First time home buyers: The ultimate guide to buying your first home

Buying your first home is an exciting time, but it can also be challenging if you don’t know where to start.

Understanding the home buying process and real estate terminology can be difficult and, with property prices high in many parts of the country, buying a home can be very expensive so it’s important to get it right.

Domain has compiled this guide to answer the most common questions you might have about buying your first home. It’s designed to provide you with general advice to navigate the home-buying process from start to finish so you can make informed decisions when it comes to your first property purchase.

How to set a budget for buying your first home

It’s tempting to base your budget on properties available for sale in your favourite suburb but, ultimately, if you’re a first-home buyer, your budget will be based on how much money you can borrow.

It’s wise to speak to a bank, lender or mortgage broker at the very beginning of your home-buying journey. Even if you don’t have a big deposit saved, they will be able to advise on how much you will need for a deposit for the kind of properties you are interested in, which gives you a goal to aim towards.

They may also help you realign your expectations, as your ideal suburb or property type may be more expensive than you can afford as a first-home buyer.

How much can I borrow?

To find out how much you can borrow, you will need to speak to a lender such as a bank or building society, or a mortgage broker. The lender calculates a maximum loan amount based on your income, savings, assets, expenses and credit history.

Although lenders will tell you the maximum amount you can borrow, this doesn’t necessarily mean you should borrow up to your limit. Ongoing mortgage repayments are higher for bigger loans, and other costs of owning a home, such as council rates, strata fees and insurance can add up.

Compare your after-tax income with your estimated ownership costs, as well as general household expenses such as groceries, bills, transport, schooling and leisure. If you feel there is only a small amount left over for non-essential purchases like dining out or holidays, you might want to consider a smaller loan. Alternatively, consider whether you can cut back on expenses and live more frugally as a home owner until your income rises.

Put yourself through a “pressure test” before determining your financial limits. Can you handle a 2 per cent interest rate rise? Do you have enough money set aside to make your mortgage payments for a few months if you lose your job? No matter how secure your job seems today, something could happen in the future. Being ready for the worst will ensure you land safely on your feet if or when it does happen.

Eight Things You Need To Know Before Buying Your First Investment Property

Although there are numerous examples of people who have earned themselves a fortune with real estate investment, real estate, like every other business, has many risks associated with it. Moreover, regardless of the type of property you are purchasing or whether you plan to rent or resell it afterward, investing in real estate requires a good amount of cash — which makes it critical to take extra measures to ensure profit on your investment or at least save yourself from a huge loss.

I’ve observed a shortage of property in good areas over the past few months. This lack of property creates an excellent opportunity for investment. However, it doesn’t mean that anybody can earn a fortunate by investing in real estate. You need to know a lot of things before buying your first investment property.

1. Don’t let your emotions play with you.

Most of the time when buying a home, people listen to their heart more than actually thinking about it logically, which is perfectly fine when it is the place where you will be living for many years of your life. But don’t let your emotions affect your decision when buying your first investment property. Think of it as purely a business investment and logically negotiate to get the best possible price.

Remember, the lower the price you get for a property, the better the odds that you will earn a higher profit from it.

2. Do your research.

Depending on the clients you are targeting, you need to do proper research before buying your first investment property. Make sure that the property is situated in a location that will attract the type of clients you hope to sell or rent to, that it will reach to the returns you are expecting and that it will appeal to the market.

Doing the proper researching and using an analytical approach logically based on the financial factors, rather than considering your personal likes and dislikes, will surely help you in purchasing the best property. After all, investment isn’t about emotions; it’s about economics.

3. Secure a down payment.

Unlike the 3% down payment on the house you are currently living in, you are going to require at least 20% down payment for buying your first investment property. This is because mortgage insurance is not applicable for investment properties. Moreover, investment properties require greater down payments than your regular building and have strict approval requirements. Keep in mind the expenses needed for the renovation before you pay your down payment.

4. Calculate expenses and profits beforehand.

As the expression goes, only the paranoid survive. OK, not always, but there is no harm in being a little paranoid and considering every detail beforehand. Start with calculating the money that you already have and what you can borrow before buying your first investment property. Next, calculate how much it would cost to purchase and renovate the house. Also, keep in mind the operation costs. Finally, estimate the price you are going to list your property for and cut out the expenses to get a rough estimate of the profit you stand to make. Honestly speaking, you may not even hit half of the estimated profit, but this calculation is necessary to keep yourself in the safe zone.

5. Select a low-cost home as your first investment property.

Even if you are ready to invest up to a million dollars in your first investment property, it is always a good idea to go for properties that lie in the lower- to mid-range price brackets. Some experts suggest the house that doesn’t cost you more than $150,000. Don’t forget, you will need to spend more money on the renovation of the house before renting or selling it.

Furthermore, since it is your first investment property, keeping your investment as low as possible will help you stay in the safe zone. Even if you don’t hit the expected profits, you won’t risk losing too much on it.

