Buying a home is one of the biggest purchases most people make in life, and it can certainly be a daunting one. In fact, it is estimated to be one of the purchases that will take up to 50% of your lifetime earnings in most markets!
San Diego for many (especially first-time homebuyers) is around 20% and it's very common to see 3%, 5%, 10%, or even 15% down.
pro tip: While buyers do have to pay PMI (private mortgage insurance), PMI drops off once you hit 80% loan to value (as long as you are using a conventional loan). Given how quickly the market has been appreciating, it often makes much more sense to buy with less down and pay the PMI than try to out-save the market. I would remove the "Try to avoid getting into a situation where you'll have to take out a PMI, as it may lead to your costs skyrocketing."
There's so much that goes into the process—financing, paperwork, viewings—and many decisions to make along the way. However, taking it step-by-step can go a long way. Set up a plan and work within that and you'll find your dream home in no time.
Here are the main points to consider when buying a home in San Diego.
Set Up a Time Frame
Essentially, the question want to ask yourself is: does it make more financial sense to rent a home, or buy one? Typically, it takes four to seven years to break even on a house.
Get personal with yourself and try to look ahead at your life. Evaluate various factors such as career, kids, whether you see yourself moving around to help guide your decision.
People often believe that selling a home two years after ownership is cheaper than renting. It usually doesn't play out that way, so factoring in expenses within your time frame is important as well.
Check Your Finances
The price of the average home in the U.S. is over $300,000, while homes in San Diego are averaged at $825,000. For that amount of money, most people will need to qualify for a mortgage of some kind.
Mortgage lenders on principle will lend to those they're certain will be able to pay off the loan. This means they'll verify that you're a worthy candidate, with enough income coming in every month.
Check Your Credit Score
Good credit is important when buying a home because it often leads to lower monthly payments and a lower net cost. A score over 760 will earn you the most competitive rates and terms.
The lower your credit score, the higher your interest. Lenders may choose not to lend to you at all if you have a very poor score. In this case, it might be better to delay buying until your credit score goes up.
Here are a few easy things you can do to increase your rating.
Save for Your Down Payment
The general rule of thumb is a 20% down payment. If you can't put the 20% down, you will have to take out a Private Mortgage Insurance (PMI). This serves as insurance against any defaults on your monthly mortgage.
PMI'S are usually between 1-1.5% of the mortgage. Then there's the annual charges, maintenance, taxes, insurance, renovations, furniture, it goes on and on. Try to avoid getting into a situation where you'll have to take out a PMI, as it may lead to your costs skyrocketing.
Instead, save till you have enough for your downpayment, and buy only after you've reached your downpayment goal.
Calculate the Hidden Costs
There are a lot of hidden costs associated with buying a home. It is better to calculate them upfront so you don't get a shock after the fact.
San Diego ranks third in the country for hidden costs in homeownership. Besides the down payment and mortgage payments, there are unavoidable hidden fees. These include property tax, insurance, liability costs, and utilities.
San Diego homes can come with hidden costs totaling a whopping $14,257 a year! Remember to factor in these costs and save up for them before homeownership.
Go With a Trusted Realtor
Finding a realtor you can trust can be a game-changer. Remember, it's the seller that bears the realtor's fees and not the buyer. You won't have to pay anything and you get a real-estate guide who knows the market inside out.
San Diego real estate in particular can be difficult to navigate as homes have a high turnover rate. This is why the right realtor will come in handy to guide you through everything - from negotiating a price to handling home inspections.
Shop for Your Dream Home
You've got your finances worked out. You have a trusted realtor all set up. It's now time to get out there and find your dream home.
Finding the right house is mostly just a numbers game. Try to see many different houses in different styles, and you'll be sure to find one that works for you.
Making a list of all the features and characteristics you're looking for is particularly helpful. This will help you eliminate the ones that aren't right for you and evaluate the ones that are instead. Remember to go with your gut—instinct is crucial when buying a home because if you don't feel like you'd be comfortable living in a place, you probably won't be.
What Should I Be Looking Out For?
There are some basic elements to consider when you're house shopping. If you find a particular feature in a home that works for you, be sure to let your realtor know. This way, they can set up more viewings with features that you're already interested in.
Consider the following when you're making your decision.
One of the most important factors to consider is the area or neighborhood of your future home. You may wish to find a home close to work, in a good school district, or with great nearby amenities.
Houses in San Diego vary greatly by location, so be sure to pick an area that matches your needs.
To determine the size that will suit you, consider how you'll be using it.
Ask yourself if you'll be traveling a lot, whether you'll be using the backyard often, and if you have the need for a shed or driveway. Then look for homes with these features, which may require additional square footage.
If you have guests over often, you'll likely need a guest bedroom. Planning to expand the family? Consider how many kids' rooms you'll need. You might need an extra office space so factor that in as well.
Age of the House
While older homes have a certain charm and spaciousness, you may have to dish out more money for repairs and renovations. San Diego is full of beautiful Craftsman and Spanish Style Homes, but they do come with extra upkeep and costs.
A newer house may come fitted out with all the appliances and modern hardware but perhaps doesn't fit your dream aesthetic. Either way, consider how old the property is before buying a home, so you're aware of extra costs upfront.
Remember those hidden costs we talked about earlier? Maintenance can often take up a significant chunk of a homeowner's budget, requiring extra time, money, and effort.
Come up with a budget, and stick to it. Finding the right home can be difficult, but pick a home that is within your means and will fit within your financial goals and habits.
Some other factors to consider are the layout of the home, the appliances it comes with, as well as the number of bathrooms. Look into whether the home will need cosmetic changes, such as fresh paint or changes in hardware or cabinetry as well.
Get Home Inspections Done
Remember to do a complete home inspection and negotiate an offer before your final purchase (right after an offer is accepted). If you decide to sign the contract before you can get a home inspection done, be sure to have a contingency clause saying the house must pass inspections.
This way, you will be able to be certain there are no problems with the house such as functional and structural defects. If there are minor issues, such as plumbing or hardware issues, you'll have to decide if they are worth the repairs.
Doing a termite and pest appraisal beforehand is also crucial to understanding the hidden costs the home comes with.
Negotiate an Offer
You've decided on a house and wish to buy it. After that, it's a matter of gathering up your documentation, making an offer, and then negotiating it down.
This is where your realtor will come in handy again. Real estate agents are extremely knowledgeable about current market rates and fair asking prices. They will advise you on the right amount to offer, and which strategy (aggressive bid, lowball offer, etc) to take up, amongst other things.
You can also make stipulations to your offers, such as the desired closing date, or a request that furnishings and appliances be included in the sale. This can drive up the negotiations and cause it to go back and forth for a bit. Don't get stressed about the offers and counteroffers too much, because it'll be worth it once you have the home of your dreams.
After the offer is accepted, you'll need to include what is called 'earnest money' with your documentation. This is a check or money order that is anywhere between 1-3% of the purchase price. It could also be a fixed amount.
This money is held in escrow and applied to your final purchase when the deal is closing.
You did it—you bought a house! The financing, agreements, and inspections are the most stressful part of the process. After some paperwork, you'll be ready to receive the keys to your new home.
Choosing the right home in San Diego can be a challenging process, but remember, you're not alone. Your realtor will be there to guide you through it all and ensure you have the property of your dreams.
If you're considering buying a home, reach out to Steele San Diego Real Estate or check out our blog for more information.