the opportunity cost of putting all of your cash into one big investment? You could, after all, be putting that liquidity to work elsewhere and diversifying it.

Option #2: a mortgage

There are very few people that can pay for a home without borrowing at least a little bit of money.

A mortgage lets you do just that: it’s a loan that is secured (i.e. backed or guaranteed) by the property that you're buying, which you usually have to pay back over 10 to 30 years.

The down payment is the amount you put up for the home up-front. The bank will lend you the rest and charge you monthly payments, along with interest.

The down payment

This is your “skin in the game.” The more you put down, the more of the house you own immediately and the less money you have to borrow.

The minimum size of a down payment is usually 10-20% of the total purchase price of the home. When you put less than that down, you’ll usually have to pay mortgage insurance, which covers the risk of you defaulting on the loan.

Example:

Option 1

  • Downpayment: 10% or $10,000, monthly payments: $775 (includes PMI)

Option 2

  • Downpayment: 50% or $50,000, monthly payments: $545

Think about the difference in the monthly payments and the difference in the down payment. Would you rather pay more monthly and have extra cash?

Nerd Wallet Mortgage Calculator is a great tool to model different scenarios: Here

The mortgage approval process

Before lending you money, a mortgage lender will usually look at your W-2, pay stubs, tax returns, assets and your FICO Score

Your FICO is a credit score (out of 850) that determines how risky you are as a lender. If you’re at 680 or above, you’re probably in good shape. I use Nerdwallet to keep tabs on my credit score. 

(Disclaimer: Nerdwallet is not associated with Talk Money. It is not an affiliate. We do not get paid. I just like their digital tools) 

When deciding how much of a loan they’re willing to give you, a lender is usually going to look at what percentage of your monthly earnings goes out to your monthly expenses, and how much is left over for you to devote to mortgage payments. 

This is known as the debt to income ratio. The lower the %, the less risky you are. 

Another way to look at is, The lower your monthly expenses and higher your monthly earnings, the less risky you are as a borrower. 

Mortgage expert John Teweles explains the difference between what’s affordable for a buyer vs what you’re approved for.


15 or 30 year term?

Most mortgages are 30-year term mortgages, for the simple reason that the monthly mortgage payments are lower, making them more affordable.

While the monthly payments on a 15-year term mortgage might be higher, however, the total interest you pay on one will be much lower. If you can afford those higher payments, consider a shorter term.

Conclusion

Are you ready to own a home at this point in your life? Hopefully we’ve given you some tools you can use to better answer that question. 

It’s not an easy or obvious one to answer: it depends a lot on what life stage you’re at, where you are financially, and what the real estate market you’re buying into looks like.

The most important thing here is not to get distracted by folks telling you to go out and buy a  home, sight unseen, or that you’re ‘wasting’ money on rent.

Run the numbers, think about it long and hard, and make the best decision for yourself.


Table of Contents

  • Should you buy a home?
  • What should I look for in a home?
  • What’s your budget?
  • What do you want in a home?
  • Getting pre-approved, and other costs you should think about
  • Making the offer, and making it competitive
  • Finding a great realtor
  • Risks & Contingencies
  • Paying for your home
  • Conclusion