6. Pay your debts.

As a new investor buying their first investment property, you might need to consider the investment loan options — one shouldn’t be carrying debts as their investment portfolio. You must clear all of your debts, student loans, medical bills, etc., before starting out in real estate.

7. Consider investment loan options.

There are a large number of options available when it comes to collecting funds to purchase your first investment property. Choosing the right option that could make a positive difference to your financial situation requires a lot of research.

Different investment loan options come with different benefits, and the best possible option depends on your situation. However, you need to consider features such as which loan option is giving you the freedom to split the credit or if it provides you with the line-of-credit facility.

8. Choose your partners carefully.

Many people consider partnering up with their friends instead of talking an investment loan to start in the real estate business. First-time investors need to carefully consider many factors while choosing partners, such as how comfortable you are with them and the implications of a partnership agreement.

Like every other business, investing in real estate can go either way: You could earn a good chunk of money, or it might turn into a disastrous experience. If you follow smart tips and play it safe from the start, you will surely be on the winning side.

7 First home buyer mistakes

The first time out of the gate you can’t be expected to know all the rules. But there are some common missteps first-time home buyers make that are easy to avoid.

1. Not managing emotions

No matter how many people caution you to take the emotion out of the process, if you’re going to buy your first home, you’re going to have emotions. Lots of them. It’s naive to expect us to disconnect from a decision so personal.

But you can keep your emotions under control, and you have to if you want to make sure you’re not taken advantage of and so you’re able to spot issues and risks before you buy.

Try leaning on a friend or third party to help you stay objective and sound out your thought processes. And if you fall in love with a house on first sight (it happens), don’t ignore that little voice in your head reminding you to do your due diligence if you want to spend the rest of your life with it.

Read the fine print, even if you’re dazzled by the packaging.

Remember: this is a huge purchase. Read all the fine print, even if you’re dazzled by the packaging.

2. Stretching the budget too far

When you’re doing the numbers on buying your first home, build in some buffer but have a clear idea of your actual, immovable limits. When you’re staring down other buyers at an auction and the adrenalin is pumping, it’s far too easy for even the most rational of us to shoot up the hand for an extra $5,000 we simply don’t have.

Exercise financial discipline and don’t over-extend yourself. The perfect home won’t be consolation if you can’t afford to furnish it – or, worse still, can’t cover your mortgage payments and living costs because you got carried away.

3. Not budgeting for hidden costs

The price tag on the property is just the beginning. Before you’ve bought you’ll need to factor in the cost of building and pest inspections. Then there’s stamp duty and legal fees to cover conveyancing and title searches.

There may be fees imposed by your mortgage broker, such as application, valuation and settlement fees.

And then you’ll need to consider moving costs, insurance, council rates and the cost of ongoing maintenance – many things you didn’t have to worry about when you were renting.

There may be fees imposed by your mortgage broker, such as application, valuation and settlement fees.

Make sure you’re aware of the costs you’ll be facing and budget for them so there are no nasty surprises and you have plenty of income to enjoy your new lifestyle.

4. Not getting your finance sorted

If you’re ready to buy you’ll need to get pre-approved finances from a lender. That way you’re ready to pounce when you find your dream property. Failing to have your paperwork in order can mean you might miss out when you can least afford it.

Failing to have your paperwork in order can mean you might miss out.

You’ll need documentation of your loan and be ready to pay the deposit immediately.

While some vendors and agents do accept offers on their property subject to financing, an unconditional offer will always be preferable.

5. Getting impatient

If you’ve been house hunting a while (and for most people it takes a while), you can get search fatigue. You’re tired of  getting everything ready, and getting pipped at the post at the last minute by somebody who came in with a higher offer.

If you’re exhausted and frustrated, it becomes very tempting to buy the next property that comes along, whether it ticks all your boxes or not. It might not have to tick all of them, but it still should tick the most important ones, or you’ll be unhappy in the home and want to move on.

Remind yourself what your top priorities in a home are – take a break from house hunting if you need to – then start again with renewed vigour. Plenty of buyers have jumped in because they were impatient and suffered from remorse when the right property came along a month later.

6. Getting a building inspection

It’s one of those things than can not only save you money, but possibly save your life. Faulty wiring, shaky foundations, pest infestations … there are a range of things that might be wrong with a property that you won’t catch with the naked eye.

Always get a trained professional to give a property you’re considering buying the once-over. For only a few hundred dollars they can catch the stuff you won’t see – but that might cost you a fortune in renovations or repair if you charge ahead unaware.

7. Going it alone

A good real estate agent. A lawyer, building inspector, mortgage broker. A trusted open-for-inspection buddy. Even if you’re buying on your own, you shouldn’t face the process alone. There are specialists whose job it is to cover those areas you didn’t even know you didn’t know.

Surround yourself with a good team of people you trust and everything about the process will become easier.

Surround yourself with a good team of people you trust and everything about the process will become easier. Best of all, you’ll have that network for your next property move – whether it’s buying an investment property, renting out of selling the home you’ve just purchased, or just undertaking renovations.