This story is part of Power Money Moves, CNET’s coverage of smart money decisions for today’s changing world.
During my time as a real estate agent, I was shocked by the amount of basic misconceptions that sabotaged first-time homebuyers — sometimes preventing them from buying a home.
But I’ve also been on the other side, a first-time homebuyer myself not long ago. And all my professional experience didn’t protect me from crying tears of frustration and almost giving up. Buying a home can be challenging — financially, emotionally and psychologically. But the right preparation, strategy and knowledge will make it easier.
With mortgage interest rates on the rise and home prices sky high, diligence and strategic decision-making has become vital for potential homebuyers.
Here is my hard-earned advice for how to buy a house in 2022, based on what I’ve learned from being on both sides of the process — plus a cautionary tale of one buyer’s ordeal.
The real estate agent and lender you choose are extremely important to maximizing your homebuying experience. You rely on them to complete your purchase, and your choice of representation can have a significant impact on your budget and stress levels.
Your real estate agent should demonstrate their expertise before you sign anything. There should be an initial meeting where your needs and goals are discussed. You’ll be led through the homebuying process and review some potential home options so that the agent can gauge your preferences. Remember that you are under no obligation to work with them until you sign an agreement. Though your relationship with your lender may not be as personal, you’ll want to have a conversation and vet them, too, before formally agreeing to work together.
Interview different real estate agents and lenders to gauge their experience and make sure you’re compatible. Your agent should explain things thoroughly, be familiar with your desired locale and respond to you in a prompt and professional manner. Above all, you should trust them. Once you’re under contract — that is, you’ve signed the paperwork to purchase a home — you’re legally bound to your agent and lender, and it may be difficult, time-consuming and expensive to switch.
Moving too fast can have devastating results, as Stuart Jones discovered on the way to buying his first home in Philadelphia (Jones asked CNET not to use his real name while his deal is still underway). Jones had been eyeing a three-bedroom airlite row house built in 1930 — a fixer-upper with a facade made of local stone. Eager to sign, Jones got a recommendation for a lender from an acquaintance and signed a contract without asking any questions.
Looking back, Jones says that red flags started popping up almost immediately: “The first thing that went wrong was that my lender said he wouldn’t work with me on a loan unless I used his realtor.”
That real estate agent failed to present him with the paperwork Jones needed to make informed decisions. He had never signed off on the seller’s disclosure — a legally required step — which certainly would have influenced his offer.
Jones also says that his agent failed to make a particular request of the seller, which is a breach of his fiduciary duty to Jones. Eventually, his agent stopped responding to him altogether.
Jones eventually disclosed his predicament to another real estate agent, who was blown away by his story. “Seeing the sheer contrast between what a good agent could do and what my agent was doing — it was time to look and see what else was out there,” he said.
To find the right realtor, ask local homeowners for real estate agent recommendations and contact a local brokerage to request interviews with potential agents. The right agent should present you with a buyer agency agreement, which commits you and your agent in a way that both of your financial interests are protected.
When it comes to selecting a lender, Jesus Cruz, vice president of community lending at LoanDepot, says that honesty is the most important characteristic. “You need to find someone who is willing to take the time — and walk you through every step of the process… And above all else, the loan officer needs to follow through and do what they say they will,” said Cruz.
It took Stuart weeks to legally wiggle out of his contract with the agent, and much damage had been done. Jones was already locked in, having waived his right to a home inspection and no room to negotiate.
With a good agent secured, search with an open mind — it’ll be easier than adjusting your expectations later on. I’ve seen first-time homebuyers paint themselves into a corner by getting caught up in their idea of a dream home.
The vast majority of first-time home buyers are unlikely to get their top choice. The more flexible you are, the higher your chance of success. It may be helpful to rank the features you want most before you start your search –that’ll help you assess your options once you begin visiting potential homes.
If you’re priced out of one market, you may need to consider an alternative locale. This is where you can get more proactive, and get an edge on other buyers by researching new construction on the outskirts of a hot market, or learning about upcoming local infrastructure projects along public transit routes.
Open and closed permits for residential work can give you insight into where commercial development may be going on. If you’re willing to wait out plans for a few years, you may be able to get a discount on a home. This approach can also help boost your equity over a short amount of time. This information is typically available through your city or county website. Your agent should be able to help you find this information, as well.
Real estate contracts are dry and long, but they’re not written in stone until you sign. You can negotiate any parameter when you submit an offer. If something doesn’t make sense, ask for an explanation. Keep in mind, if any part of it does not suit your needs, you can request modifications before you submit the contract to the seller. When in doubt — or to get a reality check — you should consider the advice of your knowledgeable and experienced agent.
Know your “contingency elections.” These determine what types of inspections and negotiations can be done and in what time frame, such as standard home inspections, inspections for pests, whether you can qualify for a mortgage and more.
Jones’s agent failed to fully explain his contingency elections, preventing Jones from engaging in negotiations. It’s critical to be familiar with the contingencies in the contract before you sign, because even if something goes wrong, like in Jones’s case, you will still be subject to its terms.
After the contract is signed by both parties, the homebuyer usually has 10 to 14 days to get a home inspection. Based on the results of the inspection, your real estate agent (or lawyer, depending on the state) can request monetary concessions or ask that repairs be added to the contract to offset any concerns or potential problems.
A thorough inspection report can be overwhelming, especially if it’s an older home. No house is perfect and most problems are addressable. But if you come across something you don’t want to deal with, you can always negotiate or walk away — as long as you are within the contingency period.
On the other hand, inspectors are not foolproof. They won’t be able to get behind walls or move the current occupant’s belongings to inspect. They also won’t be responsible for any mistakes made or issues missed in their assessment.
If you’re searching in a hot market — where homes are selling fast and competition is fierce — you may feel pressured to forgo an inspection. If you’re considering that, recruit some help: bring someone knowledgeable about buildings and systems to the showing. It may give you more insight into the state of the home and highlight major red flags.
While the traditional 20% down payment has its benefits — like a lower monthly mortgage payment and exemption from private mortgage insurance costs — there are drawbacks, too. “There’s definitely a misconception, especially among first-time homebuyers, that 20% down is needed to purchase a home. I hear this from new customers all the time,” said Cruz. “But for some homebuyers, it’s a major hurdle.”
And private mortgage insurance isn’t always a major expense. Generally, PMI costs 0.5% to 1.5% of your mortgage balance per year, so as little as $125 per month on a $300,000 mortgage. And that rate is partially determined by your credit score, so if you have good credit, it may boil down to a negligible amount. “You’ll also have the opportunity to discontinue PMI down the road once your equity reaches 20%,” Cruz said.
In my own time as a real estate agent, clients were consistently surprised by the actual cost of PMI versus their impression. Most people thought their payments would be way higher than they were quoted for.
There is a risk in waiting to save up for a bigger down payment, too. If increases in home prices outpace your savings rates — not to mention inflation in other areas of life — you may be doing yourself a disservice by waiting. Even if home prices stay stagnant, mortgage interest rates are on the rise. With the Fed likely to raise interest rates through 2022 in response to high inflation, this trend is expected to continue for now.
A smaller down payment may also allow you to keep a healthy pile of savings accessible for unexpected repairs on your new home.
There are also various loan products designed for different types of mortgage applicants that are tailored to specific financial circumstances. For instance, FHA loans allow for smaller down payments and let people with lower credit scores qualify for a mortgage. Physicians loans allow medical doctors and pharmacists to qualify for 0% down mortgages to account for their often nonexistent savings, large school loan balances and high earning power. VA loans, meanwhile, exist for service members and veterans to acquire a home with no down payment and other benefits. Even conventional loans allow you to put as little as 3% down.
But you should never make a purchase you cannot afford. Be mindful of what you feel comfortable spending, both upfront and on a monthly basis, because that’s a far more important metric than whatever purchase price you may be preapproved for. Check out “How Much House Can I Afford?” to assess your budget.
The path forward to a new home should be a little more clear now. Start figuring out how to budget for your home ahead of time so you’re not tripped up by logistics when you find the right house. And remember, homeownership is not necessarily for everyone — there are pros and cons to both owning and renting. Make sure you want to be a homeowner before you make this commitment.